How to Start a Business in South Dakota

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South Dakotais renowned for its iconic landmarks like Mount Rushmore and Badlands National Park. However, many overlook that the state has a good climate for getting a business started. According to the US Small Business Administration’s 2022 report, South Dakota ranks 17th in small businesses per capita, with 90,274 active small businesses. Moreover, the state offers a business-friendly tax environment, ranking second in the nation by The Tax Foundation. This is due to its lack of corporate state income tax and a modest 4.5% state sales tax rate. Starting a business in South Dakota is easy and affordable, with DBAs costing a mere $10 and filing fees for LLCs and Corporations amounting to only $150. If you’re considering launching your business in South Dakota, continue reading for the key steps to get your business off the ground.

1. Research and Plan your Business

You have a compelling business idea, don’t you? That’s fantastic! However, before diving headfirst into it, it’s wise to take a step back and conduct thorough research. This involves delving into market analysis and meticulously outlining a business plan.

Market research entails identifying your target customers, evaluating your competition, and highlighting the unique aspects of your business. Next, transform all that valuable information into a comprehensive business plan. Now, don’t dismiss it as a tedious document. Think of it as your strategy, your roadmap, your secret weapon.

While you may be eager to get started, but trust me, this step is too crucial to overlook. In fact, according to Harvard Business Review, businesses with a well-defined, written plan are 16% more likely to achieve great success compared to those without one.

Now, don’t fret. Your plan doesn’t have to be a lengthy novel. Even a concise three-page plan can make a strong impact. Your plan will serve as the playbook that guides your business, addressing critical questions:

• What sets your business apart (your Unique Selling Point)?
• Who is your target market?
• What will drive your revenue?
• How will you execute your marketing strategy?
• What resources do you need to get started?

Now, you’re fully prepared to conquer the world. Best of luck!

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Want More Info?:Proven Strategies for Writing an Effective Business

2. Choose a Business Structure

After creating your business plan you’ll want to determine the legal structure for your business. Consider your comfort with personal liability risk, desired tax status, and source of capital. There are four common types of business structures to evaluate:

• Limited Liability Company (LLC)
• Corporation
• Sole Proprietorship
• Partnership

Limited Liability Company (LLC)

An LLC or limited liability company is a business structure that provides limited liability and pass-through taxation benefits. Think of it like incorporating a business without the extra formalities.

An LLC can help protect business owners from legal liability for company debts and other liabilities, just like a corporation. Because an LLC is treated as separate from its owners, individual owners don’t typically bear legal responsibility for business debts.

Pass-through taxation means that LLC income isn’t taxed separately but instead passed through to the owner(s). If the LLC has more than one owner, a tax return for the company must still be filed. The income or loss is shown on this return and passed through to the members. Members must report the income or loss on their personal tax returns and pay any necessary taxes.

Additional Information:What is an LLC and is it the right fit for your business?

In short, LLCs bring the benefits of both corporations and partnerships, along with easy maintenance and flexibility innownership arrangements.

Corporation

A C corp (corporation) is a separate legal entity that can earn profits, be taxed, and held legally liable. However, forming a C corp is more expensive and requires extensive record-keeping, operational processes, and reporting. Nevertheless, it provides robust protection from personal liability. C corps pay income tax on profits, not owners. In some cases, corporate profits may be subject to double taxation, both at the company level and on shareholder dividends. C corps have an independent life from shareholders. Even if a shareholder leaves or sells their shares, the business can continue with few interruptions. Raising capital is easier for C corps as they can sell stock, attracting top talent. It’s a good option for medium- to higher-risk businesses that need money, plan to go public, or aim to be sold eventually. Overall, C corps offer many benefits but require careful consideration for success.

Additional Information:Advantages and Disadvantages of a Corporation

Sole Proprietorship

A sole proprietorship is a business structure where the owner operates and manages the company independently. In a sole proprietorship, the owner is personally responsible for all aspects of the business, such as profits, losses, investments, and liabilities. The advantage of this type of structure is that it’s easy to set up and manage since everything goes through the owner. It also enables the owner to keep all the profits and ultimately control their business decisions.

However, there are some downsides to this structure as well. For example, sole proprietors are personally liable for any debts or obligations incurred by their business. This means that if a lawsuit is filed against them, they can be held responsible for any losses. Sole proprietorships tend to have difficulty raising money since banks hesitate to lend to them. Finally, tax regulations may be more complicated since all profits and losses are reported on the owner’s personal income tax return.

Additional Information:What is a Sole Proprietorships and How Does it Work?

