How to Form an LLC in South Dakota: The Affordable Way

Planning on starting your business journey in South Dakota? Great! The first step is for you to decide on the business structure. Conducting business through a Limited Liability Company (LLC) has many advantages. It protects your personal assets from business liabilities, involves less filing costs and paperwork, and is more flexible than a corporation.

It is important to clearly understand the process involved in forming an LLC in South Dakota. The State has steep fines if your company misses its annual report filings and has certain taxes you must pay on time. You can plan to start your LLC efficiently once you know what to expect. Through this article, we will ensure you complete the process of setting up the LLC without error, avoiding wasting time and non-refundable fees.

Name Your South Dakota LLC

Naming your LLC is the first step in forming an LLC. The name of your business is how your clients and the market identify your company. Therefore, the name should ideally be such that it attracts the attention of your potential clients and is easy to remember. The name must also comply with certain guidelines mandated by South Dakota.

Naming Guidelines

The name that you select must be something unique. Thus, the name should not be such that another business is using it in the State of South Dakota.

Apart from being unique, the name should also not be similar to the name of another LLC in South Dakota. For example, the names ‘Appel’ and ‘Apple’ are not clearly distinguishable, and there is a good chance that people will get confused between the two.

Similarly, you cannot use suffixes such as ‘like’, ‘co.’, ‘inc’, ‘corp’ etc.; conjunctions like ‘and’, ‘&’; singular or plural forms of the word; abbreviations, punctuations etc. to distinguish your name from an existing name. The name of your LLC should be truly unique.

The name of your business should have the words “limited liability company” or one of its abbreviations (LLC or L.L.C.).

The name of your LLC cannot include words that can make people confuse your LLC for a government agency. For example, words such as ‘FBI’, ‘Revenue Service’, and ‘State Department’ cannot be included in the name you select for your LLC.

A few restricted words such as ‘Attorneys’, ‘Bank,’ etc. can only be used if your LLC is actually in that line of work. For example, you can only use the word ‘Bank’ if your LLC is a Bank. To use such words, you would be required to file additional paperwork.

Does Your Business Require a DBA?

A DBA (doing business as) enables you to operate your LLC under a different name. DBA is also sometimes referred to as a ‘trade name’, ‘assumed name’ or ‘fictitious name’. Over time, you may wish to diversify your business. For example, you may enter new market areas or decide to sell new products. A DBA can help you in such scenarios.

But remember that the trade name alone does not protect your personal assets. To avail of the protection of limited liability, you need to form an LLC. South Dakota requires all businesses to file a DBA with the State when using a different name to conduct business.

Doing a Name Search and Name Reservation

Before finalizing a name for your LLC, you must ensure that the name you selected is not similar to an existing business. You can look for existing names of LLCs in South Dakota by using the State’s Business Name Availability Search (for exact matches) and Business Information Search (for variations of the name you desire). You should properly check the name selected for your LLC to avoid rejection later on.

South Dakota allows you to reserve a business name until you are ready to form your LLC. You can apply with the Secretary of the State for this purpose. Presently, there are no provisions to apply online. Instead, you may submit your application via mail to the office of the Secretary of the State. Once your application is reviewed, the name shall be reserved for 120 days.

Registering Your Business Domain

It would be best if you also considered a domain name for your business at this stage. Selecting and registering a domain name early would ensure that the name is still available when your business is up and running.

Having a domain gives credibility to the business and shows professionalism. It also gives visibility to your brand and shows that the business is tech-savvy. An internet presence will also attract more clients.

Choose a Registered Agent In South Dakota

A registered agent is an individual or another business entity responsible for receiving all official communication on behalf of the LLC. You must select a registered agent before your company can start functioning. The registered agent shall also receive any process service concerning a lawsuit against your company.

Who Can Be a Registered Agent?

A registered agent can be a registered agent service or an individual, such as a friend or a family member. You can also be your own LLC’s registered agent. A registered agent service is usually a company specializing in accepting correspondence and forwarding it to clients. However, South Dakota has some rules you must remember while appointing a registered agent. The agent you select for your LLC must be:

• An individual State resident (above 18 years) or
• A business entity that has obtained authorization to conduct business in the State. 

The registered agent should be available during business hours on all working days.

Individual v. Registered Agent Service

You can be the registered agent of your LLC. However, this is not very advisable. Hiring a registered agent service has a lot of advantages over appointing yourself as the registered agent.

A registered agent service protects you from the risk of losing official correspondence or not responding to them in time. If you are the registered agent of your LLC, there is a good chance that you may miss important communication from the State as you mostly concentrate on growing your business.

It is also possible that you are not at the office at some point, which could make you miss important correspondence. A professional registered agent service ensures that you don’t fail to duly respond to any notice or other communication that may be sent to your LLC.

Professional help lets you focus your energy and time on core business areas. They also keep your address off of public records, protecting your privacy.

