South Dakota offers one of the lowest business costs in the nation, with the lowest income tax rate and the lowest corporate tax rate out of any state in the US. These factors, combined with the state’s low cost of living, make South Dakota a great place to do business overall.
If you’re looking to join the ranks of South Dakota entrepreneurs, you may be wondering how to start a business in South Dakota. There are a lot of important steps to take, but this guide will show you the way from start to finish.
1. Decide on a business idea
First and foremost, you’ll need to decide what kind of business you want to start. Chances are you already have something in mind, but if not, here are some things to consider:
- What are you talented or naturally skilled at? Could this talent make you well suited to a certain type of business?
- What business does your community need? Have you talked to people to find out?
- What are you interested in? Can you combine any of your passions with a business idea?
- Is this going to be a full time business, or more of a side hustle?
Don’t forget about market research
Once you have an idea, you’ll want to do some market research. You want to gain a better understanding of who your customers – and competitors – are. You can achieve this by conducting online research, running focus groups, sending out surveys, and more. There are also companies that can help you complete market research, for a fee.
2. Plan your South Dakota business
Now it’s time to start planning. This means coming up with a business plan, naming your business, researching locations, and more. There’s a lot to cover here, so let’s break it down:
Select a business name
Choosing a name for your business is a great place to start in the planning process. You likely have some ideas in mind already, but you’ll need to do the research to see if the names are actually available.
South Dakota requires that new businesses use a name that is unique – meaning a name that’s distinguishable from all other business names already registered in the state of South Dakota. You can search the state database of businesses to confirm availability.
Buy yourself some time to think about it by reserving the business name for a period of 120 days. This prevents anyone else from registering the name for this time period.
It’s helpful to brainstorm some good potential names, and then consider how memorable they are, how “brandable” they are, and if they are relevant to your line of work. Then, pick a few finalists and double-check that they are available to be registered.
The name will also need to follow all the South Dakota business name rules, including:
- Names for LLCs need to contain “limited liability company”, or select approved abbreviations such as “LLC” or “L.L.C.”
- Names for corporations need to contain “corporation”, “incorporated”, or select approved abbreviations such as “corp” or “inc”
- Other rules may apply – see the full LLC naming rules here and corporation naming rules here. Rules for other entity types are found here.
South Dakota allows for the use of fictitious names, also known as trade names or DBAs. Once your business is formed, you can register additional trade names to use in the course of your business. For instance, “ABC, LLC” could register trade names for “Mary’s Pies” or “Custer Automotive”, and could then do business legally under any of the registered names. Keep the use of trade names in mind when you’re working on your branding and marketing plan.
Register a domain name
Once you choose a name, you should immediately register a domain name for your new business. In most cases, getting a .com domain name is ideal, but there are many other extensions (.biz, .net, etc.) that are worth considering.
Select a business location
Unless you plan to run a remote/virtual business, you will need to find a physical location for your company. Research commercial property in your area, and take note of typical costs.
For customer-facing businesses (retail and some services), location is very important, so take your time in selecting the right area for your business.
Create a business plan
You will now need to create a detailed business plan for your new venture. This plan is helpful for your own purposes, and will also be necessary in order to obtain funding from a bank. A good business plan should contain these elements:
- Finances: How much funding does the business need to get started? How many sales does it need each month to break even on expenses?
- Product: What do you plan to sell? Is it a product or a service? What problem does your business solve, and how is it distinct from your competitors?
- Marketing: How will you drive sales? What marketing and sales efforts do you plan to employ? How much money will you set aside to fund marketing efforts?
- Staff & partnerships: How many people will you need to hire, and what skill sets do they need to have? Will you have any partnerships or arrangements with other local businesses?
If you need help, you can find business plan templates online that will help walk you through the steps you need to take to draft a detailed business plan. If you plan to seek funding, you may also wish to call your bank to see what they require in terms of business plans.
3. Decide on a business structure
Before you form your business as a legal entity, you will need to decide which business structure you will use. There are a few different types of businesses, each with its own pros and cons.
Sole props are single-person operations. Examples include freelancers, gig economy workers, and consultants. A sole proprietorship business is very easy and inexpensive to form, and tax reporting is also fairly simple. As a sole proprietor, your business taxes are reported as part of your personal tax return.
The downsides to a sole prop are that you cannot hire employees, and you don’t have the legal liability shield that something like an LLC or corporation would provide. 100% of the debts and liability of a sole proprietorship go to the sole owner: you.
A general partnership is an unincorporated business structure similar to a sole proprietorship, except with two active owners/participants. Partnerships do not have liability protection.
