Starting a Holding Company in South Dakota | The Ultimate Guide

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Start a Holding Company in South Dakota

Starting a holding company can be wise for business owners who want to form an LLC in South Dakota while minimizing liability and maximizing tax benefits. A holding company is an entity that owns and controls one or more subsidiary companies without engaging in any business activities itself. Instead, the holding company receives income from its subsidiaries through dividends, interest, and other payments.

This comprehensive guide will walk you through Starting a Holding Company in South Dakota, covering everything from research and planning to registration and ongoing management.

Webinarcare Editorial Team will help you start your holding company. You must be guided by all the factors gathered in this article.

Steps in Starting a Holding Company in South Dakota

What is a Holding Company?

A holding company is a business entity that primarily owns and manages various assets, including controlling interests in other companies. The main purpose of a holding company is to control and oversee its subsidiaries or investments rather than being directly involved in producing goods or services. 

Holding companies typically generate income through dividends, interest, royalties, and capital gains from the sale of assets. They can own diverse assets, such as stocks, bonds, real estate, trademarks, patents, and other business entities. 

The advantages of holding companies include the following:

  • Asset Protection: By separating the ownership and management of assets from the operating businesses, holding companies can protect assets from potential liabilities and risks associated with the operations of the subsidiaries.
  • Tax Efficiency: Holding companies can sometimes leverage tax benefits through the strategic allocation of assets, income, and losses among subsidiaries, potentially reducing the overall tax burden.
  • Management Efficiency: Holding companies can streamline decision-making and provide a centralized management structure for multiple subsidiaries, leading to operational efficiencies.
  • Investment Diversification: Holding companies can diversify their investments across various industries and asset classes, reducing the impact of market fluctuations and economic downturns on the overall portfolio.

However, there are also some disadvantages to holding companies, such as increased complexity in management and accounting, potential regulatory scrutiny, and the possibility of reduced control over the operations of subsidiaries.

Example of Holding Company in South Dakota

In South Dakota, there are many holding companies to check out. However, the below holding company is one of the best known.

Sanford Health – A holding company with subsidiaries in the healthcare sector, including hospitals, clinics, and health insurance.

It is suggested that you speak with a legal professional before you begin setting up your holding company. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in South Dakota for your business.

– WEBINARCARE EDITORIAL TEAM

Steps in Starting a Holding Company in South Dakota

In starting a holding company in South Dakota, you should understand the below steps and guidelines for you to have a successful holding company in South Dakota. Here are the comprehensive steps for you to do: 

Step 1: Research and Planning

Conducting thorough research and planning is crucial before starting a holding company in South Dakota. This includes:

1. Analyzing the Market and Competition: Understand the local business landscape and identify potential competitors in your industry. This will help you determine the feasibility of your holding company and guide your decision-making process.

2. Identifying your Target Audience: Determine the types of businesses or industries your holding company will focus on. This will guide your investment strategy and help you target the right subsidiary companies.

3. Developing a Solid Business Plan: A well-structured business plan is essential for any successful holding company. Your plan should include the following:

  • Executive Summary: A brief overview of your holding company, its purpose, and goals.
  • Company Description: Outline your holding company’s structure, ownership, and management team.
  • Market Analysis: Provide detailed information about the target market, including market size, trends, and competition.
  • Investment Strategy: Describe your approach to acquiring and managing subsidiary companies, including your criteria for selecting investments and your long-term objectives.
  • Financial Projections: Provide a detailed financial forecast for your holding company, including income, expenses, and projected growth.

Step 2: Choose a Business Structure

Selecting the right business structure for your holding company is a critical decision. Limited Liability Companies (LLCs) and Corporations are the most common structures for holding companies. Consider the following factors when choosing a business structure:

Limited Liability Company 

Legal Liability – Limited Liability Companies provide limited liability protection to their owners, called members. This means that members are generally not personally responsible for the debts and obligations of the LLC. Their personal assets, such as homes, cars, and bank accounts, are usually protected from business creditors. 

Tax Implication- By default, LLCs are treated as pass-through entities for tax purposes, which means that the profits and losses of the LLC pass through to the individual members. Single-member LLCs are taxed as sole proprietorships, while multi-member LLCs are taxed as partnerships. The LLC does not pay federal income taxes; the members report their share of the profits or losses on their personal income tax returns and pay taxes accordingly.

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Corporation 

Legal Liability-  Starting a corporation in South Dakota offers limited liability protection to their shareholders, meaning that shareholders are generally not personally responsible for the debts and obligations of the corporation. Their personal assets are protected from business creditors, similar to LLC members.

