South Dakota LLC (6 Step-Guide) – How to Form an LLC in South Dakota

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If you are trying to decide where to form your LLC (Limited Liability Company), South Dakota may not have come to mind. With one of the smallest state populations in the country, many may overlook this state. But, the truth is a South Dakota LLC holds many advantages

South Dakota is one of the most business-friendly states in the country, and with an LLC, you can protect your personal assets while benefiting from reduced taxes. This is a great combination with South Dakota, which holds few taxes for business owners. Let’s take a closer look at some of the benefits that a South Dakota LLC can offer you and how you can form one in only six easy steps.

Why Would You Want a South Dakota LLC?

There are many reasons that you would want a South Dakota LLC, so let’s take a look at some of the biggest.

  • Limited Liability: With a South Dakota LLC, your personal assets aren’t at risk when forming a new business. You can rest easy knowing that even if your business plan doesn’t work out as intended or your business is sued, your home, vehicle, and personal bank account won’t be held responsible in nearly all circumstances.
  • Reduced Taxes: Who doesn’t want to take more money home from work? With a South Dakota LLC, you can! This business structure benefits from pass-through taxation. This means that unlike a corporation that is taxed as an entity and again on owners’ returns, a South Dakota LLC will pass profits through the business to be taxed solely on the owner’s returns. This avoids the dreaded “double taxation” associated with corporations while still retaining the same limited liability.
  • Easy Maintenance: Running certain structures such as a corporation can require considerable work to meet the state’s stringent requirements. This can include regular meetings between owners, detailed minutes, and establishing certain management structures. With a South Dakota LLC, there are none of these requirements, and your business will likely benefit from little more than filing an Annual Report with the state.

Quick South Dakota LLC Pros & Cons

You are probably in a hurry to get started filing for your business, but before making such an important decision, it is important to consider the pros and cons. Don’t worry. We will make this quick and painless so that you can get started on the fun part.

Pros

As we said, South Dakota is one of the most business-friendly states in the country, so unsurprisingly, there are a number of pros. Here are some of the largest:

  • Plenty of Financing Options: No matter where you are forming your business, your success in acquiring financing will likely play a large role in whether or not it succeeds. Fortunately, there are a number of options for financing available in South Dakota. Some of the options available from the Governor’s Office of Economic Development include the South Dakota Jobs Grant Program, the Proof of Concept Fund, the Revolving Economic Development & Initiative Fund, and several more.
  • Fast-Growing Economy: South Dakota’s business-friendly policies have not gone without notice. Every year more than 2,500 LLCs are formed in this state, which holds more than 11,000 active LLCs. This state is also ranked as having one of the highest rates of business survival by the United States Chamber of Commerce, as well as possessing a stable regulatory environment.
  • Flexibility in Distributing Profits: With most business structures, distribution of profits and losses are pretty much fixed. But with a South Dakota LLC, you can distribute profits in any way you choose regardless of percentages of ownership. All you need to do is specify how it will be done in the LLC’s Operating Agreement.
  • Low Taxes: It is hard to get a much better tax situation than in South Dakota. This state has one of the lowest tax burdens in the country for most businesses. South Dakota has no corporate income tax, no personal income tax, no personal property tax, and no business inventory tax. What it does still have is a sales tax; however, on a 4.5% statewide tax, it still is not a high rate compared with other states.
  • Economic Development Finance Authority: This program is intended to help small businesses with projects requiring a lot of capital. This program offers small businesses that are starting up as well as those looking to purchase new equipment tax-exempt bonds to help reduce the impact.

Cons

South Dakota, as we have said, is quite business-friendly, but that certainly doesn’t mean that there are no cons to forming your LLC here. Cons for forming here include:

  • Shortage of Qualified Workers: South Dakota has one of the lowest unemployment rates in the country. This means that as more businesses are formed in this business-friendly state, there is a shortage of workers to fill all of the openings.
  • Low Population: Though steadily growing year after year, South Dakota’s population is quite low. South Dakota has the fifth smallest population in the country, which could turn off some businesses that depend on a large customer base. On the other hand, some could potentially benefit from the low population, so consider your industry.

How to Form Your South Dakota LLC in Six Easy Steps

Now that you have seen why you might want a South Dakota LLC and some of the biggest pros and cons, hopefully, you are still with us. If so, that’s great! Now let’s get down to the nuts and bolts of forming your South Dakota LLC. Luckily we only have six steps ahead of us.

