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Starting a business in South Dakota requires careful planning and preparation. You need to consider not only how your business will operate, but also how it will affect your own life and finances. By forming a limited liability company (LLC) in South Dakota, you can increase the odds of protecting yourself from personal liability for business debts. An LLC also gives you a framework for managing your business, distributing profits, and handling obligations such as taxes.
South Dakota presents numerous business incentives for LLCs. The South Dakota Governor’s Office of Economic Development offers several financing programs for new businesses. Other state programs can help with startup costs, employee recruitment, and other matters. South Dakota law gives LLCs great flexibility in terms of management. Perhaps most importantly, the state has no income tax for businesses.
Much of what you will need to form an LLC in South Dakota is available online. You will have to provide a fair amount of information about yourself and other members of your LLC, such as names, phone numbers, and addresses.
Here are the 6 steps to forming a South Dakota LLC:
Detailed descriptions of each of these steps follow below.
First, you will need to pick a name for your LLC. South Dakota has several requirements for LLC names. First, the name must contain one of the following:
Next, the name must be “distinguishable” from other names registered with the South Dakota Secretary of State (SDSOS). This includes the names of other LLCs, corporations, and partnerships, as well as reserved names and fictitious names used by foreign (meaning out-of-state) businesses registered in South Dakota. The SDSOS provides a search tool on its website to see if a name is available or not.
South Dakota law makes 2 exceptions to the requirement that a business name must be distinguishable from all others. You may use a name for your LLC that is not distinguishable if:
Once you have found a name for your LLC, you must protect it to ensure no one else uses it first. You may do this by forming the LLC, but you may also have several other options.
If you have chosen a name, but you are not ready to form your LLC yet, you can reserve the business name for up to 120 days. You must file Form SDCL 47-34A-106, Application for Reservation of Name, with the SDSOS.
The form asks for your name and address and the name you intend to use for the LLC. You must specify that you intend to use it for a new LLC you are going to create, rather than as a fictitious name for an existing company.
The filing fee for the form is $25. You can send the form, along with a check made out to the “Secretary of State,” to the Secretary of State’s Office, 500 E. Capitol Avenue, Pierre, SD 57501.
The reservation is valid for 120 days. You cannot renew the reservation until 60 days after the expiration date. If, for example, you file the form on May 1, the registration would be valid until August 29. You would not be able to renew the registration until October 28. Between August 29 and October 28, someone else could reserve or use the name.
A business may register a fictitious name with the state, also known as a DBA (“doing business as”), to operate using a name other than its legal name. Businesses do this for a variety of reasons. A sole proprietor—meaning a person who owns their own business with no formal business structure—might use a DBA rather than using their own name in all their business materials. A company with multiple product or service lines might use DBAs for different lines.
You can register a DBA online with the SDSOS. You must provide your name and address if you have not formed the LLC yet. If you already have an LLC, you must provide the Business ID number the SDSOS gave you.
The filing fee for a DBA is $10, payable by credit or debit card. The registration remains valid for 5 years. You may renew it indefinitely, as long as you are still using the name.
Trademark law protects business names, brand names, logos, slogans, and other marks that identify goods or services. The SDSOS handles trademark registration at the state level, while the U.S. Patent and Trademark Office (USPTO) handles it nationwide.
To register a trademark, you must provide information about the mark. If it consists of more than just a name or slogan, you must provide a description of the visual elements. In South Dakota, you must state when you first used the mark for business purposes. Federal trademark law allows you to apply for trademark registration if you have a bona fide intention to use the mark in business soon.
You must choose at least one classification code for your mark, which identifies the type of product or service associated with the mark. Examples of product classification codes in South Dakota include chemical products, pharmaceutical products, motor vehicles, musical instruments, and clothing. Service classification codes include advertising, insurance, communication, education, and medicine. South Dakota’s list of classification codes includes 45 items. The USPTO’s list is much longer.
To apply for state trademark registration, you must complete Form SDCL 37-6-5, Trademark Registration: Initial Application. The form must be signed in front of a notary public. The fee for the application is $125. You can send the form along with a check to the Secretary of State’s Office, 500 E. Capitol Avenue, Pierre, SD 57501.
You can apply for federal trademark registration online at the USPTO website. The fee starts at $325 per classification code.
Federal trademark registration offers protection for the business name nationwide, while state registration only applies within South Dakota. On the other hand, state registration is much less expensive.
Once you have chosen your business name, you may be ready to form the LLC. You may do so by filing articles of organization with the SDSOS either online or by mail. The person who files the articles of organization is known as the “organizer.”