Tax implications – A C corporation is a separate legal entity for tax purposes and is subject to corporate income tax. The corporation pays taxes on its net income at the corporate level. When profits are distributed to shareholders as dividends, those dividends are taxed again at the individual shareholder level. This creates the double taxation issue.

To avoid double taxation, a corporation may be treated as South Dakota S corporation if it meets specific requirements. S corporations are pass-through entities for tax purposes. The corporation’s income, deductions, and credits pass through to the shareholders, who report their share of the income on their personal income tax returns. S corporations do not pay federal income tax at the corporate level.

Step 3: Register the Holding Company

Once you’ve chosen a business structure, the next step is to register your holding company with the appropriate government authorities in South Dakota. This process typically includes the following steps:

Choose a Business Name

Select a unique and descriptive name for your holding company. Check the availability of the name through the South Dakota Secretary of State’s Business Name Search and ensure it is not trademarked or already in use.

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 a DBA in South Dakota, 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 for up to five years, which cost $10.

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Hire a Registered Agent

A Registered Agent is a person or entity responsible for receiving legal documents and official notices on behalf of your LLC. In South Dakota, your Registered Agent must:

  • Be a resident of South Dakota or a business entity authorized to do business in the state
  • Have a physical address in South Dakota (P.O. boxes are not acceptable)

It’s essential to choose a reliable and responsible South Dakota Registered Agent, as failure to receive and respond to legal documents can have serious consequences for your business. 

You can serve as your own Registered Agent, appoint a friend, or family member, or hire a Professional Registered Agent Services in South Dakota.

Register the Business Name

To register your business name, file the necessary paperwork with the South Dakota Secretary of State. This may include filing Articles of Incorporation for a Corporation or Articles of Organization for an LLC.

In South Dakota, the Articles of Incorporation can be filed by two methods, online and by mail, which costs around $150 for online filing, and $165 for filing by mail. Create an account/Log in to the SOS site, get the online form, fill it, and submit online.

Filing for Articles of Organization has a different fee which costs around $150.

You can check the South Dakota Secretary of State for more information or visit South Dakota LLC Cost if you would like to form an LLC and know more about the specific cost. 

Obtain an Employer Identification Number (EIN)

Apply for an EIN in South Dakota from the Internal Revenue Service (IRS) to identify your holding company for tax purposes. An EIN, also known as a Federal Tax Identification Number, is used by the Internal Revenue Service (IRS) to identify your business for tax purposes. You’ll need an EIN to open a business bank account, file taxes, and hire employees. 

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.

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Register with the South Dakota Secretary of State

Depending on your business structure and activities, you may need to register your holding company with these state agencies for tax and employment purposes.

Obtain Necessary Permits and Licenses

Research local, state, and federal requirements for permits and licenses related to your holding company and its subsidiaries. Apply for and receive any required permits and licenses to ensure your holding company operates legally.

You can check out the business licenses in South Dakota if you want to know more about the South Dakota licenses and permits.

Step 4: Set up Financial Systems

Proper financial management is crucial for a successful holding company. Take the following steps to set up your financial systems:

Open a Business Bank Account

Separate your personal and business finances by opening a dedicated bank account for your holding company. This separation helps preserve the limited liability protection offered by the LLC structure. You can check out the Best Banks in South Dakota, which offers the best fees, services, and convenience for your business needs.

Choose an Accounting Method and Bookkeeping System

Select an accounting method, such as cash or accrual, and establish a bookkeeping system to track your holding company’s income, expenses, and other financial transactions.

You can manage your finances using spreadsheets, accounting software, or becoming a CPA in South Dakota.

Apply for Financing or Funding

If necessary, seek funding or financing options to support your holding company’s investments and operations. This may include lines of credit, shareholder equity investments, and small business loans in South Dakota.

Step 5: Obtain Insurance

Choosing small business insurance in South Dakota is essential for protecting your holding company and its assets. Evaluate your insurance needs based on your business type and location, and obtain the necessary policies, such as:

  • General Liability Insurance: Covers your holding company for third-party bodily injury, property damage, and personal injury claims.
  • Property Insurance: Protects your holding company’s physical assets, such as buildings and equipment, from damage or loss.
  • Directors and Officers (D&O) Insurance: Shields directors and officers of the holding company from personal liability related to their management decisions.
  • Workers’ Compensation Insurance: If your holding company has employees, you’ll need workers’ compensation insurance to cover medical expenses and lost wages for work-related injuries and illnesses.

