Converting Your South Dakota Sole Proprietorship to an LLC in 2024

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Convert South Dakota Sole Proprietorship to LLC

As a small business owner in South Dakota, you may have started your business as a sole proprietorship due to its simplicity and low initial costs. However, as your business grows, you may want to start an LLC in South Dakota, which is more suitable for your needs. Converting your South Dakota sole proprietorship to an LLC can protect your assets and optimize your business’s growth potential.

In this comprehensive guide, Webinarcare Editorial Team will walk you through the step-by-step process of Converting your South Dakota Sole Proprietorship to an LLC, enabling you to make an informed decision for your business.

How to Convert your South Dakota Sole Proprietorship to an LLC

What is a Sole Proprietorship and Limited Liability Company?

A sole proprietorship is the simplest and most common form of business ownership, where a single individual owns and operates the entire business. A sole proprietorship has no legal distinction between the owner and the business, meaning the owner is responsible for all the business’s debts, liabilities, and obligations. 

On the other hand, a Limited Liability Company (LLC) is a legal business structure that combines the limited liability protection of a corporation with the pass-through taxation of a sole proprietorship or partnership. This means the owners, known as members, are not personally responsible for the company’s debts and liabilities. The company’s profits and losses are reported on the members’ tax returns. We reviewed some of the Best LLC Services and provided features as an add-on with their packages for you to check out.

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Having a sole properietorship had given you freedom and comfortability, but, starting an LLC in South Dakota has a lot to offer, which is why it is a highly recommended business structure. It is suggested that you speak with a legal professional first before you begin coverting your sole proprietorship to an LLC. They will understand what’s best for you and your company.

– WEBINARCARE EDITORIAL TEAM

Steps on Converting South Dakota Sole Proprietorship to an LLC

To convert South Dakota sole proprietorship to an LLC, you must follow the guidelines that include choosing a name for your LLC, appointing a Registered Agent, preparing for the Articles of Organization, creating an Operating Agreement, obtaining an EIN, opening a business bank account, registering for state tax and licenses, and lastly, informing clients and vendors of conversation.

Step 1: Choose A Name For Your LLC

The first step in converting your sole proprietorship to an LLC is selecting a unique and distinguishable name for your new entity. In South Dakota, there are specific naming requirements and restrictions that you must adhere to when choosing your LLC’s name:

  • The name must include “Limited Liability Company,” “LLC,” or “LLC.“
  • The name cannot include words or phrases that imply the company is engaged in activities it is not authorized to conduct.
  • The name must be distinct from other registered businesses in South Dakota.

In South Dakota, if you do not wish to file your LLC right away but want to hold the name that you have decided on, then you can reserve your LLC name for 120 days. You must file a name reservation application in the South Dakota Secretary of State to keep the name. 

You can register your business under a different legal name if your preferred name isn’t available. Once you have chosen a name, you can submit an application for a DBA (doing business as). In this manner, you can choose any name you desire for your business. A DBA allows a company to operate under the name of the person or entity who owns it. If you have decided to file for South Dakota DBA, you can file it in two methods, by mail and in person. However, before filing a DBA, you should know that you need to renew your DBA from up to five years, which costs around $10.

You can check the availability of your desired business name by searching the South Carolina Secretary of State Business Filings Search‘s website.

Step 2: Appoint a Registered Agent

In South Dakota, all LLCs are required to appoint a Registered Agent. Registered Agent is a person or entity responsible for receiving and forwarding legal and tax documents on behalf of your South Dakota LLC, such as service of process, South Dakota Annual Report, and state tax notifications. Your Registered Agent must have a physical address in South Dakota and be available during regular business hours. In South Dakota, the cost of Registered Agent usually ranges from $50 – $150.

When selecting a Registered Agent, consider their reliability, knowledge of state requirements, and ability to manage sensitive legal documents. You can serve as your own Registered Agent, appoint another individual, or hire the Best Registered Agent Service.