Partnership

A general partnership is a type of business where two or more people come together to make money. Unlike other types of businesses, like corporations, you don’t need to register a general partnership with the state. It’s a simple and easy way to start a business. When you’re in a general partnership, each person has unlimited liability for the business. If the company can’t pay its debts, you must pay them with your money. You also share the profits and losses of the business with the other partners.

Additional Information:Advantages and Disadvantages of General Partnerships

3. Choose your Business Name

Now that you’re up to speed on legal structures, it’s time to focus on the next step. Choosing a great business name is crucial to the success of your business. You might feel tempted to pick the first name that comes to mind, thinking the product or service matters more than anything else. But in reality, the name is what opens the door for you. Your choice of name can make or break your business, as it’s a crucial part of your marketing efforts once your business is established. Therefore, it’s best to take your time and develop a robust and memorable name. After all, it’s not just about getting started but about making your business thrive in the long run. If you feel like you’re lacking in the creativity department and can’t seem to come up with any good names, it might help to remember the three crucial ingredients of a great business name:

• Creates an Identity
• Memorable and Easy to Recall
• Easy to Search and Find

For a detailed deep dive into creating a great business name, check out our guide, Tips for creating a business name.

4. Register your Business

Once you have finalized the business structure and chosen a name for your venture, it is crucial to take the necessary steps to officially register your business in South Dakota. The process of registering a business name in South Dakota varies depending on the specific structure of your business.

• Register a South Dakota LLC
• Register a South Dakota Corporation
• Register a South Dakota Sole Proprietorship
• Register a South Dakota Partnership

Register a South Dakota LLC

To establish an LLC in South Dakota, you’ll need to submit a document known as Articles of Organization to the South Dakota Secretary of State. The filing fee for Articles of Organization in South Dakota amounts to 150. Before finalizing your LLC filing, it’s important to ensure that your desired business name is available by conducting a thorough search. Once you confirm its availability, you can proceed with filing the Articles of Organization. This filing should include the LLC’s legal name, address, contact information of the owner(s), and the designation of a registered agent in South Dakota. Although not legally required, it is advisable to create an operating agreement to establish essential guidelines for your LLC, including ownership percentages and voting rights.

Register a South Dakota Corporation

Corporations are formed in South Dakota by filing Articles of Incorporation (along with an Initial Report) with South Dakota Secretary of State. South Dakota charges 135 to file Articles of Incorporation (along with an Initial Report). You will also need to appoint a registered agent to receive service of process documents. You will also want to create a corporate bylaws document to establish its internal operational rules.

Register a South Dakota Sole Proprietorship

If you’ve made the decision to start a sole proprietorship in South Dakota, you won’t need to file any formal documents at the state level. However, if you plan to operate under a name that is different from your own or doesn’t include your name, you’ll need to obtain a a South Dakota DBA (also known as a Business Name). South Dakota DBAs are registered with the state. Additionally, make sure to acquire all necessary federal, state, and local permits and business licenses, which we will cover in step 7 of this guide below.

Register a South Dakota Partnership

When starting a general partnership in South Dakota, there is no requirement to file official documents. However, it is highly recommended to create a partnership agreement. This agreement helps establish decision-making rules and can be beneficial in resolving disputes between partners. If the partnership operates under a name that does not include the partners’ last names, a a South Dakota a Business Name filing must be completed with the state.

5. Get an EIN

An EIN is an Employer ID Number. This is used to identify your business to the IRS when you file your taxes, as well as for employment purposes. It’s a unique identification number given to each business, much like a social security number is given to each individual. You must acquire an EIN if you form your business as a Corporation, Partnership, or LLC. Other business owners should still strongly consider getting one. An EIN is necessary for many types of business filings and you can use it instead of your social security number.

6. Register for South Dakota Sales and Use Tax

If your business has a South Dakota sales tax nexus, you sell taxable goods or services to South Dakota residents, or if your buyers have to pay sales tax, you’ll need to collect and remit sales tax in South Dakota. To ensure you comply with state and local laws, you must effectively manage the taxes you collect. Neglecting this responsibility can lead to penalties and interest charges.

How to Know if you need to collect Sales Tax in South Dakota?

