Why Start an LLC in South Dakota?
Forming your business as a Limited Liability Company (LLC) in the United States wreaths it with many benefits that the status of a conventional corporation, sole proprietorship and partnership cannot individually offer as an LLC possesses a unique hybrid make-up that merges the defining features of these traditional business structures with one another.
To illustrate, an LLC offers the flexibility of sole proprietorships and partnerships as it is free from most of the formalities and paperwork necessitated with corporations, and yet it also provides the limited liability inherent to a corporation, offering liability protection to you and your personal assets if you are faced with a lawsuit. Its hybrid structure also crucially bestows upon you your taxation of choice.
Anyone can form an LLC in the United States – even foreign citizens and companies. However, the requirements for forming an LLC varies slightly from state to state.
In this article, we will be looking at how to start an LLC in the state of South Dakota. Not only does the state house the famed Mount Rushmore, it houses more than 11,000 LLCs. The Four Presidents witness the birth of 2,500 South Dakota LLCs every year. The defining commercial perk of South Dakota is how cheap it is to start a business. It has some of the lowest tax burdens in the country, in fact, it demands the lowest business cost out of all the states!
How to start an LLC in South Dakota?
STEP 1: Name of the LLC
First and foremost, you must name your South Dakota LLC in your formation documents. You would have to pick a unique name for your South Dakota LLC that complies with South Dakota’s naming requirements:
- The name must contain either the words “Limited Liability Company” or “Limited Company” or one of their abbreviations, “LLC”, “L.L.C.”, “LC” or “L.C.”.
- The name cannot insinuate that it is a business entity other than an LLC.
- The name cannot contain words that may associate the LLC with a government agency.
- The name cannot contain prohibited words, if it contains restricted words it would need to go through additional paperwork and it may necessitate a licensed person whose profession respectively correlates to those restricted words being a part of the LLC.
- The name must be unique, distinguishable from the names of pre-existing business entities in South Dakota. In order to determine if the exact name you have envisioned is available, you may browse through the business name database on the South Dakota Secretary of State’s website.
You may reserve the name you have envisioned for 120 days by filing an Application for Reservation of Name with the South Dakota Secretary of State. No online filing option is available, the reservation may only be filed by mailing the form to the office of the South Dakota Secretary of State. The filing fee would be $25.
You should also check if your LLC’s name is available as a web domain name. You may preemptively buy the URL in order to ensure that the web domain name matches your LLC’s name.
Though you are not required to register a “doing business as”, a “DBA” for your LLC in South Dakota, you may want to do so if you intend on operating under a name other than your LLC’s filed legal name in the Articles of Organization. This is achieved by filing the necessary forms online. This name would only last for 5 years and you would have to file the forms again once the time limit has been reached.
STEP 2: Appointment of Registered Agent
You are required by South Dakota’s state laws to nominate a designated Registered Agent for your South Dakota LLC while filling out your formation documents.
A Registered Agent is a business entity or an individual that acts as the LLC’s point of contact with the state, being responsible for receiving on the behalf of the LLC any tax forms, notices from the South Dakota Secretary of State and even legal documents from lawsuits. The Registered Agent also keeps the South Dakota LLC afloat by ensuring that the proper paperwork is updated and correct.
One of the requirements of being a Registered Agent in South Dakota is that the agent must either be a resident of South Dakota or a corporation present within the state with authorised Commercial Registered Agent services. The agent must have a physical street address within South Dakota, the state where the business of the LLC is to be conducted and where the documents are to be sent. Additionally, the agent must always be available during business hours to receive a Service of Process when necessary.
Anyone within the South Dakota LLC who is over the age of 18 and has a physical address could suffice, even friends and family who satisfies all the above could also suffice. You could also appoint yourself as the Registered Agent if need be, as the business owner you are not barred from having a dual position.
Nevertheless, though it will cost you some additional expenses, it is suggested that you hire a professional Registered Agent service as it greatly cuts down the risks of mistakes that a mere amateurish individual would make, therefore avoiding the accumulation of even more expenses over time. This suggestion is especially relevant if you yourself or your acquaintances do not have a physical address within the state.
