How To Start A Business in South Dakota
South Dakota offers a unique and promising environment for entrepreneurs looking to start a small business. With its business-friendly regulations, stable economy, and skilled workforce, the state has cultivated a climate that fosters the growth and success of small businesses. In addition, South Dakota boasts an attractive tax structure that includes no corporate income tax, personal income tax, or business inventory tax, allowing entrepreneurs to invest more resources into their companies.
The state’s blend of urban and rural communities, combined with strong community support for local businesses, presents numerous opportunities for entrepreneurs to tap into the diverse needs of its growing population. From agriculture and tourism to healthcare and renewable energy, South Dakota offers a wide range of possibilities for those seeking to launch a successful small business.
South Dakota Small Business Stats
- There are 90,274 small businesses in South Dakota, which is 99% of all businesses in the state. (2022 SBA Small Business Profile)
- 58% of South Dakota employees work for small businesses, which is far above the national average. (Statistics of US Businesses)
- Exports by small South Dakota companies reached $424 million. (2022 SBA Small Business Profile)
- South Dakota was ranked as the 22nd best state for business by CNBC, with business friendliness, access to capital, and low cost of doing business being the highest-ranking factors.
- Forbes named South Dakota as the 5th best state to start a business, due to high business survival rate, low tax rates, and financial accessibility.
- Tax Foundation ranked South Dakota #2 on their 2023 State Business Tax Climate Index.
Steps To Start A Business In South Dakota
To ensure a smooth start and establish a thriving business, our step-by-step checklist provides a valuable roadmap for navigating the crucial aspects of launching your small business. By following our guide, you’ll be equipped with essential information on selecting the right business entity, obtaining necessary permits and licenses, securing funding, and hiring your first employees.
Step 1: Choose a Business Idea
The first step for starting a business in South Dakota is having a good business idea. Maybe you already have an idea picked out, or maybe you are still deciding on one. Regardless, you can check out our library of business ideas to get detailed industry information, trends, costs to start, tips, and lots more.
Step 2: Write a Business Plan
Formulating a great concept is just the beginning; executing it successfully depends on having a sound plan backed by consistent execution. Creating a business plan helps to solidify a clear vision and direction, establish goals, and help secure funding. By investing time and effort in creating a thorough business plan, you will greatly enhance your chances of success.
Related: How to write a business plan
Step 3: Select a Business Entity
A business entity refers to the legal structure through which a business operates and is recognized by state law. Choosing the right type of entity is crucial because it impacts various aspects, such as tax obligations, personal liability protection, ownership transfer options, and fundraising capability. Understanding the differences between the four primary types of entities in South Dakota can help entrepreneurs select the most suitable one for their particular circumstances. Let’s examine each of these in more detail.
Sole Proprietorship: A single individual who owns and manages the entire business without any legal distinction, assuming full responsibility for financial debts and obligations. Pros include simplicity, low costs, and flexibility. Cons involve unlimited personal liability.
General Partnership: Two or more individuals who collaboratively own and operate the business, sharing profits and losses according to agreed percentages but facing unlimited liability exposure for debts and legal issues arising from business operations. Pros include increased capacity, shared decision-making, and mutual encouragement. Cons include disagreements over management responsibilities and the risk of being held personally responsible for actions taken by another partner.
Corporation: A separate legal identity distinct from shareholders or owners, offering personal liability protections and the ability to source investment capital from external sources, in addition to debt. Corporations must adhere to strict formalities and are required to hold annual meetings, maintain records, file annual reports, and pay fees and taxes at both state and federal levels.
The Limited Liability Company (LLC) is a popular business entity choice because it provides the liability protection of a corporation with the sole proprietorship’s ease of operation. The Limited Liability Company does not have many of the burdens the corporation has and has the greatest tax flexibility of the four entities. Income can be taxed as a pass-through entity like the sole proprietor or partnership or as a corporation.
Related: How to form a South Dakota LLC
Forming a corporation or LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.
Some popular formation services include:
IncFile - Great service and free registered agent the first year.
Northwest - Privacy-Focused: Free registered agent and private business address for 1 year!
ZenBusiness - Easy to use and free registered agent for 1 year!
Step 4: Register the Business
There are several federal, state, and local rules and regulations South Dakota businesses need to register for and comply with. Some common registrations include:
Business Licenses: The state of South Dakota doesn’t have a general business license; however, many cities require a business license in order to operate.