Limited Liability Company (LLC)
A limited liability company, or LLC, is a popular choice for business owners because it provides liability protection to the owners. It separates the business from the owners, which means the personal assets of owners will not be at risk if the company gets sued or goes into bankruptcy.
LLCs are also a bit easier to form than corporations. Even so, there is definitely more work involved with an LLC than there is with a sole proprietorship.
A corporation is owned by its shareholders and is a separate entity. There are a few different types of corporations (C-corp, S-corp, etc), with the main differences being the way they are treated tax-wise.
Corporations are more regulated than LLCs, which makes them more attractive to outside investors. For this reason, most large companies are corporations. The downside is that it takes more effort, and more paperwork, to form a corporation.
A nonprofit is a legal entity that is set up with charitable status, meaning that its goal is not to make a profit, but rather to address a certain cause. Nonprofits are funded by donations, rather than investors, and are subject to many regulations. They are exempt from most forms of taxation, although tax returns must still be filed.
4. Register your business in South Dakota
When you’re ready, the next step is to actually register your new company. This process is handled by the South Dakota Secretary of State. The necessary paperwork can be filed online, or you can mail physical copies in.
There are basically two ways to go about this process: Doing the work yourself, or using a paid business formation service.
If you do decide to complete the process on your own, the basic steps typically include:
- Naming your company
- Choosing a statutory agent (this individual/company is responsible for receiving legal documents on behalf of the business)
- Filing paperwork with the state
- Obtaining business licenses and permits if necessary
- Applying for an EIN from the IRS
Keep in mind that the formation process is a bit different for the different business entity types. Here’s an overview of some popular company structures:
Form a South Dakota sole proprietorship
Follow these steps:
- Decide if you will operate under your legal name, or use a trade name
- If you use a name other than your own, you may need to register a trade name/assumed name
- Apply for a business license and/or other necessary permits from local governments (city/county), as needed
Form a South Dakota LLC
Follow these steps:
- Name your new LLC (see notes above)
- Choose a South Dakota Registered Agent (or use a service such as Northwest Registered Agent). Registered Agents are responsible for receiving legal notices on behalf of your company.
- File the LLC Articles of Organization online or by mail, and pay the $150 filing fee ($165 if filing by mail)
- Draft an LLC operating agreement
- Apply for an EIN with the IRS
Form a South Dakota corporation
Follow these steps:
- Decide on your desired corporate tax structure (S corp or C corp)
- Name your new corporation
- Choose a Registered Agent for your business (or use a service)
- Hold an organizational meeting and appoint directors
- File the South Dakota Articles of Incorporation online or by mail, along with the filing fee ($150 online, or $165 for mailed applications)
- Apply for an EIN from the IRS
5. Apply for business licenses and permits
Registering your business and forming an LLC or corporation is an important part of starting your business – but in order to operate legally, you will likely also need to obtain certain permits and/or business licenses.
The specifics vary depending on the type of business you are running, as well as your location. For example, restaurants will need health permits, bars will need liquor licenses, and medical service providers will need various professional licenses and federal permits. You will need to research the specifics that relate to your business type.
There are different requirements at each level of government:
- Local: Cities and counties may require certain business licenses or permits. Contact your county clerk for details.
- State: South Dakota may require additional permits and/or licenses in order to operate legally in the state. Check the South Dakota Licensing and Registering Your Business Checklist for details.
- Federal: Federal permits/licenses may be required for certain regulated industries, such as construction, medicine and legal services. Check the Small Business Administration (SBA) guide for more details.
At this time, you should also apply for an Employer Identification Number (EIN). An EIN is a federal tax ID that is required to hire employees. You can apply for an EIN online with the IRS – the application is free and quick.
6. Secure funding
For most businesses, some startup funding will be necessary in order to get started. In step #2, you should have calculated your funding needs while drafting a business plan. Use this information to determine how much funding you need to raise.
For bootstrapped companies, you may be able to get by with your own personal savings, or some seed investments from friends and family. If your funding needs are small, this is likely your best route.
If your business plan indicates that substantial funding is needed, you will likely need to apply for a loan and/or a grant.
- Small business loans are offered by banks, credit unions and other lenders. They can range from as little as a few thousand to hundreds of thousands. Specifics will depend on your business, as well as your personal creditworthiness. Most small business loans are issued in a lump sum, and paid back on a monthly basis, with interest.
- Small business grants are offered by government agencies and some nonprofits. They are essentially business loans that don’t need to be paid back – but they usually have substantial fine print. It’s worth looking into, however, as there may be grants available, particularly for businesses serving an important social need, or for underprivileged entrepreneurs starting their first business.