Step 6: Develop an Investment Strategy

As a holding company, your primary focus will be acquiring and managing subsidiary companies. Develop a clear and well-defined investment strategy that includes the following:

  • Identifying Target Industries or Sectors: Determine the types of businesses or industries your holding company will focus on based on market research and your expertise.
  • Setting Investment Criteria: Establish clear criteria for selecting subsidiary companies, such as financial performance, growth potential, and strategic fit with your holding company’s objectives.
  • Monitoring and Managing Investments: Implement a system for monitoring the performance of your subsidiary companies and making strategic decisions, such as divesting underperforming businesses or making additional investments.

Ongoing Compliance for a Holding Company

Ongoing compliance requirements for a holding company may include filing Annual Reports, maintaining proper records and documentation, paying taxes, and renewing licenses and permits. The requirements depend on your holding company’s business entity type and state regulations.

Is Forming a Holding Company in South Dakota Necessary?

Forming a holding company in South Dakota is unnecessary for every business, but it can offer certain advantages depending on your specific situation and goals. South Dakota holding company may provide certain tax planning benefits, such as strategically allocating subsidiaries’ income, losses, and credits.

FAQs

What is a holding company?
A holding company is an organization that owns shares in and manages other companies.
Why would someone want to start a holding company in South Dakota?
South Dakota is a business-friendly state with a favorable tax climate for holding companies.
What are the tax advantages of starting a holding company in South Dakota?
South Dakota does not have a corporate income tax, which can be a huge advantage for holding companies.
Do I need to live in South Dakota to start a holding company there?
No, you do not need to be a resident of South Dakota to start a holding company there.
What are the requirements for registering a holding company in South Dakota?
You will need to file the appropriate paperwork and pay the necessary fees to register your holding company with the South Dakota Secretary of State.
Is there a minimum requirement for the number of shareholders in a South Dakota holding company?
No, there is no minimum requirement for the number of shareholders in a South Dakota holding company.
Can I register a holding company in South Dakota online?
Yes, you can register a holding company in South Dakota online through the Secretary of State’s website.
What is the cost of registering a holding company in South Dakota?
The cost of registering a holding company in South Dakota varies depending on the type of company and other factors, but it typically ranges from $60 to $150.
How long does it take to register a holding company in South Dakota?
The registration process typically takes a few days to a week to complete.
Are there any annual filing requirements for holding companies in South Dakota?
Yes, holding companies in South Dakota are required to file an annual report with the Secretary of State.
What is the fee for filing an annual report for a holding company in South Dakota?
The fee for filing an annual report for a holding company in South Dakota is $50.
Are there any other fees or taxes associated with holding companies in South Dakota?
No, South Dakota does not charge any additional fees or taxes specifically for holding companies.
Can a South Dakota holding company own foreign businesses?
Yes, a South Dakota holding company can own foreign businesses.
Are there any restrictions on the types of assets that a South Dakota holding company can acquire?
No, there are no restrictions on the types of assets that a South Dakota holding company can acquire.
Can a South Dakota holding company be used to hold real estate assets?
Yes, a South Dakota holding company can be used to hold real estate assets.
What are the capital requirements for formation of a holding group in South Dakota?
There are no capital requirements for formation of a holding group in South Dakota.
Are there any residency requirements for directors of a South Dakota holding company?
No, there are no residency requirements for directors of a South Dakota holding company.
Can a South Dakota holding company conduct business activities other than holding assets?
Yes, a South Dakota holding company can conduct other business activities.
What is the liability of a South Dakota holding company?
The liability of a South Dakota holding company is limited to the assets held within the company.
Can a South Dakota holding company issue stock?
Yes, a South Dakota holding company can issue stock.
Is it possible to convert an existing business into a South Dakota holding company?
Yes, it is possible to convert an existing business into a South Dakota holding company.
Can a South Dakota holding company have multiple subsidiaries?
Yes, a South Dakota holding company can have multiple subsidiaries.
Is it possible to dissolve a South Dakota holding company?
Yes, a South Dakota holding company can be dissolved through the Secretary of State.
What happens to the assets of a dissolved South Dakota holding company?
The assets of a dissolved South Dakota holding company are distributed to the shareholders.
Are there any advantages to locating a South Dakota holding company in a specific area of the state?
No, there are no advantages to locating a South Dakota holding company in a specific part of the state.
Can a South Dakota holding company provide loans to its subsidiaries?
Yes, a South Dakota holding company can provide loans to its subsidiaries.
Are there any limits on the number of subsidiaries that a South Dakota holding company can have?
No, there are no limits on the number of subsidiaries that a South Dakota holding company can have.