Step 1: Choose Your South Dakota LLC’s Name

Choose-your-LLC-Name-1

Your first step is not a difficult one, and it may even be fun. It is time to choose your LLC’s name. It is a good idea to choose a creative name that still gets the idea of what product or service your business provides across.

Your business name will also need to be unique from all other businesses that have previously registered in South Dakota. To ensure your business name is unique, you will need to do a quick search on the South Dakota Secretary of State’s Business Information Search Tool.

Simply choose keywords from the name you have chosen and type them into the search bar. Then look at the results and see if any other businesses have a name that too closely resembles yours. If not, then your name should be okay to use.

Once you are satisfied, add a designator to the end of your LLC’s name. This can be “limited liability company,” “limited company,” or any of the abbreviations of these phrases. Abbreviations include “LLC,” “L.L.C.,” and “LC.”

Reserve a Domain for Your LLC (optional)

Once you choose a name for your LLC and find out that it is available, you’ll want to see if the domain name for your business is available. A website is important for any business today, and you want one with the same name as your business so that customers will easily associate it with your business. If a suitable domain name isn’t available, you may want to consider choosing another name for your South Dakota LLC.


Step 2: Select a Registered Agent for Your South Dakota LLC

Appoint-Registered-Agent

All LLCs are required to have a registered agent. The registered agent must have a physical address in South Dakota. A P.O. Box is not acceptable. The registered agent is required to be available during all business hours to receive service of process and other official notices.

Who Can Be a Registered Agent?

You can choose anyone to be your registered agent as long as they are 18 years or older and have a physical address in South Dakota. You can even be your own registered agent. However, there are some advantages to using a registered agent service, which we will list below.

  • Privacy: If you choose to be your own registered agent, your name and business address will be part of the public record. This could lead to unwanted sales calls. Also, this address will be used for service of process, which could be embarrassing if you are served in front of customers, friends, or family. It could also hurt your business reputation.
  • Availability: You may also want a registered agent service if your business does not tend to operate during normal business hours. A registered agent has to be available during all business hours to accept service of process, So if you will have trouble being available during these hours, you would probably find it convenient to use a registered agent service.  Also, even if you are available during normal business hours, you may prefer to have someone perform this service for you if you tend to be very busy.
  • No Business Address: A registered agent service can also be useful for someone who does not have a physical business. You could use your home address, but this could be inconvenient for privacy reasons. This service can also be useful for businesses that are located in more than one state.

Step 3: File Articles of Organization For Your South Dakota LLC

File-your-Atricles-of-Organization

Filing your Articles of Organization is what actually forms your LLC in South Dakota. The Articles of Organization include important details about your LLC. Once these documents are filed and approved by the South Dakota Secretary of State, your LLC will be officially registered with the state.

There are a number of details you will need to provide in these articles, such as:

  • The name of your LLC
  •  The address of your LLC
  •  The registered agent for your LLC, including their address
  •  The names and addresses of all the organizers of your LLC
  •  Whether your LLC is going to be member-managed or manager-managed
  •  The end date for your LLC if it is not perpetual
  •  Whether any of the members of the LLC are going to be liable for its debts
  •  The LLC organizer’s signature

It will cost $150 to file your Articles of Organization online and $165 to file by mail. To file by mail, send the documents to:

Secretary of State Office
500 E Capitol Ave
Pierre, SD 57501


Step 4: Draft an Operating Agreement

Operating-Agreement-02

The next step you should take is to draft an operating agreement.  South Dakota does not require LLCs to have an operating agreement, but you should definitely have one.  An operating agreement is a legal document that describes the structure of your business as well as the rights and responsibilities of its members.  This agreement can be very helpful for avoiding arguments between members in the future and maybe even lawsuits due to arguments between the members. There are no specifics on what has to be included in an operating agreement, but there are a number of things you should include, which we will discuss below.

