South Dakota Technology Business Center

Legal Structure

One of the first steps to opening the doors of your business is to decide on the legal structure for your business. Each legal structure has advantages and disadvantages, so explore your options.

A sole proprietorship is relatively easy to start. You will need to file form SS-4, Application for Employer Identification Number (EIN) with the IRS. You will also be required to report your business income or loss with a schedule C on your income tax form 1040. Sole proprietors are also expected to file schedule SE with your form 1040 to pay self employment tax for your own Social Security and Medicare. Sole proprietors in South Dakota should also register their trade names at the local counties Register of Deeds and check with the Secretary of State to be sure that you have met all state requirements for the type of business you are opening.

A Partnership in South Dakota must also apply to the IRS for an Employer Identification Number (EIN) and will be required to file a federal tax form 1065, a partnership information return. You and your partner will be required to report your share of the partnership income or loss on your federal income tax return and pay self-employment taxes for Social Security and Medicare. A partnership should also register their trade name with the county Register of Deeds and make sure that they have met all state requirements for doing business in South Dakota with the Secretary of State. You should also consider writing a partnership agreement that is reviewed by your attorney and accountant and signed by both partners. Limited Partnerships must register with the Secretary of State in South Dakota.

If you choose to incorporate, the start-up process is more complicated. The advantage of incorporating is that of separating your personal assets and liabilities from those of the business. It is wise to consult an attorney to incorporate, as there are several decisions that you will make in the process of incorporating. The brief list follows:

Choose the type of corporation and the state of incorporation, get a corporate address and select a name for your corporation. File your company’s articles of incorporation with your secretary of state and pay all required fees to the appropriate state agency, usually the Secretary of State. Adopt a set of by-laws and designate a registered office or agent to be available to handle official correspondence for your corporation.

You also need to decide if the corporation will issue stock: what kind, how will dividends be paid, draw up a shareholder agreement and be aware of the securities laws that you will need to comply with.

Corporations also need to elect a board of directors and schedule when the board will meet. Someone should be responsible for taking minutes and distributing them and keeping detailed records of shareholder and board meetings. A list of all of the names and addresses of offices and directors and the most recent annual report for the corporation should always be maintained. If your corporation will do business in more than one state, it is necessary to obtain a certificate of authority from each state in which you will do business. These filings and payments of appropriate fees are usually handled by the Secretary of State’s office in each state. Corporations also need to file form SS-4 the Application for Employer Identification Number (EIN), and they will file corporate income tax returns on form 1120. Be sure to register with your state’s taxing authority and the Secretary of State. Remember that annual reports must be filed for corporations once they are up and running, and be sure that your company complies with all state and federal securities laws.

Some companies decide to form a limited Liability Company (LLC). An LLC can be expected to be similar to a corporation in complexity and cost to organize. As with a corporation, the procedures and criteria for forming an LLC are specified by statute. There is very little case law to guide organizational and operational decisions although the LLC law is modeled on the business corporation law. For this reason, owners of a LLC may need to consult often with their professional advisers, increasing their costs.

The basic steps and expectations to create an LLC are essentially the same as those outlined in the area above describing corporations. In both cases, your attorney should guide the formation of the business structure with financial advice from an accountant.