File a South Dakota S Corp

Requirements and Limitations of a South Dakota S Corporation

Being able to “pass-through” incomes without paying corporate taxes is certainly a benefit to any corporation, but it comes with strings attached. You cannot transform your business into a South Dakota S Corp unless it:

• Issues only one class of stock
• Has fewer than 100 shareholders
• Is a domestic entity and
• Is not considered by the IRS as an ineligible corporation type, like domestic international sales corporations and insurance companies. 

Finally, your business’s shareholders must be only estates, individuals, and certain trusts. You cannot have a partnership, non-resident immigrant, or corporation serve as shareholders. If your business meets all these requirements, then it can qualify for S Corporation status, However, you should consult with financial and legal advisors before making this decision. For some businesses, the cost of meeting these requirements may outweigh the benefits. 

What to Know Before Creating an S Corp in South Dakota

As you can see, South Dakota S Corps are not right for everyone. That’s why it’s essential to understand the advantages and drawbacks before moving forward. Another thing that is vital to understand is that you cannot become an S Corporation when you first form a company. All corporations in South Dakota are C Corporations when they first form. 

What’s the Difference Between an S Corporation and a C Corporation?

As we mentioned earlier, a South Dakota S Corp avoids “double taxation,” which normal C corporations have to deal with.  “Double taxation” refers to the fact that C Corp shareholders have to pay both corporate taxes on the business’s income and personal income taxes on their earnings from the business.  

However, an S Corporation in South Dakota is taxed under Subchapter S of the Internal Revenue Code by the IRS (hence the name “S Corp.”) Qualified Subchapter S Corporations are not subject to double taxation. Instead, S Corps can “pass-through” their revenues to their shareholders without having to pay taxes at the corporate level. The only taxable event occurs when the S Corporation’s shareholders pay personal income taxes on their gains from the business.

It’s also worth mentioning that C Corporations can issue more shares of stock and more classes of stock compared to S Corporations. This may affect your company’s ability to raise funds. 

What Are the Requirements for Creating an S Corporation?

Once you have a C Corporation or an LLC, all you have to do is meet the eligibility requirements and file a copy of Form 2553 with the IRS.

Forming an S Corp in South Dakota 

Before you form an S Corporation in South Dakota, you need to already have a standard corporation or an LLC as a basis. You can read our in-depth guides on how to form a standard corporation or LLC in South Dakota separately, but here are the main filing requirements that you need to meet for both business types:

S-Corp Election Steps for LLCs

For detailed formation steps, see our South Dakota LLC formation guide.

• Step 1 – Name your business
• Step 2 – Select a South Dakota Registered Agent
• Step 3 – Appoint Directors/Managers
• Step 4 – File Articles of Incorporation/Articles of Organization
• Step 5 – Draft key operating documents
• Step 6 – Apply for an Employer Identification Number (EIN)
• Step 7 – Apply for S Corp status with IRS Form 2553

S-Corp Election Steps for Corporations

For detailed formation steps, see our South Dakota Corporation formation guide.

• Step 1 – Name Your Corporation
• Step 2 – Appoint Directors
• Step 3 – Choose a South Dakota Registered Agent
• Step 4 – File the South Dakota Articles of Incorporation
• Step 5 – Create Corporate Bylaws
• Step 6 – Draft a Shareholder Agreement
• Step 7 – Issue Shares of Stock
• Step 8 – Apply for Necessary Business Permits or Licenses
• Step 9 – File for an EIN and Review Tax Requirements
• Step 10 – Submit Your Corporation’s First Report
• Step 11 – Apply for S Corp status with IRS Form 2553

File Form 2553 to apply for S Corp status 

After you’ve successfully formed a standard corporation or an LLC under South Dakota law, one of the last South Dakota S Corporation filing requirements is to submit a copy of Internal Revenue Service  Form 2553. Like many IRS forms, timing is essential for Form 2553.

Make sure you file the form no more than 2 months and 15 days after the beginning of your business’s tax year. Delaying past that date means that your business won’t become an S Corp until the next tax year. 

Weighing the Pros and Cons of Creating an S Corp

Forming a South Dakota S Corp, like any other business decision, comes with both pros and cons. The benefits of an S Corp include:

• Improved asset protection
• Pass-through taxation at your personal income tax bracket
• Favorable tax characterization of income

However, the cons of an S Corp include:

• More oversight from the IRS
• Limited flexibility in how you allocate income and losses
• More obligations and limitations regarding entity formation and maintenance
• Fewer options on issuing/owning company stock

Depending on your business’s situation, these limitations might outweigh the significant benefits of electing to become an S Corp.