The service provides you with the luxury of privacy whereby the service’s address will be listed in public records instead of yours, moreover, if you do get into a lawsuit, the service will immediately and discretely inform you, allowing you to avoid being served those documents in public. It will also shoulder the burden of being up to date with the necessary legal documents and free up your schedule as it is no longer a necessity to be on-site at all business hours.
You may nominate your Registered Agent via the South Dakota Secretary of State’s website while you are filing your formation documents or by mailing a physical copy of the Articles Organization with your Registered Agent’s information filled up in Article III to the South Dakota Secretary of State’s office address.
It is also possible to change your nominated Registered Agent, simply do so virtually via selecting this page on the South Dakota Secretary of State website or by mailing in a physical copy of a Statement of Change form to their office. The filing fee shall be $10 for both methods.
STEP 3: Filing the formation documents
An LLC in South Dakota may be formed once the Articles of Organization is filed and mailed to the South Dakota Secretary of State’s office.
Alternatively, you could also form your LLC in South Dakota by opting for the more convenient and cheaper route of filing the form online through the South Dakota Secretary of State’s website. It is as easy as selecting the “Start a New Business” option and filling up the LLC formation document found within it.
Regardless of the available routes chosen, the filing must include these necessary details of the LLC:
- Office Address;
- Registered Agent’s Name;
- Registered Agent’s Address;
- Organizer’s Name;
- Organizer’s Address;
- Organizer’s Signature;
- Management Structure;
The filing fee for the Articles of Organization shall be $150 if done through the website and $165 if filed through mail.
Before you submit the document, do ensure that you have reviewed it thoroughly to affirm that there are no mistakes made, these mistakes could carry on and even affect the business if they are as glaring as a misspelling of the LLC’s name.
Once the formation document is submitted and approved, usually within 3 to 5 days if transacted by mail or instantaneously if transacted through the virtual route, you would receive a stamped and approved copy of the Articles of Organization which could be either physical or digital depending on the method chosen when filing the forms.
STEP 4: Register the Business for Tax and Regulatory Requirements
Depending on the trade and location your LLC is in, you may need to apply for business licences or permits after forming it. The licences in question could vary from a Building Permit to a Liquor Licence, most LLCs would at the very least need small business licenses.
These licenses are provided at a local level, through specific county offices. In order to ascertain the exact licenses you may be mandated to possess you could contact your county office and make an inquiry whereby they would direct you accordingly.
With an idea of what licenses your LLC in South Dakota should possess, you may now search them up on the South Dakota Department of Revenue website for information on the laws pertaining to them and more detailed instructions on how to procure them, it could even take you to the specific agency in charge of the exact license you want.
Depending on the trade your LLC is in and how the company is run, you might be required to file for one or more forms of state tax. The South Dakota Department of Revenue website will assist you in locating and applying for the correct tax forms.
STEP 5: Prepare an Operating Agreement
Albeit of the fact that having an Operating Agreement is not compulsory within the state of South Dakota in order for an LLC to function, it still highly suggested that you prepare an LLC Operating Agreement for your business in South Dakota as it plays a vital part in determining the dynamics within the LLC and how it is run.
An Operating Agreement is a foundational legal document that establishes who owns the LLC, how much of it they own and member terms. The Operating Agreement is a comprehensive internal document that also serves as the core of the business by listing out a multitude of crucial information in order to reduce future conflicts. South Dakota’s LLC Law would only affect the internal affairs of the LLC in the absence of an Operating Agreement.
The Operating Agreement gives members of an South Dakota LLC the contractual right to customise their capital investments and share of gains and losses, according to the South Dakota LLC Act. As per Section 47-34A-404.2, an Operating Agreement may also divide members into two groups: “voting members” and “non-voting members.” As a result, members have the option of either increasing their importance in the South Dakota LLC by voting or decreasing their risks in the business by opting out.
Amongst the most important structural support an Operating Agreement provides to an LLC that you should have within your own version are:
- Its organization of how the ownership of the LLC is divided as mentioned above.
- The verdict on whether the LLC would be managed by managers or by multiple members and if the latter case occurs, how the voting powers are divided amongst the members.
- Records of the capital contributions that each member had invested in the LLC.