File the Articles of Organization with South Dakota

You must prepare and file your Articles of Organization as the next step. It is a legal document needed to officially form and legally incorporate your LLC. You must file this document with the office of South Dakota’s Secretary of State. The following information is required to be included:

• Name of the LLC
• Address and name of the Registered Agent
• Address and name of the organizers of the LLC
• Reason for forming the LLC
• Management structure
• Names and addresses of the managers
• If applicable, names of people responsible for the company’s debts and to what limit.
• Signature of all the organizers

Expedited Filing

Online applications are processed immediately. Applications sent via mail take three to five business days to be processed. However, the State provides an option to pay an expedition fee of an additional $50 to have in-mail applications processed faster.

Publish Notice of Formation

The South Dakota Department of State does not require you to give public notice about the formation of your LLC.

Create an Operating Agreement for Your South Dakota LLC

An operating agreement is a legal document. It describes how your LLC will conduct business. It outlines capital contributions, division of profits between members, and relationships among members.

It is not legally mandated to register or even have an operating agreement in the State of South Dakota. It is still advised that you have an operating agreement in place.

Having an operating agreement ensures that members and managers of the LLC are on the same page. It helps in avoiding conflict in the future. It also offers credibility to your enterprise. You will need an operating agreement for opening an account with the bank. More importantly, it helps protect the LLC’s limited liability status by reinforcing it.

There are no rules regarding what should be included in your operating agreement. However, the document should ideally cover the following aspects:

• Organization Details 
• Ownership 
• Duties of Members and Managers
• Management and Voting 
• Capital Contributions
• Division of Profit and Losses
• Bookkeeping Procedures
• Procedure for adding new members
• Requirements concerning Meetings and Procedures thereof
• Dissolution

Writing the Operating Agreement Yourself v. Hiring a Service

An operating agreement can be written by yourself or by a professional you hire. Both options have their pros and cons. Hiring an attorney would make it easy for you to draft an operating agreement.

A professional’s experience would be helpful because they would know what must be covered in such an agreement. Make sure that you select a person familiar with South Dakota’s laws. However, hiring a professional can be expensive.

You can create your operating agreement, or you can purchase templates that you can customize to draft the operating agreement of your LLC. It will cost you less, but it can be tricky if you are unfamiliar with the legal side.

Most registered agent services also offer to draft services and would be ready to draft your LLC’s operating agreement.

Limits of Operating Agreement

There is no fixed format for this agreement. You have all the freedom to include the terms of the agreement you feel are necessary for your LLC. However, the terms are limited to the law.

Therefore, you cannot include a few things in an operating agreement. For example, you cannot have any provision in the agreement that “…vary the right to expel a member in an event specified in S. 47-34A-601 (6).”

You may read provisions of Section 47-34A-103(b) of the Codified laws of South Dakota for a comprehensive list of things that cannot be included in your operating agreement.

Obtaining an EIN for your South Dakota LLC

EIN stands for ‘Employee Identification Number.’ It is issued to entities by the Internal Revenue Service to serve as an identification number for businesses. An EIN is to businesses what social security number is to citizens.

It is required to have an EIN to complete most of the important steps of forming an LLC. The authorities ask for it while applying for a license, opening a bank account, applying for business loans, etc. Getting an EIN is a very easy process and is completely free of charge.

File Annual Reports in South Dakota

An annual report refers to a regular filing that includes information about your LLC, such as its address, the registered agent, and information about the officials of the LLC. South Dakota requires your LLC to file annual reports yearly so that the State stays updated with information about your business.

An annual report in South Dakota is due each year by the end of the month in which your LLC was formed. For example, if your LLC is formed on 15th March 2022, your annual reports will become due by 31st March every year. The first annual report is due in the immediate next year of the year of formation.

You will need the business ID allotted to your LLC at the formation time to file your annual report. If you are unsure about your business ID, you may use the State’s online portal to search for your ID.

You can file your annual report using the online portal of the Secretary of State. The filing fee is $50.

If you miss a deadline to file the annual report, South Dakota imposes a penalty of $50. If your failure to file the document continues beyond a period of 60 days from the due date, you risk your LLC getting shut down by the authorities.

Tax Liability for Your South Dakota LLC

The way your LLC will be taxed depends upon the number of members in your LLC. There are four ways in which LLC will be taxed:

• Sole proprietorship: a business owned by a single person
• Partnership: a business owned by multiple people
• C – Corporation: income is split or segregated for taxation
• S – Corporation: tax liability is split between the business and its owners

Federal Tax Liability

All members and managers of LLCs are required to pay a federal self-employment tax (presently 15.3%). It is a tax on your profits taken out of the business.

You are also liable to pay Federal Income Tax. The income tax you have to pay will vary depending on your income, filing status, deductions, etc. However, federal corporate taxes must be paid if you treat your LLC as a corporation for tax purposes.

