How To Start An LLC In South Dakota
The state of South Dakota is becoming increasingly popular because of the excellent rate of growth of its economy. Additionally, the government of the state has several incentives and policies in place to help further accelerate this economic growth. As a result, nearly 2500 limited liability companies are set up in South Dakota every year while almost 11000 are presently actively operating in the state.
The state’s economic situation is so noteworthy that it has excellent rankings with the Chamber of Commerce in various fields, such as its business tax environment and per capita income. Forming a limited liability company in South Dakota is just as easy as in other states, although the procedure is justifiably somewhat lengthy.
What is an LLC?
A limited liability company, shortened to LLC, is a business structure in South Dakota that combines the characteristics of a corporation with those of a partnership or a solitary proprietorship. Such a structure may be owned and run by one or several members. All LLC owners are protected from all sorts of debts and liabilities relating to the business. Therefore, they get the privilege of a lack of liability but also a quite flexible and customizable business structure.
Although LLCs are not categorized as either corporations, partnerships, or sole proprietorships, owners have the freedom to decide whether they wish to pay the taxes of their LLC under one of those categories or other business types.
Forming and running a limited liability company in South Dakota has several advantages. If you are new to the business world or simply want a relaxed working environment and increased authority over the business, then forming an LLC in South Dakota is a great option.
Advantages Of An LLC In South Dakota
South Dakota is a brilliant location for anyone looking to start an LLC. Like in many other states, forming an LLC is perhaps the simplest way of starting a business in South Dakota for all businesses, regardless of size. This is because of the protection against several critical business intricacies that owners of a company otherwise have to face.
The state of South Dakota has an excellent standing with the United States Chamber of Commerce, which means that its economic growth speaks for itself. New businesses can take advantage of numerous scaling opportunities here while also benefiting from the general benefits of forming an LLC. Below are some advantages of setting up a limited liability company in South Dakota:
South Dakota has a new rule in place, passed by the name of the South Dakota Limited Liability Company Act, which gives LLC members greater authority to choose and customize their control over the company. The Act rules that the operating agreement, which is essentially the constitution of the LLC, may include a clause that may prohibit any of the members from transferring their interests to a third party.
If, however, the LLC members choose not to include this clause, then such a transfer may take place, that too, without having to dissolve the company. The transferee, though, would not be able to participate in management activities or become a member. The transferee will also have no ownership whatsoever over the shares of the entity they have transferred their distribution too. Although if they want to become a member of the LLC again, they will have to get written consent from all members.
Individual security against business creditors
All states, including South Dakota, guarantee that all the members of any LLC will have their assets protected from business creditors, that is, entities or individuals who claim personal liabilities against your business or its members, another business that your LLC may have contractually partnered with, or even the employees of your company.
Having an LLC in South Dakota will ensure that such creditors and claims can not object to or ask for more assets than are incorporated in the LLC. This is also called inside-out creditor protection and is a critical regulation that helps protect LLCs.
Business security against creditors
The state of South Dakota has a well-built reputation for offering unmatched protection to LLCs. One of these benefits is that, similar to how business creditors can not put claims on the individual assets of the members, any creditors bringing claims on the assets of a member can not have any claim on the assets of the LLC.
There is a legal limit in the state about how much from the LLC’s assets can be used to fulfill the claims of an individual creditor. This law is not found in other states where a personal creditor can not only claim as many assets of the LLC as they want but also claim to become the owner of the business.
Even at most, a personal credit claim holder can request a charging order. This will allow them to claim whatever distribution the LLC and its members have given to the creditor’s target member. However, this will not give the creditor authority to partake in your business, make decisions like dissolving the LLC, or affect the other members, regardless of whether your LLC is single-member or multiple-member. This method is not only time-consuming but also quite expensive, so most creditors choose to forgo it.
The flexibility in LLC management, operation, and other affairs offered in South Dakota is unlike that in other states. There is also no limit over how many members an LLC can have, starting from single-member LLCs to multiple-member LLCs having a hundred members or more. Each of the members can choose to divide management responsibilities as they wish, but they can also select one individual to handle this task. This individual may be a non-member or a member, or they may choose a group of people who may be members or non-members.