The South Dakota Department of Revenue mandates businesses operating within South Dakota are required to obtain a license for sales tax collection if they have a physical presence. This includes gross sales or transactions involving tangible personal property, electronic product transfers, or services. Some examples that would trigger a sales tax nexus include:

• Maintain any business location in South Dakota, including offices.
• Regular or frequent engagement in South Dakota by an employee or representative who actively seeks orders and has the authority to accept them.
• Operating mobile stores in South Dakota.
• Renting physical assets and granting permission to use intangible rights in South Dakota.
• Ownership of goods stored in a public warehouse or under consignment in South Dakota.
• Ownership of goods held by a distributor or non-employee representative in South Dakota, used to fulfill orders on behalf of the owner.
• Regular or frequent business activities in South Dakota by employees or representatives involved in purchasing or providing services (including construction, installation, assembly, or equipment repair).
• Other miscellaneous activities carried out by employees or representatives in South Dakota, such as credit investigations, collection of overdue accounts, and conducting training classes or seminars for customers on the operation, repair, and maintenance of products.
• The sale of non-tangible items, such as real estate, services, and intangible assets, in South Dakota.
• The execution of construction or service contracts in South Dakota.

Businesses without a physical presence in South Dakota must collect and remit sales tax if they meet either of the following criteria in the previous or current calendar year: gross revenue from sales into South Dakota exceeded $100,000 or they had 200 or more separate transactions for delivery into South Dakota.

For more detailed information visit the South Dakota Department of Revenue: Sales & Use Tax page or contact a qualified South Dakota tax professional.

7. Apply for South Dakota Business Licenses and Permits

To ensure legal compliance with federal, state, and local laws, it is important for your business to obtain one or more business licenses and/or permits. The specific licenses and permits required will vary depending on various factors, such as the nature of your business, the products and services you offer, the data you collect, and your location. It is crucial to understand and adhere to these requirements to operate your business smoothly and within the bounds of the law.

Federal Licenses and Permits

Your business may need a license or permit to operate legally if your business is involved in an activity that is regulated at the federal level, such as:

• Agriculture
• Alcoholic beverages
• Aviation
• Firearms, ammunition, and explosives
• Fish and wildlife
• Commercial fisheries
• Maritime transportation
• Mining and drilling
• Nuclear energy
• Radio and television broadcasting
• Transportation and logistics

For more detailed information on federal business licenses and permits visit the Small Business Administration: Federal Licenses and Permits page.

State and Local Licenses and Permits

A general business license is not required in South Dakota, however most businesses will require a local business license.For more detailed information visit the South Dakota Govenor’s Office of Economic Development Business License page.

8. Open a Business Bank Account

Separating your personal finances from your business finances helps to protect you and keeps all of your money organized. Mixing them together, known as “co-mingling funds”, can lead to big issues, so it’s best to have a separate business bank account. If you don’t you could make bookkeeping and accounting more difficult and even lose your limited liability status (if your business is an LLC or Corporation). If your business is sued, it could be argued that your personal money and assets are fair game.

We have an in-depth guide to opening a business bank account to give you all of the details you need to get it done. It will help you to choose a bank and get all of your documents in order.

9. Set Up Credit Card Processing

Accepting payments via card is essential for most modern businesses. Most transactions over $10, around 60%, are now processed by card. This makes processing card payments essential if you want to compete in today’s market.

To get a more detailed breakdown on this topic you can check out our guide: a href=”https://stepstostartingabusiness.com/how-to-accept-credit-card-payments/” target=”blank”>How to Accept Credit Card Payments

10. Establish an Accounting System

Setting up an accounting system allows a business to track business expenditures and create reports to gain insight into your business’ performance. By establishing an accounting system, you can quickly and easily create budgets, manage cash flow and generate the required financial reports to know how your business is doing.

For a more in-depth breakdown, visit our Small Business Accounting 101 guide. Covered in the guide are the steps to do small business accounting, including how to choose between cash basis and accrual basis accounting methods.

11. Get Business Insurance

One of the most overlooked aspects of starting a new business in South Dakota is obtaining business insurance. Having the proper business insurance coverage helps to mitigate your risk so that you’re covered in the event of an accident, natural disaster, or lawsuit.

In our Small Business Insurance Guide, we go over the six types of business insurance so that you can make sure you’re covered.

12. Hire Employees and Set Up Payroll

If you want help running your business, you’ll want to consider hiring employees and setting up a payroll. Employers are responsible for reporting new hires and verifying their employment status.

There are two items that employers must complete to be federally compliant when hiring new employees. You must verify that any employee is eligible for employment in the US and obtain a signed IRS Form W-4 to ensure you are withholding the correct amount for federal taxes. For more detailed information, visit the IRS page for Businesses with Employees.

Since South Dakota has a state level income tax, you’ll need to withhold taxes from your employees and remit them to the state. In addition to this you’ll also need to register for unemployment insurance. Luckily in South Dakota both of these registrations are done with the None. For more specific information about your requirements as an employer in South Dakota visit the SD.gov: New Hire Information page for more info.