How to Start a Sole Proprietorship in South Dakota
Are you thinking about starting your own business in South Dakota? A sole proprietorship is among new businesses’ simplest and most popular options. We will walk you through starting a sole proprietorship in South Dakota, including choosing a business name, applying for necessary licenses and permits, registering for taxes, and more. Whether you’re a freelancer, startup, or small business owner, this step-by-step guide will give you all the information you need to get your sole proprietorship up and running.
What is a sole proprietorship?
A sole proprietorship is an informal business structure where an individual operates a business as the sole owner. It is the simplest and most common form of business ownership, popular with startups and entrepreneurs. It is characterized by its ease of setup and minimal legal requirements. As a sole proprietor, you have full control and decision-making authority over your business, but you are personally liable for any debts it incurs.
A step-by-step guide to starting your South Dakota sole proprietorship
Choose a business name
If you want to operate your business under a name other than your own, you must file a DBA (doing business as) or “Business Name” registration with the South Dakota Secretary of State. This allows you to operate under a business name separate from your name. A DBA can give your business a more professional and trustworthy image.
Here is how you file your new DBA name:
- Choose a business name: Consider a few catchy, explanatory names that reflect your business’s core identity. Use keywords and phrases related to your business to help connect with future customers.
- Check availability: Once you have chosen your name, you have to confirm your proposed name is not already taken by another business.
Before filling in your DBA paperwork, check if it is available:
- Visit the Secretary of State’s business information search tool and check that your name is not already being used in the state.
- Check that your name is available on the US Patent and Trademark Office’s Electronic Search System to confirm that you are not infringing on copyright or pre-existing intellectual property.
- Check online availability: Confirm that key digital real estate like your .com and social handles match your business name. A consistent online presence makes it easier to find your business and, in the long term, can help brand recognition.
- Register the business name: To register a DBA name, you must submit a Business Name application online and pay a filing fee to the South Dakota Secretary of State. This fee covers the registration for five years.
Obtain an (Employer Identification Number) EIN
While obtaining an Employer Identification Number (EIN) is not mandatory for sole proprietors without employees, it is recommended.
An EIN is a nine-digit number the Internal Revenue Service (IRS) allocates. It serves as a unique identifier for your business and can provide several benefits:
- Opens up business banking opportunities: Having an EIN lets you open a business bank account separate from your accounts. This separation helps you maintain clear financial records and simplifies tax filing.
- Helps establish business credit: With an EIN, you can start building a separate credit history for your business, which may be beneficial when applying for loans or lines of credit.
- Eases the hiring process: If you plan to expand your sole proprietorship and hire employees, having an EIN is necessary for payroll tax reporting and other employment-related requirements.
- Enhances business privacy: Using an EIN instead of your Social Security Number (SSN) on invoices and contracts adds an extra layer of privacy and identity protection.
- Prepares for business growth: If you have plans to grow your business and potentially convert it into a different business entity, such as a Limited Liability Company (LLC) or a corporation, having an EIN is a crucial step in the transition process.
Register through the IRS website or click here to obtain an EIN.
Obtain South Dakota business licenses, permits, and zoning clearances
- There is no general business license requirement for sole proprietors in South Dakota.
- The South Dakota Department of Revenue manages the main permit, the sales tax license, at the state level. If your sole proprietorship has a physical presence in South Dakota, you are required to obtain this permit.
- It is also important to check for local regulations, such as building permits and zoning clearances, that may apply to your business. Each city or town may have specific requirements, so we recommend contacting your local government.
- Specific business activities at the federal level may mandate particular permits or licenses from relevant agencies. The Small Business Administration provides resources to identify federal licenses you may require.
Register for taxes
Sole proprietors in South Dakota must file Schedule C with their personal income tax return (Form 1040) to report business profits and deductions. Your business income gets taxed at your individual rate.
You’ll also owe self-employment taxes, which you calculate and pay using Schedule SE when you file.
