Start an S Corporation in South Dakota

If you’re considering starting an S corporation in South Dakota, you’ll find all you need to know in this article. We cover the steps to forming a business entity in South Dakota, how to file for S corp status with the IRS, and the pros and cons of your small business becoming an S corporation.

S Corporation in South Dakota: Key Takeaways

• S corp status is a federal tax classification granted by the IRS, not a business structure in itself. LLCs or C corporations can elect S corp status if they meet specific requirements.

• S corporations have pass-through taxation, which can provide tax advantages to some C corporations and South Dakota LLCs.

• S corporations can also allocate distributions to their shareholders after paying them “reasonable” compensation, which can reduce self-employment tax for some shareholders.

What Is an S Corporation?

An S corporation is a tax classification electable by a business entity eligible to be taxed as a corporation. The entity must meet specific requirements laid out by the IRS and file Form 2552, known as an S corporation election.

S corporations receive pass-through taxation on federal income taxes. This can provide benefits to C corporations. S corps status can also help highly profitable LLC members reduce their self-employment tax liability.

When a limited liability company (LLC) or C corporation becomes an S corporation by filing Form 2553 with the IRS, its business structure doesn’t change. An S corporation has S corp status but doesn’t cease being a C corp or LLC.

Tax Considerations for an S Corporation in South Dakota

So if businesses can choose to be taxed with S corp status, why would they choose to do so? Below, we cover the tax nuances for South Dakota S corporations.

South Dakota Tax Treatment of S Corporations

Unless you’re new to South Dakota, you’re probably aware that the state has no income tax, whether personal or corporate income tax.[1] So, S corp status doesn’t change your tax treatment as a business in South Dakota at the state level.  

The benefits of S corp status for South Dakota businesses will relate to federal income taxes.

South Dakota Franchise Tax for S Corporations

South Dakota has a franchise tax, but it’s only for banks, which are ineligible for S corporation status.[2] 

Pass-Through Taxation

S corporations pay federal income taxes as “pass-through” entities. They don’t pay corporate tax; shareholders, instead of the entity itself, pay income tax for the business on their tax returns. The taxes “pass-through” the entity to the shareholders.

This allows S corps to avoid “double taxation” typical of most C corporations (corporate tax for the business followed by income tax for shareholders).

Self-Employment Tax

Entrepreneurs with an LLC will be responsible for self-employment tax on every penny they earn from their company. On the other hand, S corps can pay their shareholders a reasonable salary for their work in the business. They can allocate profits to the shareholder free of self-employment tax if any are left over.

Requirements for Forming an S Corporation in South Dakota

S corp status is not available to all businesses. They have to meet specific requirements.[3] For some companies, these requirements will be a dealbreaker, meaning they won’t, or can’t, pursue S corp status.

S corp status eligibility depends on the following criteria: 

1. The entity must be eligible to be taxed as a corporation. This means they will be a limited liability company (LLC) or C corporation. Sole proprietorships need to incorporate to become S corps.

2. Only 100 or fewer S corporation shareholders are allowed.

3. Non-resident non-U.S. citizens, corporations, and partnerships cannot be S corporation shareholders.

4. Certain banks, other financial institutions, insurance companies, and “domestic, international sales corporations” are ineligible to become S corporations.

Filing as an S Corp in South Dakota

Forming an S corporation in South Dakota begins with following the state guidelines to start a South Dakota business and then filing an S corporation election with the IRS to receive S corp status. 

Step 1: Choose a Business Name

Your corporation name must follow South Dakota laws, or your Articles of Incorporation will be rejected. There are three crucial aspects of the law:[4]

1. Your business name needs to have one of the following words or abbreviations (noted in parentheses): corporation (corp.), company (co.), incorporated (inc.), limited (ltd.).

2. Your name cannot imply that it is doing business other than its stated purpose and within its authorization according to the law.