Step 3: Prepare and File the South Dakota Articles of Organization

To officially form your South Dakota LLC, you must prepare and file South Dakota Articles of Organization with the South Dakota Secretary of State. The Articles of Organization is a legal document that outlines essential information about your  South Dakota LLC, including:

  • The LLC’s name
  • The Registered Agent’s name and address
  • The LLC’s purpose
  • The LLC’s duration (perpetual or for a specific term)
  • The names and addresses of the initial members or managers

In South Dakota, the filing fee for the Articles of Organization is $150. You can submit the document online through the South Dakota Secretary of State’s website or by mail. Processing times may vary, so check the website for current information.

Step 4: Create an Operating Agreement

Although not legally required, South Dakota Operating Agreement is a crucial document that outlines the structure, management, and financial arrangements of your South Dakota LLC. The operating agreement should include the following:

  • The roles and responsibilities of members and managers.
  • The process for admitting or removing members.
  • The allocation of profits and losses among members.
  • The procedure for making major decisions.
  • The process for dissolving the LLC.

Having a written South Dakota operating agreement can help prevent disputes and ensure a smooth operation of your LLC. It is advisable to work with South Dakota Business Attorney to draft an operating agreement that meets the specific needs of your business and complies with South Dakota laws.

Step 5: Obtain an Employer Identification Number (EIN)

An Employer Identification Number (EIN) in South Dakota, or Federal Tax Identification Number, is a unique nine-digit number issued by the Internal Revenue Service (IRS) to identify your business for tax purposes. With an EIN, you can open a business bank account, file tax returns, and hire employees.

To obtain an EIN for your South Dakota LLC, you can apply online on the IRS website, by mail, or by fax. The online application process is the fastest and most convenient method, as you will receive your EIN immediately upon completing the application. There is no fee to obtain an EIN.

The application of an EIN in South Dakota can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

Recommended: Professional services have the EIN included in their LLC formation package. We recommend using –

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Step 6: Opening of South Dakota Business Bank Account

When converting your sole proprietorship to an LLC, separating your personal and business finances is essential by opening a dedicated business bank account. South Dakota business bank account helps maintain limited liability protection and makes managing your business’s finances and taxes easier.

To open a business bank account in South Dakota, you will need the following documentation:

  • Your LLC’s Certificate of Formation
  • Your LLC’s EIN
  • Your LLC’s operating agreement (if applicable)
  • A resolution authorizing the opening of the account (if required by the bank)

You can check out the Best Banks in South Dakota, which offers the best fees, services, and convenience for your business needs.

Step 7: Register for South Dakota Taxes and Licenses

As an LLC in South Dakota, your business may be subject to various state taxes and licenses, depending on the nature of your operations. Common taxes and licenses include:

  • Sales Tax: If your LLC sells taxable goods or services, you must register for South Dakota sales tax permit and collect sales tax from your customers.
  • Employer Taxes: If your LLC has employees, you may be required to register for South Dakota unemployment insurance and workers’ compensation coverage.
  • Business License: South Dakota Business License is a legal document granted by a state government body that permits you to conduct business within the area under its jurisdiction. The price of business licenses and permits in South Dakota ranges from $50 – $300.

To ensure you comply with all applicable South Dakota tax and licensing requirements, you can check out the South Dakota Department of Revenue for more information.

Step 8: Inform Clients and Vendors of the Conversion

After converting your South Dakota sole proprietorship to an LLC, you must inform your clients, vendors, and other business contacts of the change. Update your contracts, invoices, and marketing materials with your new LLC name, and communicate the transition to ensure a smooth and professional process.

Ongoing Compliance For South Dakota LLCs

As an LLC in South Dakota, you are subject to ongoing compliance and reporting requirements, including:

  • Filing Annual Report with the South Dakota Secretary of State and pay the associated fee and which you can pay every 1 year (first day of the anniversary month).
  • Maintaining accurate and up-to-date records of your South Dakota LLC’s finances, meetings, and decisions. You can manage your finances using spreadsheets, accounting software, or becoming a CPA in South Dakota.
  • Adhering to any industry-specific licensing and regulatory requirements.