Business Name Registration (Sole Proprietorships & General Partnerships): For a sole proprietorship or general partnership wanting to operate under a fictitious business name or DBA (Doing Business As), a Fictitious Name Registration will need to be filed. You can file with the Secretary of State’s office or the Register of Deed’s office in the County where the business will be located.
Employer Identification Number (EIN): An EIN, also known as a Federal Tax Identification Number, is required for most businesses, especially if you have employees or plan to file taxes as a corporation or LLC. You can obtain an EIN for free by applying online at the Internal Revenue Service (IRS) website. The application process is simple and typically takes only a few minutes.
Sales Tax License: Businesses selling products and certain services will need to register for a Sales Tax License with the South Dakota Department of Revenue.
Professional Licensing: Some occupations, such as architects, plumbers, and barbers, require licensing in South Dakota. While this isn’t a license on the business, licensing is required in order to operate.
Step 5: Open a Business Bank Account
Maintaining a clear distinction between these personal and business bank accounts is crucial for several reasons:
Simplified Financial Management: Mixing personal and business funds can make it difficult to track your income, expenses, and overall financial performance. Separating the two allows for more straightforward bookkeeping and accounting, helping you make informed decisions about your business’s financial health.
Accurate Tax Reporting: Separating your business and personal funds makes it easier to accurately report your income and expenses when filing taxes. This separation ensures you claim the correct deductions and credits, avoiding potential issues with the Internal Revenue Service (IRS) and the South Dakota Department of Revenue.
Personal Liability Protection: If you have chosen a business entity that provides limited liability protection, such as a corporation or an LLC, it’s essential to maintain a clear separation between your personal and business finances. Failing to do so can result in “piercing the corporate veil,” which means you could be held personally liable for your business’s debts and obligations.
Professional Image: Separating your personal and business finances by having dedicated bank accounts and credit cards can enhance your business’s professional image. This separation can help build trust and credibility with clients, suppliers, and financial institutions.
Easier Access to Funding: When seeking funding from investors or applying for business loans, financial institutions often require a clear demonstration of your business’s financial performance. Separating your business and personal funds makes it easier to provide the necessary financial statements and documentation to secure financing.
Improved Financial Planning: By keeping your personal and business finances separate, you can better analyze your business’s cash flow, profitability, and financial trends. This separation enables more effective financial planning and budgeting, helping you make strategic decisions to grow your business.
By taking this important step, you will be better positioned to manage your finances and make informed decisions for your business’s success.
Step 6: Find Financing
When starting a business, finding adequate funding sources is essential. Fortunately, many options exist for new companies in South Dakota looking to secure capital, ranging from personal funds to borrowing from banks, utilizing government loan guarantee programs like those offered by the Small Business Administration (SBA), accessing microloan programs, and attracting investors. Here are explanations of each option to help better understand the options.
Personal Funds: One option that new business owners can explore is using their personal savings or assets to fund the business. This can include tapping into your retirement savings or using a home equity loan. While this may seem like the easiest option, it’s important to consider the risks involved, as you are putting your own money on the line.
This form of fundraising ensures complete control over decision-making and eliminates the need for external scrutiny. Drawbacks occur when contributing too much personal wealth poses risk to overall financial security without proper planning.
Conventional Bank Loans: Another funding option for small businesses is to apply for a conventional bank loan. South Dakota has several banks that offer small business loans, with varying interest rates and terms. Applicants must have a personal investment (typically between 15% and 25% of the total startup cost), collateral, good credit and a solid business plan.
SBA Loan Guarantee Program: The Small Business Administration offers loan guarantees to qualifying businesses, which enables them to get a loan from a traditional lender with a reduced risk of default. This option can be helpful for businesses that may not qualify for a loan on their own.
Microloan Programs: Microloan programs provide smaller loan amounts to start-ups and small businesses that may have difficulty qualifying for traditional bank loans. In South Dakota, there are several microloan programs available, such as those offered by the South Dakota Development Corporation (SDDC) and various non-profit organizations. These loans typically have lower interest rates and more flexible repayment terms compared to conventional bank loans, making them an attractive option for businesses with limited credit history or collateral. However, the loan amounts are usually smaller and may not be sufficient to cover all your funding needs.