3. The name must be “distinguishable” from other South Dakota registered businesses and trade names. 

   1. You can conduct a preliminary business name search here to see if your name is taken. If you haven’t chosen your exact name, try the business information search on the South Dakota Secretary of State website to see what names containing specific words or phrases are taken.

   2. Worried that your name is too similar to that of another business? You can test if your name is distinguishable by saying both names out loud. If they sound the same, you’ll have to find another name.[5]

Keep these additional factors in mind while you choose your corporation name:

• Consider whether you can get a proper domain for your business.

• Think about trademarking your business name or other terminology you’ll use while doing business.

Found the perfect name? To buy yourself some time to form your business, file a name reservation form and mail it to the secretary of state with a $25 filing fee to reserve your name for 120 days.

Step 2: Appoint Directors and a Registered Agent

Your S corporation shareholders will need to elect a board of directors. The board is responsible for steering the company in a profitable direction. It must include at least one person and meet at least annually. Your LLC doesn’t have a board, but a C corporation does..

If you start a business and have no partners, you can be your company’s sole shareholder and board member. But, a robust corporation will have a diverse and experienced board to handle the corporation’s affairs.

South Dakota Registered Agent

To file your business paperwork, you need a registered agent to put on file with the state. Your South Dakota registered agent must:

• Have a street address (not a mailing address) 

• Keep regular business hours at that address

• Consent to being your South Dakota registered agent.

What is a registered agent for? If a court ever needs to contact you, they’ll do so via your registered agent. This is why it’s crucial to have a trusted registered agent to forward your legal documents as quickly and discreetly as possible.

Step 3: File Articles of Incorporation

Articles of Incorporation are the form you complete and file to the South Dakota Secretary of State to be an official business. LLCs file a similar document called Articles of Organization or Certificate of Formation, depending on the state.

You’ll need the following information to file articles of incorporation:

• Your business name

• The number of shares your corporation is issuing

• The company’s principal office address

• The name and address of the company’s South Dakota registered agent

• The names and addresses of the company’s incorporators

You can file your Articles of Incorporation online for $165. If you’re worried about high state fees, remember — you won’t pay a dime in state corporate tax, franchise tax, or personal income tax in South Dakota.

Once you’re officially incorporated, you’ll need to file an annual report starting in the coming year to keep the information you provided up to date. The filing fee is $50 online and $65 by mail.

Step 4: Create S Corp Bylaws

Your corporation’s bylaws are legally binding rules that all business owners agree to follow. If there’s an important decision to make for your business, or a procedure that needs to happen a certain way, you’ll refer to the bylaws for guidance.

Corporate bylaws answer questions regarding how a board of directors meets and how often, the responsibility of each director during meetings, how long the terms for each director will be, if applicable, and who shareholders are and how they wield power.

LLCs have a similar document called an operating agreement. Both of these documents are optional, but they are highly recommended.

All S corporation shareholders sign the company’s bylaws.

Step 5: Apply for an Employer Identification Number

You can’t be an S corporation until you get an Employer Identification Number (EIN) from the IRS. This is free and simple to do. 

But don’t put it off. Your EIN is critical for any legal business, including opening a bank account, registering to pay Federal employment taxes or income tax, and securing licenses and permits. Like a social security number, it’s critical for navigating government systems.

Step 6: File Form 2553 for S Corporation Election

Now that you have a South Dakota business entity eligible to be taxed as a corporation (a C corp or an LLC), it’s time to file Form 2553 to the IRS. This is the only way to become an S corporation. The form is called an S corporation election. All your shareholders sign it.

You’ll only receive S corp status if you meet the S corporation requirements detailed earlier in this article. Swyft Filings can help you with your S corporation election to ensure you meet all the deadlines and never have to do it twice.  

Keep the following S corporation election deadlines and details in mind: 

• To elect S corp status for the current tax year, file Form 2552 before the 15th day of the second month of your tax year.