Benefits of Converting South Dakota Sole Proprietorship to an LLC

In converting South Dakota Sole Proprietorship, there are benefits that you should consider. Here are the benefits you must know before converting your sole proprietorship:

Limited Liability Protection

Converting a sole proprietorship to an LLC provides limited liability protection for the business owner. This means that the owner’s assets (such as their home or car) are separate from the business assets and are protected from being seized to pay off business debts or in case of a lawsuit.

Credibility and Professionalism

South Dakota LLC can help improve the credibility and professionalism of the business. Many customers and suppliers prefer dealing with an LLC, which shows commitment and stability.

Tax Flexibility

With South Dakota LLC, you can choose how your business will be taxed. It can be taxed as a sole proprietorship, a partnership, or a corporation. This allows you to choose the tax structure that best fits your business and may result in potential tax savings.

Easier Access to Funding

South Dakota LLC may have an easier time obtaining funding from banks and investors than a sole proprietorship. Many lenders and investors prefer to work with an LLC, as it demonstrates a commitment to the business and provides legal protection.

Ownership and Management Flexibility

South Dakota LLC allows you to have multiple owners (called members) and to divide ownership and management responsibilities among them. This can make growing your business easier or bring in new partners.

Enhanced Privacy

In some states, such as South Dakota, an LLC can offer more privacy than a sole proprietorship. This is because the business owner’s personal information may not be as public as it would be with a sole proprietorship.

Easier Transfer of Ownership

With South Dakota LLC, transferring business ownership to another person or entity is generally easier. This can be beneficial if you decide to sell your business, bring on new partners, or plan for succession.

Continuity of Existence

Unlike a sole proprietorship, which ceases to exist upon the death or incapacity of the owner, South Dakota LLC can continue to operate even if the owner passes away or becomes incapacitated. This provides stability and continuity for the business and its employees.

Compliance with South Dakota Requirements

Some states require certain types of businesses, such as those in the professional services industry, to operate as South Dakota LLC or another corporate entity. Converting your sole proprietorship to an LLC in South Dakota ensures that your business complies with these regulations and avoids potential legal issues.

Access to Additional Benefits

South Dakota LLC may be eligible for additional benefits, such as state-specific tax incentives or credits, not available to sole proprietorships. These benefits can help reduce your tax burden and support the growth of your business.

In summary, converting a sole proprietorship to an LLC in South Dakota can provide significant benefits, including limited liability protection, tax flexibility, increased credibility, and easier access to funding. It’s essential to carefully consider these advantages and consult with a legal or tax professional before deciding to convert your business structure.

