How to Incorporate in South Dakota vs.
How to Start a South Dakota LLC
A Guide to Choosing the Best Business Entity in South Dakota
If you plan to start a business in South Dakota, one of the first big questions you’ll have to answer is which business entity structure is best for your company. The Limited Liability Company (LLC) and corporate entities are the most popular structures in the states, and have the most desirable elements from all the business entities, such as limited liability protection and flexible tax structuring options. This South Dakota LLC formation and incorporation guide will help you understand both business structures and explain their main characteristics. We’ll discuss the details of starting both a South Dakota LLC and a South Dakota corporation, what to expect with their annual maintenance, and the advantages and disadvantages of the LLC and corporation.
Once you decided which business structure best meets your needs, you can hire Active Filings and have our professionals streamline your incorporation process. We’re confident you’ll see in no time why Active Filings is America’s most reliable business incorporation service.
LLCs vs. Corporations
Here are the key characteristics for all LLCs and corporations that are important to understand and base your decision on:
An LLC is the simpler business structure to maintain. LLCs will need only minimal paperwork, have flexibility when a decision is needed, and have low annual upkeep. An LLC is the best choice if you have a small to medium-sized business and can only handle a low amount of maintenance. On the flip side, a corporation will require a high level of maintenance, both on a day-to-day and annual basis. Corporations have more legal formalities than an LLC, like electing a board of directors, holding shareholder meetings, and maintaining internal records such as meeting minutes and stock issuance.
LLC’s are not a separate taxable entity apart from its owners, making it a pass-through tax entity. Income and losses pass through the business and onto the members to report on their personal income tax return. LLCs are the simpler and less expensive option in terms of time and paperwork for business owners during tax season. Corporations are more advanced for a business owner to take care of during tax season. A standard corporation defaults to a tax structure called a C corporation, and is known for what’s called double taxation, where a business’s net income is taxed initially by a corporate tax, and then taxed again on personal income, after shareholders receive their profits (dividends) and losses. C corporations are typically taxed at a lower rate on profits, and have opportunities for tax deductions such as health care and travel, and can retain its earnings to be reinvested into the company’s growth. A corporation can potentially elect an S corporation tax status if it’s more beneficial. When you elect an S corporation tax status, your corporation becomes a pass-through entity, and is allowed tax advantages such as dividends not subject to self-employment tax.
Corporations are better designed to appeal to investors than other business entities. Entrepreneurs looking to expand their company in the future will most likely need investor funds, making the corporate entity the suitable choice. Investors are more comfortable investing their time and money in a traditional business structure that offers stock, like a corporation. Investors don’t have to worry about complicating their personal taxes when they invest in a corporation, and only get taxed on profits actually distributed to them, unlike an LLC. Investors view corporations as a dependable business structure that will provide them with a return on their investment. Having a corporate structure will profoundly impact the ability to raise investment money. On the other hand, investors can still invest in an LLC by owning a percentage of that LLC. Owners of LLCs will have to pay taxes on their distributive shares, even if they haven’t received a distribution on those profits, and can’t issue stock, which is a turn-off for many investors. A corporation should be considered if you are serious about gaining investors.
A business starts with its appearance, and having the “LLC” or “Inc” ending on your business name will provide your company with certain a level of prestige. These endings convey permanence and encourage trust from likely investors or clients, and show that you are serious about your business. While both entities provide a level of prestige, incorporating provides a higher level of prestige for your business, since the corporation is the oldest and most traditional entity type. Keep in mind the LLC has surpassed corporations in popularity in most states, and the prestige of an LLC is growing significantly.
SD LLCs vs. SD Corporations
After understanding the key characteristics that apply to all LLCs and corporations, next is to uncover more specific characteristics of what makes a South Dakota LLC or South Dakota corporation unique from other states, which will bring us to the final answer on which entity is best for your business. Each state has its own set of statutes and tax laws that govern the way its businesses operate, and these unique details must be considered when choosing your business entity. The information in this section will provide these specifics for the South Dakota LLC and the South Dakota corporation.
No Franchise Tax, Corporate Income Tax, or Personal Income Taxes in South Dakota
South Dakota is one of four states that does not impose either a corporate income tax or a personal income tax. Furthermore, South Dakota also does not impose any other kind of business tax such as a franchise or gross receipts tax, making South Dakota potentially the most income tax-friendly state in the country.The one exception to these limited business taxes includes the Bank Franchise Tax, imposed on certain financial institutions. This tax will not likely affect most small and medium-sized businesses.
South Dakota LLC Protection From Creditors
LLCs in South Dakota have a strong level of protection against creditors (a person who is owed funds or assets by a debtor of an LLC). In other states, creditors can have the courts order a foreclosure on the LLC. In South Dakota, creditors only have one remedy against the debtor of an LLC, which is a charging order that puts a lien on a debtor’s interest (funds and assets) and creditors then have a right to receive any distributions made to the debtor from the LLC, if the LLC makes a distribution. Often times, this leads to the creditor ending up with nothing, since creditors can’t order the LLC to make distributions (SD §47-34A-504).
South Dakota LLC or South Dakota Corporation? Final Answer.
