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South Dakota is a vast state with a small population and opportunities for small business owners. The state offers favorable tax laws, a strong job market, and pro-business regulations. It also boasts a relatively low cost of living and doing business, which can be advantageous when starting a business. LLC owners can benefit from the business climate created in South Dakota, and this article guides you through the steps of setting up an LLC in the state.
How to start an LLC in South Dakota
- Name your South Dakota LLC
- Create a business plan
- Get an IRS employer identification number (EIN)
- Choose a South Dakota registered agent
- File your South Dakota LLC Articles of Organization
- Obtain South Dakota business licenses and permits
- Understand South Dakota tax requirements
- Prepare an LLC operating agreement
- Examine business insurance options in South Dakota
- Understand financial considerations
- Market your LLC
What is an LLC?
A limited liability company, or LLC, is one of the more popular types of business entities among small-business owners in the US. According to the Journal of Accountancy, IRS statistics indicate a 66% increase in LLC formation nationwide in the first decades of the millennium.
One reason LLCs might be so popular is the personal asset protection they afford. Owners of LLCs, known as “members,” are generally not held financially responsible for the LLC’s business debts or legal claims.
You can form an LLC in one of two ways: as a single-member LLC or as a multi-member LLC.
Is an LLC right for you?
The LLC isn’t the only business structure available to a South Dakota business owner. To determine whether an LLC is the right fit for your new venture, consider the following:
- Do you have personal assets in need of protection? One of the main advantages of forming an LLC is that it effectively shields members’ personal assets from creditors and litigants.
- Are you looking to limit your tax liability? Unless your LLC elects to be taxed as a C corporation, it’s considered a pass-through entity, meaning the business is subject to a single round of taxation at members’ personal income rates—as opposed to corporations, which are usually also subject to corporate tax. However, in South Dakota, your tax liability is even further limited, thanks to the state’s lack of personal and corporate income tax.
1. Name your South Dakota LLC
Choosing a business name is one of the most essential decisions you’ll make as an LLC owner in South Dakota. A good name is the key to brand identity and recognition, and subsequently communicates your LLC’s function and mission in a short, concise, and memorable way. There are also specific rules to keep in mind for naming your LLC in South Dakota:
- Create a unique name. It should be distinct from the name of any other business entity already registered with the South Dakota Secretary of State’s office. You can search current South Dakota businesses in the state to ensure your desired name is available.
- Use specific identifiers. Your LLC name should contain the words “limited liability company,” “limited company,” or an abbreviation thereof (L.L.C., LLC, L.C., or LC).
- Exclude specific words. The name cannot contain words that would cause the LLC to be confused with any government agency, such as the FBI or Treasury Department. Also, it may not contain words that imply the business is engaged in licensed activities, like the practice of law or real estate, without members holding the required licenses.
2. Create a business plan
Writing a business plan can help you streamline your ideas and get a sense of how much time, money, and resources you’ll need to get your South Dakota LLC up and running. Investors can also use your business plan to evaluate the viability of a venture before deciding whether to fund it.
A workable business plan will include your LLC’s name and a brief description of what you sell—a product, service, or perhaps both. It might also include a thorough market analysis, an outline of the LLC’s organizational structure, profiles of one or more target customers, and marketing, logistic, and financial plans.
3. Get an IRS employer identification number (EIN)
An employer identification number (EIN) is a federal tax identification number—a nine-digit number assigned to businesses by the US Internal Revenue Service (IRS) to track tax obligations. You’ll need an EIN to register your LLC with the Secretary of State’s office, and you can obtain one online through the IRS website, free of charge.
4. Choose a South Dakota registered agent
You’re required by state law to appoint a registered agent for your South Dakota LLC. A registered agent is an individual or business entity authorized to receive legal correspondence and other official documents on your LLC’s behalf.
You can appoint a member or employee of your LLC, hire a third-party individual, or utilize registered agent services. Whichever you choose, your registered agent must be reachable—in-person—at an in-state address (not a PO box) during regular business hours.
5. File your South Dakota LLC Articles of Organization
To formally establish themselves in the state, South Dakota requires LLCs to file Articles of Organization. These articles must include:
- Your LLC’s name
- Your main office address
- The name and address of your registered agent
- The name and address of each founding LLC member
- The duration of the LLC, if not indefinite
- Whether the LLC will be “member-managed” (managed by you and any co-owners), or “manager-managed” (managed by an employee)
- If your LLC is manager-managed, the manager’s name and address
- The signature of a member, or other party, authorized to submit articles on the LLC’s behalf
Optionally, you may also include information about the LLC’s overall purpose. Articles may be filed online or by mail. Online filings are subject to a $150 filing fee; postal filings should include a check to cover a $165 filing fee.
6. Obtain South Dakota business licenses and permits
Although there is no statewide general business license requirement in South Dakota, you may need one based on your locality or line of business. The South Dakota Governor’s Office of Economic Development offers a comprehensive list of possible state licensing requirements. You can apply directly for specific state business licenses relating to taxes, including sales tax, by completing an application through the South Dakota Department of Revenue’s tax application web portal.