South Dakota also allows LLC owners to decide how to pay the LLC’s taxes. Normally, LLCs are taxed as solitary proprietorships or partnerships in the state, but they can also be taxed as corporations. There are also numerous business and tax incentives that can be availed in the state, making it a truly well-rounded choice for LLC owners.
Disadvantages Of An LLC In South Dakota
While forming an LLC in South Dakota comes with various benefits, such as limited liability protection, pass-through taxation, and fewer formalities compared to a corporation, there are some disadvantages to consider. Here are some potential drawbacks of forming an LLC in South Dakota:
Limited growth opportunities
Unlike corporations, LLCs in South Dakota cannot issue shares of stock to attract investors. This limitation may make it more challenging to raise capital for business expansion or attract outside investors if you’re looking to grow your company.
In an LLC, members are considered self-employed, and profits are subject to self-employment taxes (Social Security and Medicare). Depending on your income level, these taxes can be higher than the taxes paid by a corporation, which may lead to a higher overall tax burden for the members.
Less legal precedent
As LLCs are a relatively newer business structure compared to corporations, there is less legal precedent to rely on when disputes arise. This can create some uncertainty when it comes to resolving conflicts, as the courts may not have established guidelines to follow.
Annual report fees
Although South Dakota has no state income tax and lower annual report fees compared to many other states, LLCs are still required to submit an annual report and pay a fee of $50. This is a recurring cost that you need to factor into your business expenses.
In South Dakota, the names and addresses of LLC members or managers must be listed in the public records. This means your personal information is accessible to anyone who searches the state’s business registry, which can be a concern if you value privacy.
How To Form An LLC In South Dakota
The process of setting up an LLC in South Dakota is fairly easy to follow, given that you are fully aware of all the steps and follow them carefully. Inviting help from a legal expert or business professional is also recommended so you do not make any costly errors. However, this is not a mandatory requirement, and with the correct preparation, it can easily be completed on your own.
Below are the steps you need to follow to set up a South Dakota LLC:
- Choose a unique name for your business
- Work with a Registered Agent
- File for the Articles of Organization
- Create an Operating Agreement
- Apply for an EIN
- Maintaining your LLC
Choose a unique name for your business
The first step in the registration process, perhaps one of the most significant ones, is choosing a name for your LLC, which may take a lot of time as opposed to popular belief. The name of the LLC needs to be unique and one that is not in the use of any other registered company in the state. You can take help from one of the several free or paid tools available to confirm whether the name you have chosen is available statewide.
In some cases, you may discover that a name you have selected is free for use, but you are unsure whether you want to stick with it. In this scenario, you can book the name with the state so that while you are finalizing your decision, another business will not take it. You can easily reserve a name for 120 days in South Dakota by paying a small fee.
Another requirement in South Dakota for LLC names is that they should indicate the nature of the company in one way or another. For example, you can use terms like Limited Liability Company, L.L.C., LLC, L.C., LC, Limited Company, et cetera. You can shorten the word “limited” to “Ltd.” and “Company” to “Co.” It is also a safe option not to include the names of any living members in the LLC’s name.
One problem you may face is that another business may trademark your preferred name. This problem and several others of its nature can only be avoided by doing extensive research beforehand. There is no shortcut in this step, as there are no central platforms available where you may check the availability of names. Thus, as aforementioned, this is the step that may take up most of your time, so it is best to start preparations and research.
Work with a Registered Agent
Having a registered agent is mandatory for all businesses and companies looking to register with the state. The registered agent is an entity that receives and manages legal documents on behalf of the LLC they are working for. The registered agent is responsible for receiving legal notices for the LLC if it is in legal trouble, for example, if it is sued.
The registered agent may be an existing business in the state or an individual who is a permanent resident of South Dakota. These registered agents are normally paid annually; however, you may devise a different arrangement with your agent according to feasibility.
It is best to work with a professional agent to avoid legal discrepancies in the future. You can also change the registered agent after the LLC has been registered in the state.