  • Percentage of Ownership: You should include a list of all of your members and their percentage of ownership in the operating agreement. The percentage of ownership is generally based on the amount the member invested in the business. However, you could choose another method. Sometimes an LLC will choose to give a larger percentage of ownership to a person than their investment would indicate because they have more experience or will be doing more of the work for the LLC. If you choose to assign a percentage of ownership on something other than investment in the LLC, you should explain this method in your operating agreement.
  • Voting Rights: If you have a multi-member LLC, you will very likely need to vote to make a number of decisions. So, it’s best to include in your operating agreement how these voting rights will be distributed and what type of vote will be needed to make a decision. Voting rights are normally distributed based on the percentage of ownership, but the members can choose another method of distribution if they want. This should be included in the operating agreement. You also want to put what type of vote you will need to make different types of decisions. This could be a majority vote, supermajority vote, or even a unanimous vote. You will probably want to require a supermajority or unanimous vote for major decisions.
  • Member-managed or Manager-managed: There are two types of management methods you could choose from member-managed or manager-managed.  Member-management is the more common choice. With member-management, all of the members of the LLC run the business on a daily basis and make any decisions for the business. This style of management tends to work well for small businesses where the members have the time to run the business themselves.

Another type of management is manager-managed. In this type of management, the members of the LLC choose a manager to run the business for them. This manager runs the day-to-day affairs of the business and makes the decisions for the business. The members act as advisers to the manager. Although the manager does not need to take their advice. If the members of the LLC want to reserve any decisions for themselves, they should mention these in the operating agreement. You should also mention in the operating agreement how any arguments between the members and the managers will be dealt with.

  • Profits and Losses: Another thing you’ll want to address in your operating agreement is how profits and losses will be distributed among the members. This is a very important subject to address since it can cause a lot of arguments. Profits and losses are typically distributed based on the percentage of ownership, but this doesn’t have to be the case. You can choose another method of distribution. However, you will want to describe the method you will be using in your operating agreement.
  • Member Withdrawal: If you have more than a couple of members in your LLC, you will likely eventually have one of your members withdraw. If this happens, it can cause a lot of disruption to your business. So to try and avoid this trouble, it’s best to include how a member withdrawal will be handled in your operating agreement.

You want to mention if the member will be required to offer to sell their shares to other members first or if they will even be allowed to sell their shares to outsiders. If they are allowed to sell their shares to outsiders, will there be any restrictions on who they can sell to?

  • Dissolution: If you’re just starting your business, you may not want to prepare to end it. But the day might come when you want to end your business, and it will be a lot easier if you’ve done some preparation ahead of time by including a couple of important details in your operating agreement.

You’ll want to include what kind of vote will be required to dissolve the LLC, such as a majority, supermajority, or unanimous vote. You should also include how any assets that are left after any debts are paid will be divided. Additionally, you could include whether or not any of the members will be allowed to continue with the idea of the business after the LLC is dissolved.


Step 5: Obtain an Employer Identification Number for Your LLC in South Dakota

Obtain-EIN

An Employer Identification Number (EIN) is a nine-digit number similar to a Social Security Number. It is sometimes called a Federal Tax Identification Number as well. The IRS uses this number to identify your business for tax purposes.

You’ll need to have this number for your LLC if your LLC has two or more members or intends to hire employees. You’ll also need this number to open a business bank account.

How To Apply

Applying for an EIN is free, and you can apply online, by mail, or by fax. Also, foreign applicants can apply by telephone. If you have a Social Security Number, you can apply online at the IRS website. It doesn’t take long, and you will receive the number as soon as you complete the process. Just be sure to complete the process in one session. The form will not be saved if you leave it before finishing.

You can also print Form SS-4 and mail it to the IRS at:

Internal Revenue Service
Attn:  EIN Operation
Cincinnati, OH 45999

If you want to fax the application, just fill out and print Form SS-4. Then, after you fill it out, fax it to (855) 641-6935. If you are an overseas applicant, you can apply for an EIN by calling 267-941-1099 from 6 am to 11 pm Eastern Time Monday through Friday.


Step 6: Open a Business Bank Account for Your South Dakota LLC

Open-a-Business-Bank-Account

Although a business bank account is not required for forming an LLC, it is still a vital step. LLC members are required to keep their personal finances separate from their business finances. If an LLC is sued and the court finds that business and personal finances were mixed, the court could decide that the LLC is not a separate entity and remove its limited liability. This is called piercing the corporate veil. Should this happen, the members’ personal assets would be at risk.

One of the best ways to keep this from happening is to open a business bank account for your LLC. This account would keep your business finances separate from any of the members’ personal finances.

 A business bank account has other advantages as well. It makes bookkeeping and taxes easier. It will save you the trouble of having to separate all your business transactions from your personal transactions. This makes bookkeeping a lot easier, and you’re less likely to miss any deductions come tax time because all of your transactions will be in one convenient place.

Having a business bank account also allows you to form a relationship with your bank. This could come in handy should you want to get a loan or a line of credit in the future.