7. Understand South Dakota tax requirements
South Dakota LLCs can be taxed as a corporation, a limited liability partnership, or a single-member LLC—which are taxed much like sole proprietorships. Your LLC assumes different tax obligations based on its tax structure. Taxes you or your LLC may be obligated to pay include:
- Personal income taxes. Regardless of how you form your LLC—as a pass-through tax entity or corporation—you and your business partners will pay federal taxes on income earned through the LLC at your personal-income levels, including self-employment taxes. The federal income tax rate is between 10% and 37%, depending on your tax bracket. The self-employment tax rate is 15.3%. South Dakota does not levy tax on personal income at the state level.
- Corporate taxes. If you elect to form your LLC as a corporation, it will pay federal taxes on all profits generated before they’re distributed to shareholders, at which point they’re taxed again at the shareholders’ income levels. The federal corporate tax rate is 21%. South Dakota imposes no corporate tax at the state level—this goes for both C and S corporations.
- Sales tax. If your LLC is engaged in retail, you will need to pay a sales and use tax of 4.5%, applied to each transaction. You may collect this tax directly from customers as part of the sales process and pay the Department of Revenue monthly.
8. Prepare an LLC operating agreement
LLC operating agreements are legal documents that outline how an LLC will conduct business. Although not required by state or federal law, an operating agreement can provide guidelines for internal operations and accountability, laying out members and employee responsibilities and timelines. An operating agreement typically includes:
- Your LLC’s name and primary address
- How long you plan to run the LLC (perhaps in perpetuity)
- Information on the LLC’s registered agent
- Information about the Articles of Organization
- The business’s purpose and mission statement
- An organizational chart listing members and their respective investments
- How profits and losses are divided between LLC members
- The process for admitting new members and offboarding outgoing ones
- An overall management plan
- Various indemnification and liability provisions
9. Examine business insurance options in South Dakota
Unexpected losses can be devastating for a fledgling business—whether in South Dakota or elsewhere. While LLCs offer a degree of personal asset protection, you may still want to purchase insurance to protect your business and its property. Standard policies in South Dakota include:
- Workers’ compensation. Workers’ comp covers injuries or illnesses employees potentially suffer on the job. There is no law in South Dakota requiring any employer to carry this coverage, but state authorities highly recommend it
- General liability insurance. General liability insurance provides broad coverage for your business, covering most legal actions resulting from accidents, injuries, or negligence.
- Commercial property insurance. Commercial property insurance helps replace commercial property lost or damaged during the ordinary course of business. It can cover costs associated with fire, weather damage, or theft.
- Professional liability insurance. Professional liability insurance protects businesses that dispense professional services with a high bar for competency and risk for malpractice claims, like those engaged in law, accounting, or real estate.
- Cyber liability insurance. Data breaches and ransomware can harm your customers, business, and reputation. Cyber liability insurance helps if you have to inform customers about an attack, compensate them in case of a claim, and pay for credit monitoring for affected customers.
For your convenience, the Small Business Administration (SBA) maintains a list of forms of insurance your South Dakota LLC may need.
10. Understand financial considerations
Aside from insurance, you’ll inevitably need to make additional investments to get your South Dakota LLC up and running. These expenses might include renting an office, storage, or retail space, commissioning a professionally designed website, or paying for advertising, equipment, and software. You may also want to hire one or more lawyers, accountants, or other professionals to support business operations on a contract basis. These costs can quickly add up. Luckily, there are accessible funding options, like Shopify Capital, which lets you repay funding as a percentage of your store’s daily sales—so payments flex with your business. Consider opening a business bank account and business credit card to handle cash flow, business expenses, and overhead.
11. Market your LLC
Market your new business to reach potential customers—and turn them into repeat customers. A good marketing plan for your South Dakota LLC might include the following elements:
- Market research. Understanding your LLC’s target customer is a must. You can accomplish this by conducting thorough market research.
- Advertising and promotion. Design and place ads yourself, or hire an agency to do it for you. Traditional paid advertising may seem out-of-date, but it can still be highly effective for getting the word out about your new business.
- Social media. Successful businesses today maintain an online presence across all major social media platforms, including Facebook, Instagram, TikTok, and YouTube. Consistently publishing content that authentically aligns with your brand identity can garner more visibility within—and beyond—South Dakota.
- Public relations. Develop strong relationships with media outlets in South Dakota and nationwide to get coverage for your brand and bring attention to your business organically.
- Customer retention. Leverage your marketing materials, digital tools (such as an online store), and social media presence to build long-lasting customer relationships. That way, you can turn them into repeat customers and encourage them to spread the word about your business to friends, family, and colleagues.
Starting a South Dakota LLC FAQ
How much does it cost to form an LLC in South Dakota?
Starting an LLC costs at least $150 to register the business with the South Dakota Secretary of State’s office, if you choose to file your Articles of Organization online ($165 to file by mail). Your LLC is also required to file an annual report, which can be done online for $50, or via mail for $65.
Do you need a registered agent for your LLC in South Dakota?
Yes, all LLCs in South Dakota must nominate a registered agent or registered agent service with an in-state mailing address. The agent must be available (on-site) during regular business hours.
How do LLC state taxes work in South Dakota?
Unless your LLC elects to be taxed as a corporation, members’ earnings are only taxed once at the federal level. South Dakota does not impose personal income or corporate taxes at the state level.