The SDSOS charges a $150 filing fee to file articles of organization for an LLC online. The fee if you file a paper document, by mail or in person, is $165.
You will need the following information to file articles of organization:
You may file the articles of organization online at the SDSOS website. If you prefer to file the old-fashioned way, you must fill out Form SDCL 47-34A-203, 212, Articles of Organization: Domestic Limited Liability Company. You can send or deliver the form to the Secretary of State’s Office, 500 E. Capitol Avenue, Pierre, SD 57501.
When you complete the articles of organization for your LLC, you must designate an individual or business to serve as the registered agent. They must have a street address, not a P.O. Box, that will serve as the LLC’s registered office.
The purpose of a registered agent is to have someone who is always available during business hours to receive official correspondence and service of process. If someone sues your LLC, they must identify your registered agent as the person or business to receive service of process. The state may also send important information there. Your registered agent’s job is to forward these materials to you.
You may serve as the registered agent for your own LLC, or you can designate someone else to do it. Many lawyers and law firms, for example, act as registered agents for their clients, using their address as the registered office.
A registered agent service, such as Tailor Brands, will act as your registered agent for an annual fee. Using a third-party registered agent limits how often your name appears in the public record. It can also minimize the amount of material you receive at your office, since your address will not be listed alongside the name of your registered agent.
An operating agreement is a contract between members of an LLC that establishes policies and procedures for how to manage their business. You can use it to create formal processes for matters like:
Even if you are the only member of the LLC, an operating agreement can help you maintain the formality often expected from a business. It can give you additional credibility with creditors, vendors, and others. It can also help maintain liability protection for you individually.
South Dakota does not require the members of an LLC to create an operating agreement. In the absence of an operating agreement, state law governs an LLC’s operations.
Since an LLC operating agreement is not mandatory under South Dakota law, the state does not set any specific requirements on the form of such an agreement. It does not even have to be in writing, although putting it in writing makes it much easier to enforce.
State law does, however, identify what an operating agreement cannot do, including:
Once you have formed your LLC, you will need to obtain an Employer Identification Number (EIN) from the IRS. This number serves a similar purpose as a Social Security number. You will use it on federal tax documents but also for other purposes such as opening a bank account and applying for a business loan. Tailor Brands can help you obtain an EIN, or you can do it yourself.
If you are located in South Dakota, you may apply for an EIN online, by fax, or by mail. You will need information including the business name and address, your name, the type of business, and the reason you are applying for an EIN. You may choose “started a new business” for this item.
You can apply online at the IRS website. If you use this option, you should have your EIN within a few minutes.
To apply for an EIN by fax or mail, you must fill out Form SS-4. Several items on the form can be difficult to understand. Lines 8a through 8c ask about whether your business is an LLC. Line 9a then asks about the type of entity, but it does not include “LLC” as an option. The answer may depend on the type of tax treatment you have chosen for the LLC, which is discussed in more detail below. In short, the IRS will treat an LLC like a partnership for tax purposes by default, but you can elect to have the IRS treat it like a corporation.
You can fax the form to (855) 641-6935. You should receive your EIN within a few days, up to a week. You can mail the form to Internal Revenue Service, Attn: EIN Operation, Cincinnati, OH 45999. The IRS states that it takes 4 weeks to get your EIN this way.
The last step in the process of forming your South Dakota LLC is to learn what your tax obligations will be. You will have to deal with federal taxes to some extent. While South Dakota has no state business income tax, you may have to pay other state and local taxes.
The IRS treats LLCs like partnerships for federal income tax purposes unless an LLC chooses otherwise. Partnerships are subject to “pass-through” taxation. The partnership itself does not pay federal income tax. Instead, each partner is responsible for paying tax on their share of business profits. LLCs are taxed the same way by default. Suppose an LLC has 2 members with equal ownership of the company. If the business has profits of $50,000 for the year, each member would be considered to have $25,000 in taxable income. If the LLC has $50,000 in losses, both members can write off $25,000 on their own taxes.
An LLC can elect to be taxed as a corporation instead of a partnership by filing Form 8832 with the IRS. Corporations can choose several forms of federal income taxation. In the default form, the corporation itself files a federal tax return and pays taxes.
The system is different if an LLC only has one member. A single-member LLC is a “disregarded entity” for federal income tax purposes. The member reports all the business income, expenses, and losses on a schedule attached to their personal tax return.
If you are not the only member of your LLC, you should decide whether you want to keep the default tax form or elect to have the LLC taxed like a corporation. Since South Dakota does not have a state income tax for businesses, federal income tax is your only concern here.