File for the Articles of Organization
The Articles of Organization finalizes the incorporation of an LLC in South Dakota. You can complete the online form, which does not take long to complete. Alternatively, you may download it, print it, fill it out, and then mail it along with the fee to the office of the Secretary of State, although this process takes longer and may require a higher fee.
While filling out the form, you will have to include information like the LLC name, the address of the designated initial office, the address and name of the registered agent, the signature of the organizer, and the signature of the managing authority, if there is one in your LLC.
Create an Operating Agreement
The South Dakota operating agreement acts as the binding constitution of the LLC. It describes everything relating to its operation, such as how it will be managed and how the revenues will be distributed among members. The operating agreement is created by the members and sums up the rights and responsibilities of all members only after they have carefully discussed, negotiated, and consented to each clause.
It is recommended to create a detailed operating agreement so there are no disagreements among the stakeholders in the future about issues such as revenue distribution and responsibilities. You can also take help from a legal expert to draft a holistic agreement.
Apply for an EIN
The Employee Identification Number, simply the EIN, is another compulsory requirement of the state of South Dakota. You have to obtain it for the LLC regardless of whether the LLC currently has any employees. This number is to be obtained because it is needed for filing taxes and setting up the LLC’s bank account. Therefore, whether your LLC has hired employees or has multiple members, you need to obtain an EIN from the Internal Revenue Service.
Maintaining your LLC
Like in any other state, the registration process for incorporating LLCs is easy; successfully maintaining the LLC is another story. Granted, the state provides numerous benefits that businesses can avail of all sizes. But it is just as crucial to maintaining a good rapport with the authorities. You can do so by being vigilant and punctual in tax payments, keeping up-to-date with new regulations, and ensuring that your LLC strictly abides by all state business laws.
Types of LLC
Which type of LLC is ideal for me?
In South Dakota, as in other states, there are several types of Limited Liability Companies (LLCs) that you can form.
- Single-Member LLC: A Single-Member LLC is an LLC owned by one individual or entity. This type of LLC is ideal for small business owners or entrepreneurs who are the sole owner of their businesses. In South Dakota, a Single-Member LLC is treated as a disregarded entity for tax purposes, meaning that the business’s income and expenses are reported on the owner’s individual tax return.
- Multi-Member LLC: A Multi-Member LLC is an LLC that has two or more members (owners). This type of LLC is suitable for businesses with multiple owners or partners. In South Dakota, a Multi-Member LLC can choose to be taxed as a partnership or a corporation, depending on the business’s needs and preferences.
- Series LLC: A Series LLC is a unique type of LLC that allows for the creation of separate “series” or “cells” within the main LLC. Each series operates as an independent entity with its own assets, liabilities, and management structure. This type of LLC is ideal for businesses with multiple, distinct operations or assets that require separate management and protection. South Dakota is one of the few states that allow the formation of Series LLCs.
- Professional LLC (PLLC): A Professional LLC, or PLLC, is designed for licensed professionals such as doctors, lawyers, architects, and accountants. This type of LLC is necessary when the business provides a professional service that requires a state license. South Dakota law requires that all members of a PLLC must hold the appropriate professional license.
Applicable LLC Taxes In South Dakota
All LLCs in South Dakota must file an annual report with the state, which can be completed online or on paper. This report is due on the first day of the year’s second month, following the month in which the LLC was formed. You will need very little information to complete the report, including the LLC’s name, the address of the initial office, registered agent detail, et cetera. The fee for the annual report is $50.
There is no state income tax in South Dakota, although you will have to collect and pay sales tax if you sell any products.
Cost Of Forming LLC In South Dakota
The filing fee for LLC registration in South Dakota is not as low as in other states. Plus, there are several other costs to be covered in this process. However, given the benefits provided by the state to LLCs, these costs are worth paying. It is best to conduct ample research beforehand about how much you will have to pay at each step so that you do not get any surprises along the way.
Following are the costs you will have to deal with when incorporating an LLC in South Dakota:
Articles of Organization filing fee
Registered Agent fee (annual)
South Dakota Annual Report fee
Employer Identification Number (EIN)
State and local taxes, licenses, permits
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