How to Start a Sole Proprietorship in South Dakota

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.

• 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.

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.

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.

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.

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:

• Income
• Expenses
• Assets and liabilities
• Inventory
• 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.

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.