What qualities should I look for in a lawyer or accountant when starting a South Dakota holding company?
You should look for a lawyer or accountant with experience in business formation and management, as well as knowledge of South Dakota business and tax laws.
Why should I consider starting a holding company in South Dakota?
South Dakota offers a favorable tax environment and strong asset protection laws.
Do I need to be a resident of South Dakota to start a holding company there?
No, residency is not a requirement for starting a holding company in South Dakota.
Can I use a South Dakota holding company to protect my personal assets?
Yes, South Dakota law allows for strong asset protection strategies through a holding company.
Are there any tax benefits to organizing my holding company in South Dakota?
Yes, South Dakota has no state income tax and allows for favorable business tax rates.
How much does it cost to start a holding company in South Dakota?
The cost of starting a holding company in South Dakota varies depending on the complexity of the structure and the legal assistance needed.
What are the legal requirements for starting a holding company in South Dakota?
South Dakota requires you to file articles of incorporation and register with the Secretary of State.
Can I operate my holding company in other states if it is organized in South Dakota?
Yes, a holding company organized in South Dakota can operate in other states if properly registered there.
Is South Dakota a popular state for forming holding companies?
Yes, South Dakota is one of the most popular states for forming holding companies due to its favorable tax and legal environment.
Can a South Dakota holding company limit personal liability?
Yes, a holding company can provide strong asset protection and limit personal liability.
Do I need a lawyer to start a South Dakota holding company?
While not required, it is recommended to consult with a lawyer to ensure proper formation and compliance with legal requirements.
Can I use a South Dakota holding company to hold real estate investments?
Yes, a South Dakota holding company can be used to hold and manage real estate investments.
Are there annual fees or taxes for maintaining a South Dakota holding company?
Yes, there are annual fees for maintaining a South Dakota holding company.
Can a South Dakota holding company own stock in other companies?
Yes, a South Dakota holding company can hold stock or other equity interests in other companies.
What types of assets can a South Dakota holding company hold?
A South Dakota holding company can hold a wide variety of assets, including real estate, intellectual property, and financial assets.
Can South Dakota holding companies issue stock?
Yes, South Dakota holding companies can issue preferred stock or common stock if desired.
Does South Dakota have any corporate governance laws that I need to adhere to?
Yes, you must comply with South Dakota’s laws and regulations related to corporate governance, including holding regular meetings and maintaining accurate records.
Can a South Dakota holding company be dissolved if it is no longer needed?
Yes, a South Dakota holding company can be dissolved if you no longer need it.
What is the advantage of using a South Dakota holding company for my business?
A South Dakota holding company can provide strong asset protection, tax advantages, and flexibility in corporate structuring.
Are there any disadvantages to using a South Dakota holding company for my business?
There may be additional paperwork and annual fees associated with organizing a holding company in South Dakota.
Can a South Dakota holding company engage in business activities?
Generally, a South Dakota holding company is not involved in business activities and is instead used to own and manage assets.
Should I consider forming a limited liability company (LLC) instead of a holding company in South Dakota?
The choice between forming an LLC or a holding company depends on your specific business needs and objectives.
Can I set up a South Dakota holding company remotely?
Yes, you can set up a South Dakota holding company remotely through an experienced business lawyer or formation services provider.
What is the process for dissolving a South Dakota holding company?
Dissolving a South Dakota holding company involves filing specific forms with the Secretary of State.
Can a South Dakota holding company hold assets in other countries?
Yes, a South Dakota holding company can hold assets in other countries if properly registered in that jurisdiction.
How long does it take to set up a South Dakota holding company?
The timeframe for setting up a South Dakota holding company varies depending on the complexity of the structure and your needs.
Can a South Dakota holding company own a business that operates in other states?
Yes, a South Dakota holding company can own a business or operating company in other states if properly structured and registered.
What is the role of a South Dakota registered agent in holding company formation?
A South Dakota registered agent is required by law and is responsible for receiving important legal documents on behalf of your company.
Can a South Dakota holding company provide estate planning benefits?
Yes, a South Dakota holding company can be used for estate planning purposes, such as transferring assets to heirs or avoiding probate.

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Conclusion

Starting a holding company in South Dakota requires careful planning, research, and attention to detail. Following the steps outlined in this guide, you can establish a successful holding company that protects your assets, minimizes liability, and maximizes tax benefits. Consult with legal, financial, and tax professionals to ensure your holding company is set up and managed correctly. Dedication and the right strategy can make your holding company a powerful vehicle for long-term business success.

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