By default LLCs are treated as ‘pass-through entities’ for taxation purposes. This means that the LLC would not be paying these taxes directly. Instead, they would apply to the individual members of the LLC.

When taxed as a sole-proprietorship, you’ll have to file your taxes with the IRS under Schedule C, Schedule E and/or Schedule F of Form 1040. 

When taxed as a partnership, along with filing Form 1040, you’ll have to file your taxes under Form 1065 and provide information in K-1 of each partner. 

However, you can always have your LLC taxed as a C-corporation or S-corporation by filing your taxes under Form 8832 and Form 2553, respectively.

State Tax liability

The State of South Dakota imposes a “Sales and Use Tax” on businesses carrying out transactions through which certain taxable goods or services are exchanged. You will be required to obtain a seller’s permit before you can start collecting sales tax.

You should talk to the South Dakota Department of Revenue to find out if any other State taxes apply to your business.

Miscellaneous Tax Liability

Depending upon the kind of business that your LLC deals with, you might be required to pay other taxes. For instance, importing and exporting businesses have to pay import/export duties, fuel sellers pay taxes on the sale of fuel, etc.

Similarly, if your LLC has hired employees, you must sign up for Unemployment Insurance Tax.

Filing taxes can be tricky, especially when a business structure as sophisticated as an LLC is concerned. A lot of things are required to be complied with. You might be liable for tax evasion if you miss things and underpay your taxes.

Similarly, you might also miss tax deductions and allowances that you could be entitled to if you are not careful enough. It is recommended that you seek professional help for doing your taxes so that you do not commit any mistakes.

Permits & Licenses

You might be required to obtain business permits or licenses for your LLC to conduct business. This requirement depends upon the line of business your LLC deals with and also the location of the business. Accordingly, your business may be subject to three licensing jurisdictions: Federal, State, and Local.

Federal Licensing requirements will depend on the business activity carried on by your LLC. If your company is engaged in any area of business regulated by the Federal Government, you will be required to obtain relevant Federal Licenses and Permits.

Some business activities requiring Federal Licenses and Permits are:

• Agriculture
• Alcoholic beverages
• Aviation
• Firearms, ammunition, and explosives
• Fish and wildlife
• Commercial fisheries
• Maritime transportation
• Mining and drilling
• Nuclear energy
• Radio and television broadcasting
• Transportation and logistics

At the State level, your LLC is required to obtain a seller’s permit (known as a sales tax license in South Dakota) if your business is carrying out transactions through which certain taxable goods or services are exchanged. You can apply for the certificate with the Department of Revenue. Similarly, if your business is engaged in certain specified areas, you might need certain specific permits and licenses from the State. You may read the South Dakota Department of Labor and Regulation to see if any such requirements are applicable to your business.

Depending on where you operate your business, you may also be required to get the local government’s license and permit. In Pierre, certain businesses, including contractors, tattoo businesses, etc., are required to have a specific city license. To know more about local licensing requirements, get in touch with the office of your municipal or county government.

For more information regarding;

• Federal Permits and License
• Department of Labor & Regulation website
• South Dakota Department of Labor and Regulation

Business Bank Account & Phone Number

Once your LLC starts operating, you would need to have a separate bank account for it. A separate bank account would make it convenient for you to file tax returns, deduct expenses, pay employees, manage cash balances, etc., for your LLC. Opening a separate bank account for your LLC is also the best way to protect your personal assets from business expenses.

To open a new business account, you would first be required to select a good bank. Look out for a bank that caters to your needs in terms of rate of interest, minimum balance requirements, credit limits, and other fields.

The bank would require you to have an EIN to open an account for your LLC. The bank would also need your business formation documents. You should also contact the bank to know if any other documents are required. You can opt for an online bank account opening if the bank offers this service.

After your business is up and running, you would also be required to get a separate phone number for your LLC. Once you have a separate phone number, you will not be required to put your contact number in the public domain.

Thus, having a different number would protect your privacy. Getting a separate office number also gives professional credibility to a business. There are several virtual phone number services available that you can opt for to get a business phone number.

Final Thoughts

There are several advantages of forming an LLC in South Dakota. The State has a robust economic environment and is home to some of the biggest industries. In addition to that, the State also has many helpful business incentive schemes for its LLCs.

You can access several financial programs if you register a new business in South Dakota. The Governor’s Office of Economic Development in South Dakota is committed to ensuring the sustainability of business in the State, especially in the initial stages of business development.

Look out for programs such as ‘South Dakota WORKS,’ ‘SBA 504’, ‘Dakota Seeds,’ ‘Proof of Concept Fund,’ etc. Get in touch with your local county or city government office to determine if your LLC is eligible for any of these incentives.

After your business starts operating through your LLC, you should pay close attention to all the compliance requirements. Failing to fulfill State requirements may jeopardize your ‘good standing status with the authorities.

We wish you all the best!