How to Incorporate in South Dakota (May 2024 Update)
Incorporating your business in South Dakota offers many advantages, from tax benefits to ease of investment. This comprehensive guide will walk you through everything you need to know to form a corporation in the state.
Why South Dakota?
South Dakota is one of the most business-friendly states in the country. Here are some of the main reasons to incorporate there:
Minimal Taxes
South Dakota does not have a corporate income tax or personal income tax. There is also no franchise tax or business inventory tax, with the exception of certain financial companies. This saves corporations a significant amount in annual taxes.
Investor Appeal
The corporation structure makes it simpler for investors to fund businesses. Investors are accustomed to buying and selling corporate stocks. Certain corporate stocks also offer guarantees like mandatory dividends, which ensures shareholders receive payouts.
Perpetual Existence
A corporation continues existing despite changes to its ownership over time. The retirement or death of shareholders does not dissolve the business. This makes corporations more stable long-term.
Transferable Ownership
Corporations allow shareholders to easily transfer parts of their ownership by selling shares of stock. This is not always possible with other entity structures.
Steps to Forming a South Dakota Corporation
Follow these key steps to incorporate in South Dakota:
1. Choose a Business Structure
Common corporation structures include C corporations, S corporations, B corporations, and non-profit corporations. Consider the taxation, ownership flexibility, and fundraising needs of your business.
2. Check Name Availability
Verify your desired business name is distinguishable from other names registered with the Secretary of State. You can reserve a name for 120 days for a $25 fee.
3. Appoint a Registered Agent
Your corporation must have an agent authorized to receive legal documents. Agents need a South Dakota address available during business hours. Using a commercial registered agent service can provide privacy benefits.
4. File Articles of Incorporation
The articles establish your corporation with the state. File online for the fastest processing. Key details to include:
- Corporate name
- Purpose
- Number of shares
- Principal address
- Registered agent info
- Incorporator names
5. Create Corporate Bylaws
Bylaws outline internal governing rules like meetings, voting procedures, director powers, and amendments. While not filed with the state, bylaws help avoid disputes on operations.
6. Hold an Organizational Meeting
Directors typically hold an initial meeting to appoint officers, adopt bylaws, issue stock certificates, and conduct other business. Record meeting minutes for the corporate records.
7. Obtain an Employer Identification Number (EIN)
Apply online with the IRS for free to get this unique tax ID number used for payroll, banking, and tax filings.
For more information, take a look at the following article: What is an Employer Identification Number (EIN)?
8. Apply for Licenses and Permits
Research if your industry requires special state or local licensing to operate legally. Common examples include sales tax permits, food safety permits, and professional licenses.
9. Open a Bank Account
Keep your business finances separate with a corporate bank account. Bring your EIN, articles of incorporation, and corporate bylaws to the bank.
For more information, take a look at our article on the key benefits of business checking accounts.
10. File Annual Report and Taxes
Submit an annual report to the Secretary of State to retain good legal standing. As a corporation, you will file business taxes separately from personal taxes.
Ongoing Corporation Maintenance
Once successfully formed, continue meeting state and federal compliance requirements:
- File an annual report with current director and officer information
- Maintain thorough corporate records and meeting minutes
- Issue stock certificates and voting rights to shareholders
- Pay registration or licensing fees as needed
- Submit annual income taxes
For example, South Dakota corporations must file an annual report each year by the anniversary of incorporation for a $50 fee. There is no state corporate income tax to file. However, you still must submit annual federal tax returns.
Correcting a Filing with Amendments
If you make a mistake like listing an incorrect name or office address, you can file articles of amendment with the Secretary of State to correct it for a $60 processing fee.
Closing a South Dakota Corporation
When it comes time to dissolve your corporation, submit articles of dissolution to the Secretary of State with the required fee. Remember to also close your corporate bank accounts, contact the IRS about final tax filings, notify creditors, pay off remaining debts, and distribute remaining assets to shareholders per your bylaws.
Is South Dakota Right for You?
While South Dakota does offer multiple incorporation advantages, also consider your specific business needs. Factors like where you will physically operate, intend to raise investment funds, or plan to pay owners can influence which state may be a better fit.
For example, Delaware leads the country in total corporations registered despite its small size due to market-leading corporate laws. However, South Dakota beats out Delaware when it comes to lower business taxes and fees.
The Bottom Line
By taking the time to properly form and structure your corporation, you ensure full limited liability protections for owners and position the business for future funding opportunities. For tax savings and operational flexibility, South Dakota makes starting and growing a successful corporation accessible. Carefully weigh the pros and cons to decide if incorporating here matches your entrepreneurship goals.