For your decision to either incorporate or form an LLC for your company comes down to the size of your business, priority of investors, level of maintenance you’ll need, and the most beneficial tax structure for the future of your business.
A South Dakota LLC wins the decision if you have a small to medium-sized business. LLCs in South Dakota stay true to design in terms of easy formation and maintenance, simple management, strong flexibility in decision-making, and limited liability protection. If growing your company large with investors is not your top priorities, you’re looking for the least expensive and sophisticated taxes and annual maintenance, and you’re just needing limited liability protection for your business, the LLC is your answer.
A South Dakota corporation wins the decision if you plan to grow your business big with the funds from investors, and you have the means for the amount of maintenance required. a South Dakota corporation remains true to character in its substantial amount of paperwork, higher maintenance, and involved yet beneficial tax structure.
How to Incorporate in South Dakota
If you’re looking to form a South Dakota corporation, also known as incorporating, you must file the Articles of Incorporation with the South Dakota Secretary of State. You can download the Articles of Incorporation online at the South Dakota Secretary of State website. Once your Articles of Incorporation are approved, your corporation is officially formed.
You can file the Articles of Incorporation in the following ways:
- Online at the South Dakota Secretary of State website (recommended)
- By postal mail
Filing your South Dakota Articles of Incorporation on the website is the fastest, most secure, and preferred method by the Secretary of State. The fee for filing your Articles of Incorporation costs $150 (plus an additional $15 fee if you file by postal mail). The state of South Dakota processes business registration forms such as the Articles of Incorporation quicker than most states, and you can expect to get your corporation approved in about a day.
To complete your South Dakota Articles of Incorporation, include the following information:
Enter your corporation’s name exactly as you would like it to appear. Your corporation name must include one of the following words: “Incorporated,” “Corporation,” “Company,” “Limited,” or an abbreviation of one of those words.
Your corporation name can’t imply it is organized for a purpose other than what is mentioned in the Articles of Incorporation. The name can’t already be in use, and can’t sound similar to the name of any other company in South Dakota.
How to Form an LLC in South Dakota
If you’re looking to form a South Dakota LLC, you must file the Articles of Organization with the South Dakota Secretary of State. You can download the Articles of Incorporation online at the Secretary of State website. Once your Articles of Organization are approved, your LLC is officially formed.
You can file the Articles of Organization in the following ways:
- Online at the South Dakota Secretary of State website (recommended)
- By postal mail
Filing your South Dakota Articles of Organization on the website is the fastest, most secure, and preferred method by the Secretary of State. The fee for filing your Articles of Organization costs $150 (plus an additional $15 fee if you file by postal mail). The state of South Dakota processes business registration forms such as the Articles of Organization quicker than most states, and you can expect to get your corporation approved in about a day.
To complete the South Dakota Articles of Organization, include the following information:
Enter your LLC name exactly as you would like it to appear. Your company name must include the words “Limited Liability Company,” “Limited Company,” or one of their abbreviations.
Your company name can’t imply it is organized for a purpose other than what is mentioned in the Articles of Organization. The name can’t already be in use, and can’t sound similar to the name of any other company in South Dakota.
South Dakota Annual Report
Keeping your business updated and in good standing with the state of South Dakota every year can be done by taking care of a few annual maintenance tasks.
1. File your corporation’s annual report
2. File your annual South Dakota federal business tax returns
In this section, we’ll explain the basic instructions and resources you’ll need to help you take care of your tax-related upkeep and annual maintenance.
What is a South Dakota annual report?
A South Dakota annual report updates or confirms the records for your business, such as officer/member names and addresses, and lets your business remain in good standing. South Dakota LLCs and South Dakota corporations that do business in the state are required to file annual reports with the Secretary of State.
How do I file an annual report in South Dakota?
Corporations and LLCs in South Dakota need to either file their annual reports online at the Secretary of State website (recommended), or by postal mail.
How much does it cost to file an annual report in South Dakota?
For LLCs and corporations, the annual report filing fee in South Dakota is $50. If you choose to submit a paper form by mail, there is an additional $15 paper filing fee.
When are South Dakota annual reports due?
Your South Dakota annual report is due every year on the anniversary date of your original filing, with the first annual report due the year after you’ve formed your business.
South Dakota Business Taxes
The filings can get complicated and you may need the help of a tax service or CPA to complete these requirements, but regardless of your accounting skills, we’re here to help get you started.
Check out our South Dakota Business Tax FAQ below:
Does South Dakota have a corporate, franchise, or personal income tax?
South Dakota is one of four states that does not impose either a corporate income tax or a personal income tax. Furthermore, South Dakota also does not impose any other kind of business tax such as a franchise or gross receipts tax, making South Dakota potentially the most income tax-friendly state in the country. The only business taxes you need to file will most likely be the federal taxes.
The one exception to these limited state business taxes includes the Bank Franchise Tax, imposed on certain financial institutions. This tax will not likely affect most small and medium-sized businesses.
What forms do you file for your South Dakota federal business taxes?
For C corporations, submit Form 1120 federal income tax return.
For S corporations, submit Form 1120S federal income tax return for an S corporation.
For single member LLCs, submit Schedule C as part of your Form 1040 individual income tax return.
For multi-member LLCs, submit Form 1065 partnership income tax return along with Schedule K-1.