Investors: Seeking funding from investors, such as angel investors or venture capitalists, can be another viable option for new businesses. Investors provide capital in exchange for equity or a share of your company’s ownership. This funding method can offer significant financial support and valuable expertise or mentorship. However, it also means sharing control and profits with the investors, and finding the right investor can be challenging and time-consuming.
Step 7: Hire Employees
Hiring employees is a complex and often overwhelming process for a new small business owner, as there are multiple agencies to register with and labor laws to understand.
Employers are responsible for reporting new hires, verifying employees are eligible to work in the U.S., income tax withholding, unemployment insurance, unemployment taxes, and payroll withholding taxes, including Social Security and Medicare.
Step 8: Obtain Business Insurance
Small business owners face numerous risks every day, including property damage, theft, liability claims, employee injuries, and more. Without proper insurance coverage, a single event could significantly harm your finances, reputation, and future prospects. By having the right insurance policies, you gain peace of mind knowing that most unforeseen occurrences are covered, allowing you to focus on running your business efficiently.
Step 9: Track Income & Expenses
Bookkeeping plays a critical role in managing the financial health of a small business. It involves recording and tracking transactions, income, and expenses, which helps business owners make informed decisions about strategic planning, tax compliance, cash flow management, and risk identification.
Some key reasons to prioritize bookkeeping include:
Better decision-making: Accurate books allow you to monitor trends, track profits, compare performance metrics, analyze expenses, predict budgets, and evaluate growth strategies.
Tax compliance: Proper record keeping makes the preparation of accurate tax returns easier, reducing audit risks, avoiding penalties, and maximizing deductions.
Avoiding fraudulent activities: Regularly reconciling bank statements and monitoring transactions prevent embezzlement schemes or unauthorized purchases within your organization.
Tax Compliance: Maintaining organized financial records simplifies tax preparation and ensures you accurately report income and expenses, avoiding potential issues with tax authorities.
Related: Setting up accounting for a business
This material is property of StartingYourBusiness.com
Common questions when starting a business in South Dakota
Is South Dakota a good state to start a business?
If you are considering starting a small business in South Dakota, it can be a great place, depending on your chosen industry and target audience. With some research and strategic planning, you can determine if the Mount Rushmore State offers the right conditions for success in your industry.
A few factors to take into consideration include regulatory requirements, market conditions, labor pool availability, consumer behavior, and local competitiveness. Let’s explore these areas to help guide your decision-making process:
Regulations: Several publications rank South Dakota as one of the best states for ease of doing business due to minimal red tape and pro-business government policies.
Economic Stability: While not immune to recessions or downturns affecting national economies, South Dakota has generally experienced stable growth in recent years with low unemployment rates compared to many parts of the country. Local industries centered around agriculture, energy production, technology, tourism, healthcare, education, and manufacturing provide diverse job opportunities and steady customer bases across multiple sectors. This supports the overall financial climate necessary to thrive as a small business owner.
Workforce Availability: South Dakota has a skilled and educated workforce, thanks to its strong education system and emphasis on vocational training.
Sioux Falls and Rapid City have seen significant population increases over the past decade, making them prime centers for hiring skilled workers within professional services, technical trades, construction, hospitality, food service, creative arts, administrative support, retail trade, transportation, logistics, warehousing, healthcare, etc.
Expect some competition but potentially strong talent pools given area universities, vocational schools, community colleges, and adult learning programs aimed at bolstering skills and knowledge in high-demand markets.
Taxes: South Dakota is one of the few states without a corporate income tax, personal income tax, or business inventory tax. This favorable tax environment can significantly reduce the financial burden on small businesses, allowing them to invest more in growth and development.
What are the steps to starting an LLC in South Dakota?
There are three main steps to starting an LLC in South Dakota. These include:
1. Making sure the LLC name is available
2. Appointing a Registered Agent
3. Filing the Articles of Organization
There are a few more details to learn about, so be sure to check out how to start an LLC in South Dakota.
How much does it cost to start an LLC in South Dakota?
The filing fee to submit the Articles of Organization with the South Dakota Secretary of State is $150.
What licenses do I need to start a business in South Dakota?
There isn’t a general business license required by the state, however, there are potentially several different licenses and permits a business will need to obtain before starting.