- The calculation of how the profits and losses of the LLC are to be divided amongst the members. The most regular route entails that the profits and losses are to be divided equally.
- The regulation of how members are introduced into the LLC and how members could leave the LLC.
- The outlines for a potential dissolution in the scenario where the members of the LLC have decided that the business should cease to exist.
Moreover, it serves the fundamental role of preserving your shield of limited liability by aiding you in proving that your South Dakota LLC truly does stand as itself, a separate legal entity from you.
STEP 6: Obtain an EIN
An EIN, or “Employer Identification Number” could be seen as a 9-digit “social security number” that is assigned by the Internal Revenue Service (IRS) to a business in order for the IRS to clearly identify it for federal tax and filing purposes. The EIN may also be referred to as the Federal Employer Identification Number (FEIN) or a Federal Tax ID Number, nevertheless, they are just different names as they are essentially the exact same thing as an EIN.
It is required for you to obtain an EIN from the IRS for your South Dakota LLC if you:
- Own an LLC that has more than one member, even if there are no employees hired.
- Intend on hiring employees for your LLC.
- Intend on filing and managing Federal and State taxes.
- Intend on opening a bank account for your LLC.
- Intend on having the LLC taxed as a corporation.
- Intend on applying for specific business licenses that would require it.
Additionally, an EIN also serves the functions of maintaining the shield of limited liability as it once again enforces that your South Dakota LLC exists as a separate legal entity and strengthening your position against identity theft as it is less probable that someone could intrude into your accounts when you separate your personal and business finances.
Evidently, due to the wide ambit it covers, an EIN is functionally compulsory for your business to run. The only way for you to justifiably refuse to obtain an EIN is if your LLC in South Dakota has only one member, no employees and its business structure is akin and taxed like a sole proprietorship.
Getting an EIN is also the stage where you are offered to pick one of the variations of taxation options available to an LLC. As mentioned above, most would pick a “pass-through” taxation option, the default, however, if you wish for your South Dakota LLC to be taxed as an S Corporation or even a C Corporation you could file certain forms to do so once you have obtained your LLC’s EIN.
You could obtain an EIN by applying for it through the IRS website or by physically mailing it to the IRS with a “Form SS-4”, Application for EIN. No filing fee will be charged.
There are no filing fees necessitated for obtaining an EIN.
STEP 7: Annual Report for Annual Renewal
Finally, once you have done all the groundworks to set up an LLC, you will have to ensure that its upkeep goes swellingly as well. It would be distressing to watch all the work poured into the South Dakota LLC go to waste just after a year and just because of inadequate maintenance of paperwork.
Like many other states, South Dakota dictates that all LLCs within it must file an “Annual Report” as a means to renew their applications and remain in compliance and good standing with the state laws. As indicated by the name, this report must be filed once every year – without fail.
The Annual Report is due by the anniversary month of your LLC’s formation, no later than the last day of the month itself. If you have forgotten what was the month your South Dakota LLC was formed, the exact date could be found in the approved Certificate of Formation.
Mailing in your LLC’s Annual Report is an option, just print out the filled up form and forward it to the South Dakota Secretary of State postal address. Submitting it virtually is another option, it could be done through the South Dakota Secretary of State website. Your LLC’s Business ID would be needed.
South Dakota demands either an online filing fee of $50 or a filing fee of $65 if you have mailed it. These fees are non-refundable.
The content of an Annual Report must include just a few details, namely:
- The name and address of the LLC;
- The name and address of the registered agent;
- The name and address of the chief manager; and
- The file number of the LLC.
If you do not file your Annual Report by 60 days after the yearly deadline, your South Dakota LLC would be administratively dissolved. You would then have to pair the report with an additional penalty fee of $50 alongside the regular filing fees in order to have your South Dakota LLC reinstated.
Additional Information on Forming an LLC in South Dakota
With all the above carried out, your LLC in South Dakota would be up and running and hopefully flourishing. They are the compulsory components that you would have to perform for your business to even begin and continue on as a South Dakota LLC.
Nevertheless, there are additional considerations that you may want to weigh your options on in order for your South Dakota LLC to succeed even further:
Opening a Bank Account
If you possess an EIN you could open up a bank account for your South Dakota LLC which is highly suggested for the smooth sailing of your business. The bank account need not be in the same state as the LLC.