FAQs

What is an LLC in South Dakota?
An LLC is a business structure that combines the liability protection of a corporation with the tax flexibility of a partnership.
Why would someone convert a sole proprietorship to an LLC in South Dakota?
A conversion to an LLC in South Dakota limits personal liability and provides a more legitimate business structure for contractors, consultants, and freelancers.
What are the benefits of converting a South Dakota sole proprietorship to an LLC?
An LLC in South Dakota provides personal asset protection, enhanced credibility, increased tax flexibility, and greater control of the business.
Are there any fees for converting a South Dakota sole proprietorship to an LLC?
Yes, there are filing fees and other costs associated with registration and compliance in South Dakota.
How do I convert my sole proprietorship to an LLC in South Dakota?
You must file articles of organization with the South Dakota Secretary of State and obtain a tax ID number and any necessary licenses or permits.
What is the difference between a South Dakota sole proprietorship and an LLC?
A sole proprietorship is an unincorporated business owned by an individual, and an LLC is a separate legal entity with one or more owners.
Do I need an attorney to convert my sole proprietorship to an LLC in South Dakota?
No, it is not required to have an attorney, but it may be helpful to consult with one for guidance on legal and regulatory matters.
Can I convert my South Dakota sole proprietorship to an LLC myself?
Yes, but it is recommended that you consult with an attorney or other professional to ensure that you comply with all necessary requirements.
How long does it take to convert a sole proprietorship to an LLC in South Dakota?
The timeframe for converting a South Dakota sole proprietorship to an LLC depends on many factors, but usually takes a few weeks to a few months.
Can I keep the same name when converting my South Dakota sole proprietorship to an LLC?
Yes, as long as the name is available and compliant with South Dakota naming requirements.
What are the tax implications of converting a South Dakota sole proprietorship to an LLC?
By default, an LLC in South Dakota is taxed as a partnership, which means that profits and losses passed through to the owners’ personal tax returns.
Do I have to dissolve my sole proprietorship before starting an LLC in South Dakota?
No, a South Dakota sole proprietorship does not require formal dissolution to create LLC, but it is important to finalize all business operations.
Are there any ongoing compliance requirements for South Dakota LLCs?
Yes, South Dakota LLCs have ongoing compliance requirements, such as annual report filings and payment of fees and taxes.
What happens to my business name when I convert my South Dakota sole proprietorship to an LLC?
The business name remains the same if you choose to keep it; otherwise, you may need to register a new name with the South Dakota Secretary of State.
How many owners can an LLC have in South Dakota?
An LLC in South Dakota can have one or more owners, known as members.
Do I need to file for a new business license when converting a South Dakota sole proprietorship to an LLC?
It depends on the type of business and whether additional licenses or permits are required, so consult with legal and financial advisors.
Can an LLC help me qualify for more government contracts in South Dakota?
An LLC may offer more advantages when bidding for South Dakota government contracts, and it provides greater legal protection if there’s any liability.
What liability protection does an LLC in South Dakota provide?
An LLC in South Dakota has a separate legal identity from its owners, which means that it shields owners from most business-related liabilities.
Will my South Dakota LLC have foreign qualification obligations if it does business in other states?
Yes, when South Dakota LLCs do business in other states outside of duties then it required to foreign qualify or register with those states by following prescribed procedures and paying appropriate fees.
What is an operating agreement, and is it required for South Dakota LLCs?
An operating agreement outlines the rules and regulations that govern an LLC’s operations, and it is not required although organizing members can mutually work together these are important for clarity.
How do I obtain a tax ID number for my South Dakota LLC?
You can obtain an EIN tax number from the IRS website
Are there any specific South Dakota insurance requirements for LLCs?
It depends on the type of business and industry, an expert in LLC can assist you in this.
Can I have someone else convert my South Dakota sole proprietorship to an LLC for me?
It depends on limited rules and regulations involved in the conversion process in South Dakota.
Do I need to get permission from creditors before converting my South Dakota sole proprietorship to an LLC?
It is recommended to inform the creditors or other important stakeholders involved with your business or finances or FAS and it is easier to disclose intentions in the notice of change filing with the state.
Will my tax filings change after I convert my South Dakota sole proprietorship to an LLC?
Yes, your tax filings will change as your new LLC business structure navigates different compliance requirements.
How does a South Dakota LLC protect against personal liability without insurance?
An LLC provides credible coverage for general business operations, professional activities, and property control this could effectively prevent personal liability from creditors, legal suits, or contracts.
Can I change my South Dakota LLC’s business structure later down the road?
