LLC vs S-Corp | What Entrepreneurs Need to Know in South Dakota

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LLC vs S-Corp in South Dakota

When starting a small business in the South Dakota, one of the most important decisions you’ll make is choosing the right legal structure. Two popular options for small businesses are electing for S Corporation (S-Corp) or forming an LLC in South Dakota. Both offer certain advantages and drawbacks, making it crucial to understand their differences and determine the best fit for your business. 

If you want to know more about LLC vs. S-Corporation, which is better and suitable for the business you will form, you should consider a few things. Before we get through this article, you should understand LLC vs. S-Corporation in South Dakota. 

Webinarcare Editorial Team will help you define and understand the difference, and you must be guided by all the factors gathered in this article.

LLC Vs. S-Corporation in South Dakota

LLC vs. S-Corporation: Definition

A limited liability company is a type of business structure that guards against the impact of business liabilities on your personal assets. However, while not a typical business structure, the S Corp is a tax status you can register with the IRS. Unlike an LLC, an S-Corp does not offer personal asset protection. The two are explained in detail here:

What is an LLC in South Dakota?

A legal corporate organization that protects personal assets is a limited liability company (LLC). With this setup, the LLC member or owner can protect their personal assets if their company faces financial difficulties or becomes the subject of legal action. In some unique circumstances, the opposing party may pursue your personal assets if your firm is sued in court. When you are held personally accountable for the company’s debt, this is called “piercing the corporate veil.”

By creating an LLC in your state, you can take advantage of the pass-through tax benefit, which means that your personal income will be used to determine your income tax obligations rather than the revenue generated by your firm. 

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What is an S-Corp in South Dakota?

Unlike a limited liability company (LLC) or other business structures, South Dakota S-Corporation is not a type of corporate entity. It’s a tax classification that, though in various ways for corporations and LLCs, might lead to considerable financial savings. S-Corporations are similar to LLCs, except that the Internal Revenue Service recognizes them as corporations for taxation purposes. 

A well-known alternative to the LLC is the S-corp. In contrast to a traditional C-corp, an S-corp is better suited for small and medium-sized firms, such as those with 100 total stockholders. 

LLC Vs. S-Corporation in South Dakota

Creating a business in South Dakota requires careful consideration, especially when deciding whether a state LLC or an S-Corporation is more advantageous. An LLC is a legal corporate structure, but an S-Corporation is a tax categorization which some small firms are eligible for. Forming South Dakota Corporations and LLCs can elect S-Corporation taxation by filing paperwork with the Internal Revenue Service (IRS). Making an S-Corporation may be less formal than establishing an LLC, and it typically offers less security. Additionally, S-Corporation in South Dakota does not offer the same safeguards that business owners seek in an LLC. When starting a business, thinking about your alternatives from a legal and tax perspective is important.

It is suggested that you speak with a legal professional before you begin setting up an LLC. 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.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in South Dakota

There is a distinction between an LLC and an S-Corporation regarding taxation. Based on the differences in Federal and State taxes, you can determine whether S-Corporation or LLC in South Dakota is best for your business.

Federal Taxes 

There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in South Dakota. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in South Dakota are the same regarding pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners must pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in South Dakota are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
  • Self-Employment Taxes: Most LLC owners choose S-corporation taxation in South Dakota to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes. 

Consider the following scenario: you are the sole owner of an LLC in South Dakota with a $200,000 annual profit. And $150,000 is a fair wage in your area for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $200,000 profit. However, if your business is taxed as a state S-corp, you must only pay payroll taxes on the standard wage of $150,000. The remaining $50,000 will still be subject to income tax.

South Dakota State Taxes

At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in South Dakota, it costs $50, which can be paid to the TN Secretary of State. Of course, before forming the whole LLC, you must pay the initial fee of $165 (by mail and $150 online) to the South Dakota Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in South Dakota have different ownership requirements that can impact your choice of business structure. Here’s a comparison of the key ownership requirements for each structure:

1. Number of Owners

South Dakota LLC: An LLC can have any number of owners, called members, from starting South Dakota Single Member LLC to multiple members LLC. There is no upper limit on the number of members an LLC can have.

South Dakota S-Corporation: An S-Corporation is limited to a maximum of 100 shareholders (owners). This restriction can be a limiting factor for businesses that plan to have many owners or seek outside investment.

2. Type of Owners

South Dakota LLC: An LLC can have various owner types, including individuals, corporations, other LLCs, trusts, and estates. Non-resident aliens can also be members of an LLC, like forming a Foreign LLC in South Dakota.

South Dakota S-Corporation: S-Corporations have more restrictive ownership requirements. Only U.S. citizens and resident aliens can be shareholders of an S-Corporation. Additionally, other corporations, LLCs, and certain types of trusts and estates are not eligible to be S-Corporation shareholders.

3. Classes of Ownership

South Dakota LLC: An LLC offers flexibility regarding ownership classes. Members can have varying levels of management rights, profit distribution rights, and voting rights, creating different classes of membership interests.

South Dakota S-Corporation: S-Corporations are limited to only one class of stock. While shareholders’ voting rights may differ, all shareholders must have equal rights to profit distribution and liquidation proceeds.

4. Profit Distribution

South Dakota LLC: Profit distribution in an LLC is flexible, allowing members to allocate profits and losses in any proportion they choose. This can be outlined in the South Dakota Operating Agreement.

South Dakota S-Corporation: Profits and losses in an S-Corporation must be distributed to shareholders based on the percentage of shares each owns. This can be less flexible than the profit distribution options available to an LLC.

South Dakota LLC offers more flexibility in ownership requirements, allowing for a greater variety of owner types, multiple classes of membership interests, and flexible profit distribution. In contrast, an S-Corporation has more restrictive ownership requirements, limiting the number and type of shareholders, allowing only one class of stock, and requiring proportional profit distribution based on share ownership. Consider these differences when deciding which business structure best fits your needs and goals.

Which is easier to incorporate in South Dakota: LLC or S-Corp?

Filing an LLC or S-Corporation in South Dakota requires planning and time. Even though it is not as simple as it appears, something manageable keeps it from being too difficult. LLC and S-Corporations can be formed using Registered Agent. To establish an LLC in South Dakota, you must submit the Articles of Organization to the South Dakota Secretary of State. Your Articles of Organization must include information about your South Dakota LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the South Dakota S-Corporation election. Fill out Form 8832 to notify the Internal Revenue Service that you prefer to tax your LLC as a corporation rather than a partnership. Then you’ll submit Form 2553 to select S-Corporation status.

Remember that you must file annual tax returns and reports after forming your LLC to remain legally compliant.

Who Pays More Taxes in South Dakota: LLC or S-Corp?

Taxes for LLCs and S-Corporations in South Dakota depend on the tax purposes and the profit generated. LLCs are typically taxed at personal rates, and LLC owners can be treated as separate companies with their own federal tax identification numbers. You can check the South Dakota LLC Cost for detailed information.

South Dakota S-Corporation owners, on the other hand, must be paid a salary that includes Social Security and Medicare taxes. On the other hand, the owner can receive dividend income or some of the leftover profits without being classified as an employee and thus will not be subject to Social Security and Medicare taxes on that money.

Should I Incorporate South Dakota LLC as an S-Corporation?

Forming an LLC may be advantageous because your business assets are separate from your personal assets if you are a sole proprietor. You are not restricted from converting your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and follow more regulations, it is ideal for larger companies with more shareholders.

How do you convert LLC to S-Corporation in South Dakota?

You must submit Form 2553, Election by a Small Business Corporation, to the IRS to elect S-corp taxes if you want to form an LLC as an S-Corporation in South Dakota. A Form 2553 must be submitted by 75 days following the creation of your S-Corp or by 75 days following the start of the tax year in which the election is to be effective. 

You must also submit Form 8832, Entity Classification Election if your LLS-Corp has passed the deadline of 75 days and you wish to elect to be taxed as a corporation. You would collectively transmit Forms 2553 and 8832 via certified mail from the USPS. You can send your Form 2553 to the Department of the Treasury Internal Revenue Service Center – Ogden, UT 84201 Fax: 855-214-7520​ in South Dakota.

FAQs

What is the difference between an LLC and an S-corporation in South Dakota?
An LLC offers more flexibility in terms of business structure and personal liability protection than an S-corporation in South Dakota.
Can an LLC be taxed as an S-corporation in South Dakota?
Yes, an LLC can choose to be taxed as an S-corporation in South Dakota.
What types of businesses are suitable for conversion to an S-corporation in South Dakota?
S-corporation status is often ideal for small businesses with few shareholders that want to avoid double taxation in South Dakota.
Does South Dakota allow single-member LLCs?
Yes, South Dakota allows for “single-member” LLCs – businesses owned by one person in South Dakota.
What are the filing requirements for LLCs in South Dakota?
LLCs in South Dakota need to file an annual report with Secretary of State and pay an annual fee in South Dakota.
Can an LLC in South Dakota elect S-Corporation status at any time?
Yes, an LLC in South Dakota can elect S-Corporation status at any time by filing IRS Form 2553.
How is the taxation of an S-Corp different from that of an LLC in South Dakota?
S-corps in South Dakota are subject to different tax rules than LLCs. They are typically not taxed at the corporate level, avoiding double taxation in South Dakota.
Is it possible to convert an S-Corporation to an LLC in South Dakota?
Yes, it is possible to convert an S-Corporation to an LLC in South Dakota. It must be filed with the South Dakota Secretary of State.
Do LLCs have perpetual life in South Dakota?
Yes, LLCs have perpetual life in South Dakota, enabling businesses to continue even if the owner/manager changes.
How many members are required to form an LLC in South Dakota?
At least one person is required to form an LLC in South Dakota (owner aka member).
Is there a limit to the number of members that an LLC can have in South Dakota?
There is no limit as to the number of members that an LLC can have in South Dakota.
How long does it take to set up an LLC in South Dakota?
It can take as little as a few business days to set up an LLC in South Dakota.
What are the minimum share requirements for S-Corps in South Dakota?
There are no minimum share requirements for S-Corps in South Dakota.
Can foreigners own a business in South Dakota as an LLC or S-Corp?
Yes, foreigners can own and operate a business in South Dakota as an LLC or S-Corp.
Can you form an S-Corp that has more than one class of shares in South Dakota?
No, S-corps in South Dakota cannot have more than one class of shares.
Are both LLC and S-Corps required to have an Operating Agreement in South Dakota?
LLCs should have an Operating Agreement and for S-Corps – Bylaws are preferred.
Can an LLC be taxed as a C-Corporation in South Dakota?
Yes, but it depends on choice and filling during taxes. You can’t automatically do that.
What qualifications do shareholders need in order to form an S-Corp in South Dakota?
It requires at least one shareholder who is a US citizen or legal permanent alien to form an S-Corp in South Dakota.
What’s the owner liability protection like an LLC or an S-Corp in South Dakota?
Both provide their owners limited protection where the higher protection is in favor of LLCs.
Are S-Corps able to have different types of memberships in South Dakota?
No, there are no multiple types of stocks/capital structures in an S-Corp so only one type of membership.
Can S-Corporations have foreign shareholders in South Dakota?
Yes, S-Corps in South Dakota can have foreign shareholders.
Are both LLCs and S-Corps required to hold annual meetings in South Dakota?
Both are required.
Is it a legal requirement to get a business license in South Dakota for LLCs and S-Corps?
Yes, a business license is required before any kind of business activity in South Dakota.
Are there any conflicts or overlaps between federal laws and South Dakota laws for LLCs and S-Corps?
No, it’s not suppressed unless creates any manifestation of fraud, which is the same for all states.
Is it necessary to keep continuous records and state filings for LLCs and S-Corps in South Dakota?
Continuous record maintenance and state filing maintenance specifics are required by Companies similarly.
Can a live company change owners in South Dakota?
Yes, ownership may be bought or transferred to other LLC members or S-corp shareholders in South Dakota.
Is it necessary to hire a business lawyer for LLCs and S-Corps in South Dakota?
Necessary implies mandatory, but it’s not essential in all business scenarios, but heavily advised by South Dakota Counsel.
Is it illegal to do S-Corporation in South Dakota if your business belongs to some particular industry?
No, there are no specific industry-based restrictions for S-Corporation in South Dakota as long as it qualifies for S-Corporation at federal level.
How difficult is taxation and filing requirements for LLC and S-Corp in South Dakota?
There’s no huge distinction in South Dakota concerning tax and filing requirements between the two entities overall.
What are the differences between LLCs and S-corps in South Dakota?
LLCs and S-corps have several differences, including management structure and tax treatment.
How are LLCs taxed in South Dakota?
LLCs in South Dakota are taxed as pass-through entities, meaning that the business profits are reported on the individual members’ tax returns.
How are S-corps taxed in South Dakota?
S-corps in South Dakota are also taxed as pass-through entities, with business profits reported on individual shareholders’ tax returns.
Can an LLC be taxed as an S-corp in South Dakota?
Yes, an LLC can elect to be taxed as an S-corp in South Dakota if it meets certain criteria.
What is the ownership structure of an LLC in South Dakota?
LLC ownership in South Dakota is represented by membership units rather than shares of stock.
What is the ownership structure of an S-corp in South Dakota?
S-corp ownership in South Dakota is represented by shares of stock.
What are the filing requirements for forming an LLC in South Dakota?
LLC formation paperwork must be filed with the South Dakota Secretary of State’s office to legally register the business entity.
What are the filing requirements for forming an S-corp in South Dakota?
S-corp formation paperwork, including a completed Articles of Incorporation, must be filed with the South Dakota Secretary of State’s office.
How many shareholders can an S-corp have in South Dakota?
S-corps in South Dakota are limited to 100 shareholders.
Is there a minimum number of shareholders required for an S-corp in South Dakota?
No, an S-corp in South Dakota can have just one shareholder.
Can non-residents of South Dakota form an LLC in the state?
Yes, non-residents can form an LLC in South Dakota.
Can non-residents of South Dakota form an S-corp in the state?
Yes, non-residents can form an S-corp in South Dakota.
What is the minimum capital requirement for forming an S-corp in South Dakota?
South Dakota does not have a minimum capital requirement for S-corps.
What is the minimum capital requirement for forming an LLC in South Dakota?
South Dakota does not have a minimum capital requirement for LLCs.
What is the annual reporting requirement for LLCs in South Dakota?
LLCs in South Dakota must file an annual report with the Secretary of State.
What is the annual reporting requirement for S-corps in South Dakota?
S-corps in South Dakota must file an annual report with the Secretary of State.
What is the South Dakota sales tax rate?
The South Dakota state sales tax rate is currently 4.5%.
Can an S-corp or LLC purchase property in South Dakota?
Yes, both S-corps and LLCs in South Dakota can purchase property.
How are business losses handled in an LLC in South Dakota?
LLC losses can be deducted from the individual members’ income taxes.
How are business losses handled in an S-corp in South Dakota?
S-corp losses can be deducted from the individual shareholders’ income taxes.
What liability protection does an LLC offer in South Dakota?
LLC members have limited liability protection, meaning that personal assets are generally protected from business debts.
What liability protection does an S-corp offer in South Dakota?
S-corp shareholders also have limited liability protection.
What is the minimum number of members required for an LLC in South Dakota?
South Dakota does not have a minimum number of members required for an LLC.
What is the cost of forming an LLC in South Dakota?
The cost of forming an LLC in South Dakota is $150.
What is the cost of forming an S-corp in South Dakota?
The cost of forming an S-corp in South Dakota is $150.
What is the cost of the annual report filing for an LLC in South Dakota?
The cost of the annual report filing for an LLC in South Dakota is $50.
What is the cost of the annual report filing for an S-corp in South Dakota?
The cost of the annual report filing for an S-corp in South Dakota is $50.
Can an LLC in South Dakota raise capital by selling equity?
Yes, LLCs in South Dakota can raise capital by selling membership units.
Can an S-corp in South Dakota raise capital by selling equity?
Yes, S-corps in South Dakota can raise capital by selling shares of stock.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in South Dakota will depend on your business goals, management preferences, and tax considerations. It’s essential to consult with a legal or financial advisor to determine which structure is best for your business in South Dakota and help you navigate the formation process. Making an informed decision will set your business up for success and ensure you’re well-positioned for growth and profitability.

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