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Choosing the right business structure is just one of the many important corporate-level decisions to make when starting your company. Many business owners are choosing to transform their companies into S Corporations. The reason for this is simple. Opting to become an S Corporation can help you limit your tax liabilities and enhance your asset protection.
Maybe you’re wondering what an S corporation is. Simply put, an S Corporation is a federal tax election that allows companies to “pass-through” their revenue and losses to shareholders without paying tax at the corporate level. By doing this, they avoid “double taxation.” Despite the name, S Corporations are not a formal business entity type like a standard corporation or a limited liability company (LLC).
Because S Corps may be a great choice for your business, this article talks about how to transform your business into a South Dakota S Corporation. We’ll also discuss what factors you’ll want to consider when deciding whether a South Dakota S Corp is the path forward for you, and how to have your business elect for S Corp treatment.
Whatever your business needs, we can assist you and jumpstart the process. If you want, we can help you start up your own corporation or LLC in South Dakota. And after formation, we can support your business with our additional products and services.
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:
You can’t get very far in your business journey without a name. So take a few minutes to brainstorm the names that you like. Then, check to see if your business name is available by doing a South Dakota business entity search.
Both LLCs and corporations need to have a registered agent. Registered agents serve as the designated recipient for all important legal and financial documents sent to the company.
Corporations need a board of directors to oversee the business’s daily operations. LLCs are managed either by their members or by specially-selected managers. Whether you have directors, members, or managers for your business, you’ll need to appoint them before moving forward.
South Dakota LLCs require Articles of Organization, which list the LLC’s mailing address, registered agent, management structure, and organizers. Corporations must file Articles of Incorporation, which contain similar information. You should send both sets of documents to the South Dakota Secretary of State’s Office.
For corporations, the key operating documents are the shareholder agreement and the corporate bylaws. The first document describes who owns the company’s stock, what their voting rights are, and how they can transfer their stock. Corporate bylaws discuss your business’s purpose, management structure, and meeting times, among other things.
LLCs have operating agreements. Operating agreements are very similar to bylaws, discussing things like voting rights, management structure, and meeting times. Although LLCs do not need to have an operating agreement, it’s a very good idea to have one.
Applying for an EIN with the IRS is critical for paying taxes, especially when it comes to employment taxes. Think of it as your business’s Social Security number. Although you can obtain an EIN yourself, our Employer ID Number Service can get you squared away quickly.
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.
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:
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.
Forming a South Dakota S Corp, like any other business decision, comes with both pros and cons. The benefits of an S Corp include:
However, the cons of an S Corp include:
Depending on your business’s situation, these limitations might outweigh the significant benefits of electing to become an S Corp.
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.
S Corporations are small corporations that can avoid paying corporate taxes. In exchange for this special tax treatment, S Corporations agree to additional limitations on their structure and shares of stock.
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.
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.
Yes. LLCs can elect to file taxes as an S Corporation. However, the primary benefit of S Corp status for LLCs (which already have pass-through taxation) relates to self-employment taxes. Because of this fact, an S Corp status may not be ideal for many LLCs. Take a moment to review our guide on LLC tax information if you’re curious about this topic.
Few businesses are made by just one person. Rather, business owners need a good support network to help them launch and expand their businesses. We’re dedicated to supporting business owners and helping them achieve their dreams. With our S Corporation Formation Service, we can show you how to set up an S Corp in South Dakota today. Even if your business has other needs, we can get you underway. Don’t wait. We’re here to help you!
Disclaimer: The content on this page is for information purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
There are many benefits to forming a South Dakota S Corp, including less tax liability, favorable self-employment tax treatment, and additional asset protection.
Because South Dakota S Corp can be made only from existing LLCs or corporations, you shouldn’t need to worry about choosing a new name for an S Corporation.
The answer to that question depends on your business’s situation. Consult with a trusted legal or financial advisor to determine whether your business should become an S Corp. We also recommend you understand the differences between an LLC and an S Corp.
Because every business is unique, a tax professional will be best able to answer this question. That said, you can read more about an S Corp’s taxes here.