7. Set up your business finances
Beyond securing funding, there are other routine tasks that you need to take care of to get your business’ finances in order. This includes:
- Opening a business checking account. You should have a separate business bank account that you use solely for business purposes. You can open this account at most banks, credit unions and financial institutions. Call ahead to see what documents will be required to open this account.
- Open a business credit card or line of credit. This is not strictly necessary, but most businesses can benefit from having a business credit card, and/or a business line of credit. This can be used for day-to-day expenses and purchases, and may also earn you some rewards.
- Set up your accounting system. As a business owner, you will need to keep very detailed records about all revenue and expenses. To do this, you’ll want to set up the proper foundation from day one. This could be investing in an account software such as QuickBooks or Xero, hiring a bookkeeper, or at the very least establishing a spreadsheet to track everything. If you do not have any accounting experience, it’s wise to hire a professional to help.
- Purchase business insurance. Most businesses should have some form of liability insurance, and potentially other forms of business insurance as well. Insurance policies can help protect your equipment and buildings from costly damage, and help shield your company from liability if a worker or customer is injured or otherwise harmed. Speak with a local business insurance provider to get started.
8. Create a business website
In this day and age, having a solid web presence for your business is very important. Social media profiles, while important, are no replacement for an actual website. You will want to build a professional business website that you can use to drum up business, inform your customers, and stay connected with your clientele.
The simplest way to build a website is to use a website builder from a web hosting provider. When you register a new domain name, look for a provider that also offers web hosting and a site builder, so that you can purchase everything at once and get your site set up quickly.
9. Hire employees
Unless you plan to operate a solo business (with you as the only worker), you will likely need to hire employees. To do this, you will need a federal employer identification number (EIN), which is a free tax ID number issued by the Internal Revenue Service (IRS).
Whenever you hire someone new, you are required to report the new hire to the state of South Dakota Department of Labor and Regulation. You should also ensure that your employees hold any necessary permits or licenses. For instance, if you run a restaurant, you’ll need to make sure that your employees have food handler’s permits/health permits.
At this time you will also need to register for reemployment insurance tax (formerly known as unemployment insurance tax), and any other taxes that your business will be subject to.
At this point, businesses also should look into setting up their payroll system – whether you handle it yourself, or use a payroll service.
10. Run and grow your business
Now it’s time to get down to business and engage with the day-to-day activities that are sure to bring your business success. This means marketing your products and services, maintaining good relationships with your return customers, and setting yourself apart from the competition.
South Dakota business FAQs
Still have questions about running a business in South Dakota? Here are some answers to frequently asked questions.
What are some business resources in South Dakota?
There are dozens of great resources for entrepreneurs in South Dakota, ranging from small business incubators to no-cost business coaching.
A good place to get started is at the South Dakota Small Business Development Center (SBDC), also known as South Dakota Business Help. This organization offers free business consultation, coaching, and tons of other useful resources.
SCORE South Dakota in Rapid City is another great resource, as is the South Dakota District Office of the US Small Business Administration (SBA) in Sioux Falls.
What is the minimum wage in South Dakota?
The South Dakota minimum wage is $9.45 per hour, as of 2021.
On January 1st, 2022, the rate will rise to $9.95 per hour. Every year after 2022, the minimum wage will continue to increase at the same rate as consumer prices rise, based on the consumer price index (CPI). You can check the South Dakota Department of Labor and Regulation for the latest minimum wage info.
There is an exception for employees that earn tips. Tipped employees can be paid $4.725 per hour (increasing to $4.975 per hour in 2022), so long as their wages + tips equal at least the full SD minimum wage. The employer must make up the difference if the tips + wages do not equal minimum wage.
Keep in mind that it is possible for individual cities or counties to impose their own minimum wage laws that may exceed South Dakota’s minimum wage. Check with local government officials in your area to ensure your business is compliant with all local rules.
What business taxes does South Dakota have?
Businesses selling taxable goods or services in SD will need to collect and pay South Dakota sales tax, which is currently 4.5% plus any applicable local sales tax.
You’ll also need to register for and pay employer taxes, including reemployment insurance tax. South Dakota does not have a corporate income tax. There may be other industry-specific taxes, however – check with the South Dakota Department of Revenue for details.
How do I dissolve an LLC or Corporation in South Dakota?
To close a South Dakota company, you need to “dissolve” it. This will include filing voluntary dissolution paperwork, closing down tax accounts, filing final tax returns, and more.
Because this process can be complex, it’s worthwhile to use the services of an attorney or CPA to ensure that everything is handled properly.
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