Additional state and local taxes
- As previously mentioned, the main tax requirement for most businesses is the collection and remittance of sales tax. Register for a sales tax license through the South Dakota Department of Revenue.
- Depending on the goods or products you sell, you may also be required to pay other taxes, for example, gross receipts, tourism, and telecommunications taxes. It is important to consult the Business Tax Division of the Department of Revenue for more information on the specific tax requirements for your sole proprietorship.
After you’ve secured your EIN, registered for federal taxes, and received the necessary licenses, you’ve completed the essential steps to establish your sole proprietorship.
We suggest a few more tasks to help your small business stay aligned with rules and well-organized.
Open business bank accounts
To maintain clear financial records and separate your personal and business finances, it is essential to open a dedicated business bank account.
Having a separate business bank account offers several advantages, including:
- Simplified bookkeeping and record-keeping: Separating your personal and business finances allows for easier tracking of income and expenses.
- Facilitates accurate tax reporting: With a dedicated business bank account, you can easily identify and report business-related transactions on your tax returns.
- Demonstrates professionalism: Having a separate bank account adds credibility to your business and enhances your professional image when dealing with clients, suppliers, and financial institutions.
Get liability insurance
As a sole proprietor, you shoulder complete responsibility for any business debts or obligations, making insurance an essential part of your business strategy. It safeguards you from unexpected claims or events. Consider exploring the following:
- General business liability insurance: This coverage handles allegations of property damage, bodily injury, or personal harm tied to your business operations.
- Professional liability insurance: Particularly vital for service providers, this insurance defends against allegations of perceived negligence, errors, or lapses in your services.
Maintain business records
Keeping records is important for tax filing and managing your sole proprietorship’s financial affairs. You should make an effort to precisely track the following:
- Assets and liabilities
- Billing documents
Using bookkeeping software and spreadsheets or setting up a systematic method can help handle documents. Being as organized as possible will prove helpful when it’s time to file taxes, and it promotes the overall financial health of your business.
Sole proprietorship vs. LLC
While a sole proprietorship might seem appealing due to its simplicity and few legal needs, it’s vital to consider possible downsides and look into other types of business, like an LLC.
Here are some things to think about when choosing between a sole proprietorship and an LLC:
- Protection from debt: One big plus of starting an LLC is its protection from debt. As a sole proprietor, you are responsible for any money owed or legal claims against your business, which could put your assets at risk. On the other hand, an LLC gives a clear divide between your personal and business assets, keeping your personal belongings safe from business debts.
- Looking professional: An LLC could make you look more professional in customers’ eyes. Starting an LLC shows more dedication to your business.
- Potential to grow: If you plan to make your business bigger or attract outside funding, an LLC gives you more room to grow than a sole proprietorship.
- Flexibility with taxes: One plus of a sole proprietorship is how simple it is when it comes to taxes. You usually report money made and money spent by your business on your personal tax return with a Schedule C. An LLC also offers flexibility with taxes, as it can be treated like a sole proprietorship, a general partnership, or a corporation for tax reasons.
It’s important to remember that starting an LLC involves more steps and legal needs, like filing Articles of Organization and completing annual reports.
Do I need to register my sole proprietorship in South Dakota?
While there is no formal registration requirement for sole proprietorships in South Dakota, you must register a DBA if you want to operate under a name other than your own.
What taxes must I pay as a sole proprietor in South Dakota?
As a sole proprietor, you will probably need to collect and remit sales tax on behalf of the government. You may also be subject to other state and local taxes depending on your business activities.
Can I hire employees as a sole proprietor in South Dakota?
You can hire employees as a sole proprietor in South Dakota. If you have employees, you must obtain an EIN and comply with employment tax requirements.
Should I get business insurance for my sole proprietorship?
While not mandatory, obtaining insurance to protect your business and personal assets from potential risks is highly recommended.
Can I convert my sole proprietorship to a South Dakota LLC?
You can convert your business to an LLC if you decide to pursue personal liability protection. This process involves articles of incorporation with the South Dakota Secretary of State and getting a registered agent.
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