Required Documents

There are a few documents that will generally be required in order to open a business bank account. Generally, these will simply be documents that you will have just acquired in the previous steps of forming your LLC. So, here are the ones you will generally want to keep handy for if your bank wants to look at them.

  • Articles of Incorporation: The bank will want to see your Articles of Incorporation. These are the documents that show that your business is filed with the state and you are the owner. It also shows the structure of the business.          
  • Business Licenses: If your state or local area requires a business license, then the bank will probably ask for a copy of your business license to prove that you are allowed to conduct business in your area. So, you’ll want to make sure that you have any licenses required for your area.
  • (DBA) Doing Business as Certificate: Some businesses operate under a DBA name, and for those that do, the bank will probably require a certified copy of the DBA certificate if you want to start a business bank account.
  • Employer Identification Number (EIN): If you have a single-member LLC, you might not have an EIN, but you may need to get one. It’s possible that the bank will accept a Social Security Number instead, but not all banks will. So, it is a good idea to get an EIN before attempting to file just to be safe. It is a quick, easy, and free process, so there really is no reason not to.
  • Identification: You need to have some form of identification to show the bank. This could be a driver’s license, state ID, or passport. It just needs to show that you are the owner or manager of the business you’re trying to open an account for.

Additional Steps for Growing and Maintaining Your South Dakota LLC

Now that the work of forming your business is done, you can take a step back to relax. But the work of growing and maintaining your business is just getting started. Here are a few steps you can take to get started.

1. Business Website

Start-a-Business-Website

All businesses today should really have a business website. Having a business website will not only make your business appear more professional but also attract more customers to your business. There are many reasons that a business website can even be useful for businesses that do not conduct any business online.

Brick and mortar businesses can use a website to inform customers about their business and convince them to visit their company’s physical location. Though social media is a great way to get started and expand your business’s online presence, you should really have a business website, even if you have social media accounts. This website will give you a place to put the information you might not want to put on a social media account and will add a great deal of credibility to your business.

You don’t have to worry that a website is too difficult to start. There are a lot of tools you can find online to help you create an excellent website for your business. Additionally, if you are using an LLC formation service, you may find that one of their services is creating business websites. So you may choose to take advantage of this service.


2. Business Insurance

Get-Business-Insurance

All LLCs should purchase business insurance. It is true that LLCs have limited liability which will protect your personal assets from being taken to satisfy business debts, but this does not protect your business assets. If your business is sued, your business assets can be taken to satisfy any judgments. This could make it difficult to continue to run your business which is a particular problem for those whose business is their main source of income. This is why it is so important to get liability insurance for your business. You need to protect your business assets as well as your personal assets, and business insurance can do just this.

It’s also a good idea to purchase liability insurance for all of your LLC’s members. The members of your LLC can be sued in cases of negligence or wrongdoing. However, having personal liability insurance for your members should protect them in these cases.

Another insurance your business is likely to need if you have workers is Worker’s Compensation Insurance. Most states require any business with employees to have this insurance. This insurance will cover your employees in case of injury, illness, or death that occurs on the job.


Form a South Dakota LLC with Professional Help Today

Every entrepreneur has trouble finding enough time in the day, and this can leave it difficult, if not impossible, to get the time to file your South Dakota LLC. However, you don’t need to go it alone. There are countless services out there that can help you through the process, and these are two of the best!

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#2: Start Your SD LLC with Incfile

Incfile is one of the best LLC formation services out there. It’s particularly good for someone trying to start an LLC on a tight budget because it is one of the few services out there with a free option. All you have to do is pay the state fees. Also, Incfile will provide a year of free registered agent service with any of their packages. This is a great feature since all LLCs are required to have a registered agent. Incfile will also provide you with lifetime company alerts to help you stay in compliance with the state.

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Final Thoughts

A South Dakota LLC may not come to mind as one of the best options for your business formation, but it definitely ranks there. Despite the low population, this business-friendly state can help your business grow, and with limited personal liability as well as a reduced tax burden, it is hard to go wrong with a South Dakota LLC.

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About the Author
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Founder & author

Ian Broderick is an avid author and owner of LLCGuys.com. He's been involved with the LLC formation field for over 4 years. On top of that, he has worked in several well-known LLC formation service providers. Now he decided to share his knowledge and advice with everybody. Since there are a lot of questions and concerns surrounding this field - his aim is to make LLCGuys a top-notch information provider in regards to LLC creation, service reviews and etc..

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