Yes, South Dakota LLCs can be converted to general partnerships, corporations or changed ownership through compliance and registration procedures established under laws and regulations.
Is it possible to convert a South Dakota LLC to a sole proprietorship later?
Yes, South Dakota churches are allowed to plant and function as unincorporated businesses without following corporate requirements and can withdraw from corporations.
What steps do I need to take to convert my South Dakota sole proprietorship to an LLC?
You will need to file Articles of Organization with the South Dakota Secretary of State.
Do I need to obtain a new EIN number when I convert to an LLC?
Yes, you will need to obtain a new EIN for your LLC.
Will converting to an LLC in South Dakota give my business more credibility?
Yes, a limited liability company can make your business appear more serious and professional.
Can I operate my South Dakota LLC from out-of-state?
Yes, as long as you register your LLC as a foreign entity in the state where you intend to operate.
Can I add or remove members from my South Dakota LLC at any time?
Yes, you can add or remove members from your LLC as long as you follow the necessary legal procedures.
What is the liability protection for LLC owners in South Dakota?
Owners of South Dakota LLCs are generally not personally liable for the debts and obligations of the business.
How much does it cost to convert a sole proprietorship to an LLC in South Dakota?
The filing fee for Articles of Organization in South Dakota is currently $150.
Am I required to have an operating agreement for my South Dakota LLC?
While South Dakota does not require an operating agreement, it is highly recommended for the protection of your business.
Can I manage my own South Dakota LLC or do I need to hire someone?
You can manage your own LLC or hire a manager to handle the day-to-day operations.
Can I have a single-member LLC in South Dakota?
Yes, South Dakota allows for single-member LLCs.
Are South Dakota LLCs subject to annual reports and fees?
Yes, South Dakota LLCs are required to file an annual report and pay a fee of $50.
Do I need to hire a lawyer to convert my sole proprietorship to an LLC in South Dakota?
No, it is not required to hire a lawyer. However, it’s always recommended for legal advice.
What is the tax classification of South Dakota LLCs?
A South Dakota LLC can be taxed as a partnership, an S corporation, or a C corporation.
Can I change the name of my South Dakota LLC during the conversion process?
Yes, you can change the name of your business during the conversion process by including the name change in your Articles of Organization.
How do I dissolve my South Dakota LLC if I am no longer in business?
You must file articles of dissolution and pay a fee of $10.
Can I still operate my business while my LLC is being approved in South Dakota?
Yes, as long as you continue to operate your business in compliance with sole proprietorship requirements until your LLC is approved.
Does changing my business structure affect my name or branding in South Dakota?
Changing your business structure does not affect your name or branding in South Dakota.
Is it difficult to convert a sole proprietorship to an LLC in South Dakota?
Converting a sole proprietorship to an LLC in South Dakota can be a relatively simple process with the help of the South Dakota Secretary of State’s website or appropriate attorney.
Can I still benefit from tax exemptions as an individual with an LLC in South Dakota?
Depending on your circumstances, you may still be able to benefit from certain tax exemptions even if you own an LLC in South Dakota.
Can my South Dakota LLC hold and lease out real estate?
Yes, a South Dakota LLC can own, rent, and lease real estate.
What is the process for changing ownership levels in a South Dakota LLC?
You must file an amendment with the Secretary of State whenever there is a change is LLC members or percentage of ownership.
Can I transfer ownership of my South Dakota LLC to my family’s estate upon my retirement?
Yes, you can transfer ownership of your LLC to your family’s estate, with proper legal documentation.
What is South Dakota law about foreign companies registering in the state?
Foreign LLCs must register with the South Dakota Secretary of State in order to conduct business in the state.
Can I form a South Dakota LLC without a registered agent?
No, it is a requirement of South Dakota law that LLCs have a registered agent in the state.
Is it possible to change the filing status of my LLC in South Dakota?
Yes, you can change the filing status of your LLC by completing the appropriate state forms regarding State and Federal tax elections.
Are there any special regulations for hiring employees in a South Dakota LLC?
Yes, as with any business, a South Dakota LLC must comply with all regulations for hiring employees, including taxation, worker’s compensation, and employment law.
Who is eligible to be a South Dakota LLC member?
Any individual, foreign entity or domestic entity that is legally permitted to operate a business in South Dakota may be a member of a South Dakota LLC.
Can out-of-state residents form a South Dakota LLC?
Yes, out-of-state residents are permitted to form a South Dakota LCC.

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Conclusion

Converting your South Dakota sole proprietorship to an LLC is a significant decision that can provide valuable benefits, such as limited liability protection, tax advantages, and enhanced credibility. Following the steps outlined in this guide and consulting with legal and financial professionals, you can successfully navigate the conversion process and position your business for future growth and success.

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