• To select S corp status for the coming year, file anytime during the current year.

• South Dakota LLCs that missed the deadline but want S corp status in the current tax year must file Form 8832 at the same time as Form 2553.

South Dakota S Corp vs. South Dakota LLC

So in South Dakota, where income tax is a non-issue, why would a business switch to S corp status for tax purposes? There are a few reasons. 

Advantages of Starting an LLC in South Dakota

The limited liability company (LLC) business structure effectively provides limited liability to business owners, offering them the favorable tax treatment of a partnership or sole proprietorship. This combination of flexibility and protection makes it second to none for almost every business startup.

Disadvantages of Starting an LLC in South Dakota

LLCs can be challenging to buy and sell because they’re incorporated based on their members rather than a group of anonymous shares controlled by shareholders. Additionally, raising capital can be more challenging without the ability to issue stock. 

And though pass-through taxation is an advantage for South Dakota LLCs, those netting high profits will be frustrated by their self-employment taxes. In some situations, S corp status can overcome this.

Advantages of forming an S Corporation in South Dakota

S corporations confer the advantages of pass-through tax treatment to C corporations, which significantly benefits certain companies’ shareholders. In addition, LLC members who are paid reasonable compensation for their work can take distributions on top and reduce self-employment tax.

Disadvantages of forming an S Corporation in South Dakota

If the benefits to your business from S corp status are minimal for tax purposes, going through the process of electing S corp status may not suit you. S corp requirements can sometimes get in the way of potential business models, such as taking on partnerships or corporations as shareholders or having more than 100 shareholders.

Ready to File for S Corp Status in South Dakota?

It takes 60 days for the IRS to get back to you on your S corporation election. With deadlines looming, this is not a process you want to get wrong.

But you don’t have to feel any pressure. Our S corp filing service takes the whole process out of your hands and guarantees your forms will be timely, correct, and secure, ensuring your small business meets the S corp limitations and only submits when everything is ready. 

Getting to S corp status is just the beginning of the journey. Swyft Filings also provides professional services that give your S corporation in South Dakota long-term, wrap-around support to you and your fellow business owners. 

Frequently Asked Questions

What is an S Corporation in South Dakota?

A South Dakota S corporation has elected S corp status with the IRS by filing Form 2553, an S corporation election.

Does South Dakota recognize S corporations?

Because South Dakota doesn’t have a personal income tax or corporate tax, S corp status doesn’t have import under South Dakota law. But S corps are free to operate there.

What is the turnaround time for filing for S corp status with the IRS?

The IRS estimates a 60-day turnaround for S corporation elections.

What is the difference between an S corp and an LLC?

An LLC is a business that has chosen the LLC business structure; an S corp is an LLC or C corp that has elected S corp tax classification status.

What are the requirements for an S corporation in South Dakota?

S corps must have 100 or fewer shareholders; the kinds of shareholders are limited; they can only issue one class of stock, among other limitations.

Are taxes for LLCs and S corps the same?

No. After S corp shareholders receive “reasonable” compensation for their work on the business, they can receive distributions free of self-employment tax. This tax applies to all LLC member income.

What is the S corp tax rate?

Because they are “pass-through” entities, the S corp tax rate depends on the personal income tax rates of the S corp shareholders.

How do I dissolve an S corporation in South Dakota?

File articles of dissolution with a $10 filing fee to the South Dakota secretary of state.

Bibliography

1. South Dakota Governor’s Office of Economic Development. “Tax Climate.” Accessed April 5, 2023.

2. South Dakota Department of Revenue. “Bank Franchise Tax.” Accessed April 5, 2023.

3. Internal Revenue Service. “S Corporations.” Accessed April 5, 2023.

4. South Dakota Legislature Legislative Research Council. “Codified Laws 47 > 1A > 401.” Accessed April 5, 2023.

5. South Dakota Secretary of State. “Frequently Asked Questions.” Accessed April 5, 2023.