A business bank account will ease transactions with other businesses in the United States and crucially, maintain your personal liability protection. Allowing your own personal bank account to be involved with the business could lead to confusions concerning what assets belong to who. This would lead to personal liability issues and consequently, damage done to your personal assets.
Knowing which Taxation Variant you are opting for
The principal utility of an LLC is that it provides you with your taxation of choice at a federal level. As an LLC in South Dakota you could choose to be taxed as either a:
- Sole Proprietorship, if the business is a single-member LLC;
- Partnership, if the business is a multi-member LLC; or
- Corporation (either S Corporation or C Corporation).
Most companies will fall into the default, the former two on the list, which is what they prefer as the LLC will be treated as a “pass-through” entity, allowing you to be taxed directly and as such, avoid double taxation. They are considered the main tax benefit of having an LLC as you are allowed to operate like a company without its burdening taxations.
Opting to be taxed as an S Corporation would also allow you to avoid double taxation, however, the IRS imposes certain restrictions to limit the kind of businesses that could choose an S Corporation status. The LLC would need less than 100 allowable shareholders and have only one class of stock.
Opting to be taxed as a C Corporation would incur double taxation upon you, however, the upside to it is that you are allowed to have an unlimited amount of shareholders.
To change your South Dakota LLC from the tax default of a Sole Proprietorship or Partnership, you need to file Form 8832 and Form 2553 with the IRS to be taxed as a C Corporation and an S Corporation respectively.
Deciding if the LLC should be Member-managed or Manager-managed
If the South Dakota LLC is rather small and the members are on board with managing the day to day operations of the business then the LLC could pursue a “member-managed” structure.
If the LLC is rather large with copious amounts of members and the majority of them are not keen on running the day to day operations of the business, then the LLC could pursue a “centralized management” system and focus its organizational roles onto one or more managers selected.
List of Necessary Addresses for the purposes of setting up the LLC
South Dakota Secretary of State’s Mailing Address:
Secretary of State
500 East Capitol Avenue Ste 204
Pierre, SD 57501-5070
Internal Revenue Service’s Mailing Address:
Internal Revenue Service
Attn: EIN Operation
Cincinnati, OH 45999
Frequently Asked Questions (FAQs)
How much does it cost to start an LLC in South Dakota?
In order to first form your LLC in South Dakota you would have to spend around $150 to $165 for the formation fee of your LLC. A $50 or $65 renewal fee has to be made every year too, depending on the submission method. These are the sole compulsory payments, the rest would depend on your needs and wants.
Nevertheless, if you missed out on the annual deadline, you would have to pay an additional penalty fee of $50 to get your now dissolved LLC in South Dakota reinstated.
Can a foreign LLC conduct its business in South Dakota?
Yes, a foreign LLC may. However, all foreign LLCs are required to register with the South Dakota Secretary of State prior to doing so. This could be done through mail or through their website, simply submit an Application for Certificate of Authority. Do keep in mind that your Registered Agent must be present within the state of South Dakota itself.
Can a professional LLC be formed in South Dakota?
Yes, a professional LLC may. However, professional LLCs in South Dakota were required to go through a more thorough and stringent application process before they could ever come into existence. To illustrate, some of the additional requirements include professional state licenses for the LLC itself and professional licensed status for the owners themselves.
Multiple professional services cannot be offered by a singular firm, only one specific type of professional service may be provided.
What is the minimum wage for workers in South Dakota and are there any regulations on how often I would have to pay them?
The minimum wage in South Dakota is $9.45 per hour. The state mandates that a majority of employees are to be paid on at least a monthly basis.
How to Dissolve an LLC in South Dakota?
If at any given point of time, you’re looking forward to discontinue your South Dakota LLC then you must dissolve it formally. The failure to do so may render you in potential legal implications, penalties and tax liabilities. Hence, there’s 2 methods such as closing your business tax accounts and file the Articles of Dissolution.
Starting a business correctly doesn’t have to be difficult. With over 15 years of experience consulting new businesses and start ups, Matthew is probably the best person to help you set a strong foundation for your business.