If your LLC will be selling goods or providing services to the public, you might have to pay sales tax to the South Dakota Department of Revenue (DOR). You must register with the DOR. You will be responsible for collecting sales tax from customers and periodically making payments to the state.
Statewide, the sales tax rate is 4.5%. Cities may impose their own municipal sales tax of up to 2%. They may also impose a municipal gross receipts tax of 1% on certain goods and services, including alcoholic beverages, restaurants, hotels, and admissions to various events.
As a business owner, you are responsible for paying multiple taxes to both the federal and state government. Payroll taxes go toward the Social Security and Medicare programs. Employers withhold a portion of the tax from employee paychecks and pay a matching amount themselves. If you are self-employed and do not use a formal payroll system to pay yourself, you are responsible for paying both parts of these payroll taxes.
The self-employment tax rate is 15.3%, which has 2 parts. Social Security accounts for 12.4%, while the other 2.9% goes to Medicare. You may be required to make quarterly estimated tax payments using Form 1040-ES.
If your LLC has employees in South Dakota, you may have to pay several taxes based on payroll. Some federal taxes come directly out of employee paychecks. Others are your responsibility, based on a percentage of the amount you pay your employees.
Employers must withhold various federal taxes from their employees’ paychecks and remit those funds to the IRS. This includes each employee’s estimated federal income tax obligation. As mentioned above, it also includes payroll taxes that go toward Social Security and Medicare.
The IRS refers to amounts withheld from employee paychecks for tax purposes as “trust funds,” since the employer is holding them in trust for their employees’ taxes. Employers must send these funds to the IRS in a timely manner. The IRS takes trust fund violations very seriously.
Employers must withhold 7.65% of employees’ paychecks for payroll taxes. Note that this is half of the rate for self-employment tax. The other half is the employer’s responsibility. Every month, employers must send all trust funds in their possession to the IRS. Every quarter, they must file Form 941, which outlines the amounts withheld and sent that quarter.
You might also have to pay both state and federal unemployment insurance taxes. These taxes go toward the funds that pay unemployment benefits.
You will need to register with the South Dakota Department of Labor and Regulation (DLR). The tax rate varies based on numerous factors, including the number of unemployment claims made by your former employees and the length of time since the most recent claim.
Federal unemployment tax (FUTA) is due once a year. You must send your payment with Form 940 to the IRS. The FUTA rate is 6% of the first $7,000 paid to each employee. You could receive a credit for unemployment tax paid to the DLR, resulting in a lower FUTA rate. The most you will ever have to pay in FUTA tax each year is $420 per employee.
The SDSOS requires all LLCs registered in the state to file an annual report showing the current business address, registered agent, and names of all managers, if any. The filing fee for the annual report is $65 for online filings. For paper filings, the SDSOS charges an additional $15, for a total of $80.
Even at this stage, you are still not quite ready to get down to business. The following steps will help you ensure you and your business are protected.
You will need to make a complete and accurate accounting of all business income and expenses. You will also need to keep your business and personal assets completely separate. One of the best ways to do this is to open a new bank account in the LLC’s name. Having a business bank account also helps your business look credible from the start.
All money that comes into the business should go directly into this new account. When you pay business expenses, such as rent, payroll, office supplies, registered agent fees, and so on, the money should come from this account. The only time money should go from the business account to your personal account is when you are paying yourself in accordance with your LLC’s operating agreement.
Your LLC is going to have ongoing financial obligations. It will owe taxes to various government agencies, and it will have to file annual reports with the state. If you decide to use a registered agent service, you will owe an annual fee.
Keeping track of all of your LLC’s financial and reporting obligations can be difficult when you are also trying to run your new business. Hiring a financial or legal professional can give you peace of mind that these requirements are under control. A professional can also advise you on best practices with regard to financial planning, budgeting, and other concerns.
You may need to obtain business licenses and permits for your LLC. Exactly which ones you might need will depend on your business activities and location. If you have a physical location, you might need one or more building permits, and your business must comply with local zoning laws. Businesses involved in food service need licenses from the local health department. If your business draws crowds of people, the fire marshal will surely want to speak to you.
You can ask your local city or county clerk about what permits and licenses you will need for your business to operate in a particular area. Some types of businesses require licenses from the state or federal government. The SDSOS has additional information available on its website.
This portion of our website is for informational purposes only. Tailor Brands is not a law firm, and none of the information on this website constitutes or is intended to convey legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness.