How to Start an S-Corporation in South Dakota (2024 Guide)

Start an S-Corporation in South Dakota

If you want to start an LLC in South Dakota, there are things that you should consider. South Dakota is the home to a thriving business community, making it an attractive location for entrepreneurs. One popular business structure is the S-Corporation, which offers several tax and operational advantages. This comprehensive guide will explore the process of starting an S-Corporation in South Dakota, including the costs, steps, advantages, and disadvantages associated with this business structure.

Webinarcare Editorial Team will help you gain knowledge through thorough research and market study. Before starting your S-corp, all the steps in this article must guide you.

What is an S-Corporation?

An S-Corporation is a type of corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. This tax treatment allows S-Corporations to enjoy pass-through taxation, meaning the corporation’s income, deductions, and credits flow through to the shareholders, who report this information on their individual tax returns. This structure helps to avoid the double taxation experienced by C-Corporations.

An S corporation (S corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other companies. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-corp is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

Limitations and Requirements of S-Corp

As you have decided to have an S-Corp structure for your business, you must know the limitations and requirements to qualify for S-Corp status. We have listed some important points to consider following for your reference-

  • Be a domestic corporation.
  • Not be an ineligible corporation, such as specific financial institutions, insurance providers, or domestic corporations engaged in overseas sales.
  • Have just one type of stock.
  • Have a maximum of 100 shareholders or members.
  • Have only permitted individuals, certain trusts, and estates as stockholders or members.

You can apply for an S-Corp in South Dakota if qualified for the limitations and requirements.

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How to Form an S-Corporation in South Dakota?

To create S-Corp in South Dakota, you must follow the below guidelines that include forming a business name, hiring a Registered Agent, filing your Articles of Organization, creating an operating agreement, requesting an EIN, and filing a form 2553.

Step 1: Register a Business Name in South Dakota

After you have decided on the idea to start an S-Corp in South Dakota, deciding the name for your corporation is significant. Legal procedures should be taken into account when choosing your partnership name. Choose a business name that will enable you to develop a strong brand identity.

If you want to set up an S-Corp, there is a complete guide on South Dakota Business Name Search for a proper business name. Here are some guidelines you must follow while naming your S-corp.

  • Avoid profanities
  • The name should be available, and no other entity should have the same name in South Dakota.
  • Limit of restricted words that need a license in South Dakota
  • Do not use a business name that sounds like a government agency or entity (like “police,” “county,” and “state”)

Step 2: Hire a Registered Agent

The next step in starting an S-corp in South Dakota is hiring a Registered Agent, a person that accepts legal paperwork on behalf of your business. This person or business will receive important tax forms, legal documents (such as subpoenas), all notices of lawsuits, and other official government correspondence. Forming an LLC with an S-corp will be easier if you have Registered Agent in South Dakota.

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Step 3: File For Articles of Organization

The Articles of Organization is an important document to start your limited liability company (LLC). South Dakota Articles of Organization is a simple document that contains the business name and address as well as the name and address of the person who received lawsuits on behalf of the organization. For the Articles of Organization to be filed in TN Secretary of State, you need to pay a filing fee of $150. In South Dakota, the filing fee of forming an LLC is $165 (by mail and $150 online).

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Step 4: Creating an Operating Agreement

After you have filed your Articles of Organization, the next step is to create an operating agreement in South Dakota. The operating agreement is essential and necessary since it will cover your corporation’s important documentation and rules. The operating agreements usually include the following:

  • Article I: Organization
  • Article II: Management and Voting
  • Article III: Capital Contributions
  • Article IV: Distributions
  • Article V: Membership Changes
  • Article VI: Dissolution

After creating the LLC operating agreement, you can benefit in several ways since it will discuss how decisions for the business will be made, including management and member voting structure.

Step 5: Request for an EIN

After documenting the operating agreement, you should get or request an Employer Identification Number (EIN). An EIN will serve as the tax ID for your general partnership. EIN can be obtained from the Internal Revenue Service (IRS). It is a 9-digit number similar to Social Security Number. EIN, however, is distinct from SSN. It is only used for business-related activities, particularly for submitting general taxes. The form must be completed and uploaded to the IRS website.

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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Step 6: File Form 2553 for your S-Corp Business

Once you have obtained your EIN and Articles of Organization to form an S-Corp, you must file Form 2553, Election by a Small Business Corporation, to apply for S-corp status. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or at most 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS.

In South Dakota, you can file your form 2553 in the Department of the Treasury Internal Revenue Service Center – Ogden, UT 84201 Fax: 855-214-7520 .

Costs of Forming an S-Corporation

There are several costs associated with forming an S-Corporation in South Dakota, including:

  1. Filing Fees: When forming a corporation in South Dakota, you must file Articles of Incorporation with the South Dakota Secretary of State and pay a filing fee of $150 for online filing, and $165 for filing by mail..
  2. Statement of Information: After forming the corporation, you must file a Statement of Information (Form SI-550) within 90 days and pay a filing fee (currently $25). This statement must be filed annually after that.
  3. Franchise Tax: S-Corporations in South Dakota are subject to the annual franchise tax, which is the greater of a minimum tax (currently $800) or a calculated tax based on the corporation’s net income.
  4. Other Costs: Depending on the nature of your business, additional costs may include obtaining licenses and permits, registered agent services, and professional fees for legal and accounting services.

Advantages of Forming an S-Corporation

There are numerous advantages to incorporating an S-Corp, but you should be aware of certain problems. Consider the following benefits of an S corporation:

Pass-through Taxation

S-Corporations enjoy pass-through taxation, which helps to avoid the double taxation faced by C-Corporations. This can result in potential tax savings for shareholders. Pass-through taxation is a tax system where the income, deductions, and credits generated by a business entity, such as South Dakota General Partnership, limited liability company (LLC), or S-Corporation, are passed through to individual owners or shareholders instead of being taxed at the corporate level.

In this system, business profits and losses are reported on the owners’ or shareholders’ individual tax returns, and taxes are paid at their individual income tax rates. This avoids the issue of double taxation, which occurs in C-Corporations where income is taxed at both the corporate level and again when distributed to shareholders as dividends. Pass-through taxation is generally advantageous for small businesses and their owners, as it simplifies tax filings and often results in lower overall taxes.

Limited Liability Protection

Shareholders of an S-Corporation have limited liability protection, meaning their personal assets are protected from the corporation’s debts and obligations. Limited liability protection in an S-Corporation refers to the legal separation between the personal assets of the shareholders (owners) and the business assets, which protects shareholders from being personally responsible for the company’s debts and legal obligations.

In an S-Corporation, shareholders’ personal assets, such as their homes, cars, and personal savings, are not at risk if the business faces financial difficulties or lawsuits. The shareholders’ liability is limited to the amount they have invested in the company. This limited liability is a significant advantage of incorporating a business as an S-Corporation, as it provides a safeguard for the personal financial well-being of the business owners.

It is important to note that limited liability protection can only be supported if the shareholders maintain proper corporate formalities, such as keeping separate business and personal finances, holding regular shareholder meetings, and maintaining accurate business records. In such cases, courts may “pierce the corporate veil” and hold shareholders personally liable for the company’s debts and obligations.

Transferability of Shares

Shares in an S-Corporation are more easily transferable than those in an LLC, allowing for greater flexibility in ownership changes. Transferability of shares in an S-Corporation refers to the ability of shareholders to sell, gift, or otherwise transfer their ownership interest in the company to another person or entity. This is an important aspect of an S-Corporation’s structure, as it allows for flexibility in ownership and the potential for raising capital through the sale of shares.

However, there are certain restrictions on the transferability of shares in an S-Corporation, which are imposed by the Internal Revenue Service (IRS) to maintain the company’s eligibility for S-Corp status:

  • Shareholders: The number of shareholders in an S-Corporation is limited to a maximum of 100. Only individuals, certain trusts, and estates can be shareholders; other corporations and partnerships are generally not allowed.
  • Eligible Shareholders: Only U.S. citizens and resident aliens can be shareholders in an S-Corporation. Non-resident aliens are not allowed to hold shares.
  • One Class of Stock: S-Corporations can only have one class of stock. All shares must have the same rights and privileges, such as voting rights and distribution preferences. However, differences in voting rights are allowed if they are not tied to economic rights (e.g., distribution preferences).
  • Perpetual Existence: Perpetual existence refers to the concept that a business entity, such as an S-Corporation, can continue to exist indefinitely, regardless of changes in ownership or management. This means the corporation can outlive its original founders and shareholders and continue to operate even if individual shareholders pass away or decide to sell their shares.

This characteristic of an S-Corporation provides stability and continuity for the business, as it ensures that the corporation’s operations, contracts, and legal obligations remain unaffected by changes in ownership. It also makes it easier for the company to attract investors and raise capital. Potential investors can be confident that the business will continue to exist even if the original owners are no longer involved.

Disadvantages of Forming an S-Corporation

Despite these advantages, moving to an S corporation only sometimes makes sense – or at the very least, necessitates a thorough review of certain situations. The following issues may arise in particular:

Restrictions on Shareholders

S-Corporations are subject to specific restrictions, such as a maximum of 100 shareholders and limitations on the types of eligible shareholders (e.g., only individuals, certain trusts, and estates).

Single Class of Stock

S-Corporations are limited to issuing only one class of stock, which can limit flexibility in raising capital or creating different ownership structures. A single class of stock in an S-Corporation refers to the requirement that the corporation only issues one type of stock with equal rights and characteristics for all shareholders. This means that all shares of stock must have the same economic rights, such as dividend distribution preferences and liquidation rights, as well as voting rights. The single class of stock requirement is one of the key criteria the Internal Revenue Service (IRS) sets for a corporation to qualify for S-Corp status.

Increased Complexity

Forming and maintaining an S-Corporation requires more paperwork, record-keeping, and compliance with state and federal regulations than simpler structures like LLCs.

Franchise Tax

S-Corporations in South Dakota are subject to the annual franchise tax, which can financially burden some businesses.

In an South Dakota S-Corporation context, the franchise tax is usually based on the company’s income, net worth, or a combination of both. Since S-Corporations are pass-through entities for federal income tax purposes, meaning that their income is not taxed at the corporate level but rather passed through to individual shareholders, they may be exempt from or subject to lower franchise tax rates in some states than traditional C-Corporations.

However, S-Corporations must still comply with South Dakota franchise tax requirements, which may include annual filings and tax payments. It is crucial for S-Corporation owners to understand the specific rules and regulations in their state of operation and to consult with a tax professional to ensure compliance and minimize their tax.

FAQs

What is an S-corporation?
An S-corporation is a type of corporation that allows the company’s income to pass through to the shareholders for tax purposes.
What are the benefits of starting an S-corporation in South Dakota?
South Dakota has no corporate income tax, and S-corporations are not subject to the state’s franchise tax.
How do I form an S-corporation in South Dakota?
You must file Articles of Incorporation with the South Dakota Secretary of State and submit a filing fee.
How much does it cost to form an S-corporation in South Dakota?
The filing fee for the Articles of Incorporation is $150.
Do I need a lawyer to start an S-corporation in South Dakota?
No, you can prepare and file the Articles of Incorporation yourself, but it is recommended to seek professional guidance.
How many shareholders can an S-corporation have in South Dakota?
An S-corporation in South Dakota can have up to 100 shareholders.
Who is eligible to be a shareholder in an S-corporation?
Individuals, certain trusts, estates, and certain tax-exempt organizations can be shareholders in an S-corporation.
Can a non-resident of South Dakota start an S-corporation in South Dakota?
Yes, anyone can start an S-corporation in South Dakota.
What is the S-corporation tax rate in South Dakota?
There is no separate S-corporation tax rate in South Dakota.
What is the state income tax rate on S-corporation profits in South Dakota?
South Dakota has no corporate income tax, so S-corporation profits are not taxed at the state level.
Do I need to file a separate tax return for my S-corporation in South Dakota?
Yes, you need to file a South Dakota state income tax return for your S-corporation, but S-corporations are not subject to state income tax.
What documentation do I need to start an S-corporation in South Dakota?
You need Articles of Incorporation, Bylaws, and Minutes of the Initial Meeting of the Board of Directors.
Can an S-corporation in South Dakota have multiple classes of stock?
No, S-corporations cannot have preferred stocks or more than one class of common stock.
Can an S-corporation be owned by another corporation in South Dakota?
No, S-corporations cannot be owned by other entities, except in the case of Qualified Subchapter S Subsidiaries (QSubs).
How often do I need to file an annual report for my S-corporation in South Dakota?
South Dakota does not require annual reports for S-corporations.
Can an S-corporation in South Dakota elect to be taxed as a C-corporation?
Yes, an S-corporation can elect to be taxed as a C-corporation by filing Form 8832 with the IRS.
How do I obtain an S-corporation status for my business entity in South Dakota?
After your corporation is established as a C-corporation, you must file Form 2553 with the IRS to request S-corporation status.
How long does it take to get S-corporation status in South Dakota?
Once you file Form 2553, you can expect the process to be completed in a matter of weeks.
Are there any ongoing requirements for maintaining S-corporation status in South Dakota?
Yes, among other requirements, you must file an annual tax return with the IRS and hold periodic shareholder meetings.
Can the CEO of an S-corporation also be a shareholder in South Dakota?
Yes, the CEO of an S-corporation can be a shareholder in South Dakota.
Can the CEO receive a salary in an S-corporation in South Dakota?
Yes, the CEO of an S-corporation can receive a salary.
How does an S-corporation in South Dakota compare to a limited liability company?
Both offer pass-through taxation, but LLCs offer more flexibility in governance and management.
Can my S-corporation in South Dakota have employees?
Yes, your S-corporation in South Dakota can have employees.
Do I need to have a registered agent for my S-corporation in South Dakota?
Yes, you must have a registered agent for your S-corporation in South Dakota.
Can I be my own registered agent for my S-corporation in South Dakota?
Yes, you can be your own registered agent for your S-corporation in South Dakota.
Can a foreign corporation set up an S-corporation in South Dakota?
Yes, a foreign corporation can set up an S-corporation in South Dakota.
What types of businesses are best suited for S-corporation status in South Dakota?
S-corporations are a good fit for small to medium-sized businesses that want to avoid double taxation.
Can an S-corporation change its status in South Dakota?
Yes, an S-corporation can change its status by filing the appropriate paperwork with the IRS and state authorities.
What happens if an S-corporation is dissolved in South Dakota?
Assets are sold and liabilities paid off, any remaining profits are distributed to shareholders, and the business is dissolved.
What is an S-Corporation?
An S-Corporation is a type of corporation that provides tax benefits provided by federal tax law in the United States.
What are the requirements for forming an S-Corporation in South Dakota?
In South Dakota, you need to file a Form D-102 with the South Dakota Secretary of State.
How long does it take to form an S-Corporation in South Dakota?
It can take up to a few days to a few weeks to file and form an S-Corporation in South Dakota.
Who can own an S-Corporation in South Dakota?
Anyone can own an S-Corporation in South Dakota as long as they abide by the laws and regulations.
What are some other legal requirements for S-Corporations in South Dakota?
As an S-Corporation owner, you will have to follow all corporate laws of South Dakota.
What are the benefits of forming an S-Corporation in South Dakota?
Some benefits of having an S-Corporation in South Dakota include tax benefits and protection for owners’ personal assets.
Can an S-Corporation in South Dakota have multiple owners?
Yes. An S-Corporation in South Dakota can have multiple owners.
How is an S-Corporation taxed in South Dakota?
An S-Corporation in South Dakota is not taxed differently from other corporations but gets benefits related to taxes.
Does an S-Corporation need to have an EIN number in South Dakota?
Yes, all corporations in the United States must have an EIN number, including S-Corporations in South Dakota.
Can an S-Corporation convert to a different type of corporation in South Dakota?
Yes, an S-Corporation can convert to a different type of corporation in South Dakota but may have to file new paperwork to make sure the proper tax details remain.
What is the process for filing a Form D-102 in South Dakota?
South Dakota requires a $150 filing fee to be submitted with the Form D-102.
What is the annual cost for an S-Corporation in South Dakota?
Annual costs for an S-Corporation in South Dakota vary but can range from filing fees to business tax and income filings.
Do S-Corporations in South Dakota have to file an Annual Report?
Yes, S-Corporation in South Dakota is required to file an annual report with the South Dakota Secretary of State.
Can non-US residents form an S-Corporation in South Dakota?
Non-US residents can form an S-Corporation in South Dakota as long as they’re following all necessary laws.
What paperwork is required to form an S-Corporation in South Dakota?
For forming an S-Corporation in South Dakota, one needs to do a form D-102.
Do S-Corporations have to adhere to corporate formalities?
Yes, all companies in South Dakota must adhere to state-level corporate formalities regardless of classification.
Can an S-Corporation have employees in South Dakota?
Yes, S-Corporations in South Dakota can have employees, regardless of whether employees are residents of South Dakota.
Can owners of an S-Corporation be located in different states?
Yes, owners of S-Corporations in South Dakota can be located in different states if all necessary paperwork has been filed appropriately.
How does a corporation meet South Dakota state minimum filing requirements?
Corporations must file an annual South Dakota Secretary of State business report each year.
Can the State of South Dakota dissolve an S-Corporation?
Yes, the State can dissolve an S-Corporation if the corporation does not file all necessary reports filed within statutory US & state filing deadlines.
How does an S-Corporation in South Dakota provide liability protection?
S-Corporations in South Dakota exist as their entities, apart from the individual owners. This separation offers protection of personal assets to individuals.
How are taxes paid by an S-Corporation in South Dakota?
An S-Corporation in South Dakota pays company taxation using Form 1120S but only passes its taxable income to its owners unless the Standard Federal Tax laws apply.
Do S-Corporations have to yearly contributions in South Dakota?
No, they are not responsible for giving annual contributions offered to political campaigns.
What happens when a member leaves an S Corporation in South Dakota?
Overall, when someone leaves an S Corporation in South Dakota, ownership rules change. Eligible business owners are typically notified as stated in the current S Corporation Agreement.
What licenses or permits will an S-Corporation in South Dakota require?
An S-Corporation in South Dakota must get necessary licenses and permits to engage with various South Dakota state items.
Do I need to be a South Dakota resident to file for an S-Corp here?
You aren’t required to have a Dakota state physical street address under myBusiness endorsement if meeting final beyond all state borders.
Can an S Corporation structure go public in South Dakota?
Unlike public organizations, only themselves, corporation owners have interests in s corporations; rights to legally transfer membership are inherently limited.
What happens if there are gain or loss holdings of older business models rooted in a prior C Corporation form?
If owners elect attachment treatment on IRS Form 2553, all Company gains and missed C firm losses will get handled efficiently all taxpayers on-year basis.

Also Read

Why You Should Start South Dakota S Corp

One of the key advantages of forming an S Corporation is the tax benefits it provides. S Corporations are considered pass-through entities, meaning that the business itself does not pay taxes on its profits. Instead, those profits are “passed through” to the owners or shareholders, who report them on their individual tax returns. This can result in significant tax savings for owners, as they may be able to avoid the double taxation that can occur with traditional C Corporations.

Another benefit of the S Corporation structure is limited liability protection for owners. By forming an S Corporation, owners can separate their personal assets from their business liabilities. This means that in the event of a lawsuit or debt collection, the owners’ personal assets are typically protected from being seized to satisfy the business’s obligations. This can provide peace of mind and financial security for owners, knowing that their personal assets are safeguarded.

S Corporations also offer flexibility in terms of ownership and structure. Unlike C Corporations, which are subject to more rigid ownership and governance requirements, S Corporations can have up to 100 shareholders and do not have to follow the same requirements for shareholder meetings and record-keeping. This can make it easier for small businesses to operate efficiently and make decisions quickly without the burden of excessive administrative duties.

Additionally, forming an S Corporation in South Dakota can offer strategic advantages for certain businesses. South Dakota has a reputation for being a business-friendly state with low corporate income tax rates and relatively few regulations compared to other states. This can make it an attractive location for businesses looking to minimize their tax burden and regulatory compliance costs.

Furthermore, South Dakota does not have a state income tax, making it an even more appealing choice for business owners looking to maximize their bottom line. By starting an S Corporation in South Dakota, owners can take advantage of the state’s pro-business environment and potentially save on taxes compared to operating in other states with higher tax rates.

In conclusion, starting an S Corporation in South Dakota can be a wise decision for many small business owners looking to maximize tax savings, protect their personal assets, and operate in a business-friendly environment. The S Corporation structure offers numerous benefits and advantages that can help owners achieve their business goals and financial objectives. If you are considering starting a new business or restructuring an existing one, forming an S Corporation in South Dakota may be the right choice for you.

Conclusion

Forming an S-Corporation in South Dakota can be a beneficial decision for small business owners seeking liability protection, pass-through taxation, and easier transfer of ownership. By meeting the requirements set by the IRS and following the necessary steps, business owners can take advantage of an S-Corp’s unique structure and benefits. However, it is essential to consider the potential drawbacks, such as increased paperwork and limitations on ownership, before making a final decision. Consulting with a legal or financial professional can help business owners determine if an S-Corporation is right for their needs and goals.

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