How to Start an S Corp in South Dakota
South Dakota consistently ranks as one of the best states in which to start a business. With no income tax, low energy costs, an affordable cost of living, and an attractive tax schedule, it’s no surprise businesses thrive in the “Mount Rushmore State.”
Yet, starting a small business anywhere can seem overwhelming in the early stages. One of the biggest decisions you must make involves choosing your business structure. Forming an S corporation (S corp) in South Dakota can potentially save you money at tax time.
This guide will provide all the information you need to form your South Dakota S corp and ensure your business follows all state laws and guidelines to remain compliant.
Not in South Dakota? Check out our other How to Start an S Corp guides to learn more.
Recommended: If you have at least $60,000 in net earnings, an S corp may offer tax advantages. Let Northwest start your S corp today.
Factors to Consider Before Starting an S Corp in South Dakota
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation restrictions
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Restrictions
S corps have several restrictions, such as being limited to one class of stock and 100 shareholders. Read our What Is an S Corporation guide for full details.
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by a limited liability company (LLC) or corporation. With an S corp, business owners are considered employees of the company and must receive a reasonable salary. Since all S corps technically have employees, the s corp must run payroll.
In order to benefit from a South Dakota S corp tax designation, your business needs to make enough money to offset payroll expenses. Furthermore, S corps are beneficial for business owners who take large distributions in addition to their salary.
How to Form a South Dakota S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the IRS when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend forming an LLC because it’s simpler and more cost-effective.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in South Dakota
Starting a South Dakota LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Northwest to guide you through this process.
There are five basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Articles of Organization
Step 4: Create an Operating Agreement
Step 5: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in South Dakota.
Be sure to choose a name that complies with South Dakota naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for a South Dakota LLC:
- Your name must include the phrase “limited liability company” or “limited company” or one of their abbreviations (LLC, L.L.C., LC, or L.C.). “Limited” may be abbreviated as “Ltd.,” and “company” may be abbreviated as “Co.”
- Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
- Certain restricted words (e.g. Bank, Attorney, University) may require additional paperwork and a licensed individual to be part of your LLC.
- Your name must be distinguishable from any existing business in the state. This includes South Dakota reserved names.
You can also read the South Dakota state statute about LLC naming guidelines for more information.
2. Is the name available in South Dakota? You can use the business name availability search on the South Dakota Secretary of State website to see if your desired LLC name is available.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don't plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Find a Domain Now
Step 2: Choose Your South Dakota Registered Agent
You must elect a registered agent for your South Dakota LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Step 3: File the South Dakota LLC Articles of Organization
The South Dakota Articles of Organization is used to officially register an LLC.
File Your South Dakota Articles of Organization
OPTION 1: File Online With the South Dakota Secretary of StateFile Online
- OR -
OPTION 2: File by MailDownload Form
State Filing Cost: $150 online and $165 by mail, payable to the Secretary of State (Nonrefundable)
Secretary of State Office
500 E Capitol Ave
Pierre, SD 57501
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our South Dakota LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Keep Your South Dakota S Corp Compliant
After you establish your S corp, you’ll need to keep your business in good standing with all state and local laws and business guidelines. South Dakota requires you to pay all taxes on time and file an annual report every year.
South Dakota S Corp Annual Report
While your business will be taxed as an S corp, it’ll still follow the guidelines in place for an LLC. South Dakota requires all businesses to file an annual report with the South Dakota Secretary of State.
The purpose of this annual report is to provide the state with information about your business, including its contact information, and to inform the state of any recent changes. The report is due on the last day of the anniversary month in which you filed to form your business.
Visit our South Dakota Annual Report guide for a step-by-step overview of the filing process.
South Dakota S Corp Taxes
S corporations benefit from pass-through taxation, meaning the business’s profits pass-through to S corp owners’ individual tax returns. S corp owners make money from their reasonable salary and distributions, and South Dakota S corp owners can expect to pay the following taxes:
Federal Self-Employment Taxes
Self-employment taxes cover social security and medicare. The self-employment tax rate is 15.3%, and money you take as salary will be subjected to the self-employment tax. However, distributions are not subjected to this tax.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets as well as the percent owed will change each year. Both your salary and distributions are subjected to federal income tax.
South Dakota Income Taxes
South Dakota is one of only nine states with no income tax imposed on businesses and individuals. This means you can save more of your earnings, allowing you to reinvest more money into your business to help it grow.
Some states have an income tax rate as high as 10%. South Dakota’s 0% income tax is one of the reasons why it has a reputation as a business-friendly state.
South Dakota Sales and Use Tax
South Dakota’s sales and use tax rate is 4.5%, which allows the state to provide public services for its residents. This tax applies to all retail sales, including selling, leasing, and renting tangible property or products.
Many South Dakota municipalities also have the right to impose their own sales and use tax. For more details, visit the state’s Department of Revenue website.
Additional State Taxes
The South Dakota Department of Revenue provides details on the other state-specific taxes that may apply to your business. Examples of these additional taxes include:
- Alcohol Tax
- Cigarette and Tobacco Tax
- Tourism Tax
- Motor Vehicle Lease and Rentals Tax
- Contractors Excise Tax
Visit the state’s Department of Revenue website for more information.
South Dakota Local Taxes
Whether you start your business in Sioux Falls, Rapid City, or a smaller South Dakota city, your business may have to file and pay local taxes. Check with your local government to ensure your business remains compliant.
Start a South Dakota S Corp FAQ
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
If you decide to form a business in South Dakota — whether it’s in agriculture, finance, insurance, healthcare, or another key industry — you can save money on your taxes by electing S corp status. Regardless of its industry, your business can benefit from the S corp tax designation as long as it meets the requirements set by the IRS.
South Dakota is one of the few states with no state income tax. It also has a tax structure that favors businesses, making South Dakota a great place for S corps.