How to Start a Sole Proprietorship in South Dakota
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If you are interested in starting your own business as a resident of South Dakota, one of the simpler business schema options is known as a sole proprietorship, and it is fairly easy to open on your own. Read on to learn more about opening a sole proprietorship in South Dakota.
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What is a sole proprietorship?
A sole proprietorship is a business owned by an individual. The business and this individual are usually indistinguishable from one another in terms of their finances, liability, and sometimes their name.
Examples of a sole proprietorship
- A farmer selling bouquets of roses at a local farmers’ market
- A freelance writer working on a platform like Fiverr or Upwork
- An IT consultant working for themselves
- A virtual assistant who seeks out clients and establishes contracts with them for their work.
- Any freelancer working for themselves and not a company
What qualifies your business as a sole proprietorship?
Like most states, residents of South Dakota who want to start a sole proprietorship can simply start working on their business. As long as you are performing business activities, following a business plan, or taking payment for your services, you are considered a sole proprietorship.
Sole proprietorship vs LLC
A sole proprietorship is a business owned by a single individual who is one and the same as the business. These two entities share finances, taxes, and sometimes a name.
An LLC is a limited liability company or a legal business structure that separates the owner from the business under the eyes of the law. This provides legal, fiscal, and liability protections to the business owner as the business is a separate legal entity.
Who is it best for?
A sole proprietorship is best for entrepreneurs starting a new business. The sole proprietorship schema will make it easy for them to begin, and they can start working immediately. Plus, if help is needed, they are allowed to hire employees.
That being said, sole proprietorships are not a good idea for entrepreneurs heading into a risky business sector, as there is no limit to the liability they will take on. Riskier industries are much better off taking the time to form an LLC, general partnership, or S corp.
How to set up a sole proprietorship in South Dakota
Think a sole proprietorship might be the best fit for your business? Besides starting business activities, there are a few more things you will need to do to set up your business, such as naming your business, getting a DBA, and obtaining an EIN.
Is there any formal paperwork filed to establish this type of business?
No. There’s no formal registration process in South Dakota, but if your business requires licenses to operate legally, you will need to attain these prior to starting the business activity.
Name your business
Every business needs a name. In South Dakota, if you want to keep it simple, you can use your legal name for your business, or you can apply for a DBA.
Using your own name
Using your own name is the easiest option for a business name, as you don’t need to file anything. Your legal first and last name are automatically used for your sole proprietorship if you choose not to file a DBA.
It is required by South Dakota law, if you use your name for your sole proprietorship, that you must use both your full first name and full last name. If you want to make any changes or perhaps use a nickname, you will need to file a DBA or fictitious name.
Setting up a DBA
If you want to create a name for your sole proprietorship, you can do that as well; however, you must file a DBA or ‘doing business as’ name with the South Dakota Secretary of State.
There is a form on their website for filing your DBA or fictitious name (sometimes also called a trade name). There is a filing fee when you send in the document, and this is a process you will need to complete every 5 years in order to keep your same name.
How to Check if a Business Name is Taken
State licenses
South Dakota doesn’t have a general business license, so there isn’t a license required to start a business. However, there are requirements for those working in certain industries to obtain licenses to operate legally. For example, any business dealing in food or healthcare will require a license, as will one that sells alcohol.
To check if your business needs a license, perform a search on the South Dakota Business Licenses and Permits page. Remember that if you plan to have a physical building, you may additionally need zoning permits depending on your location.
Obtain an EIN
An EIN or employer identification number is a number issued by the IRS. While one isn’t required for a sole proprietorship, it is recommended if you plan to eventually hire employees.
If you hire employees and don’t have an EIN, you will be required to provide your personal social security number for their taxes. This can lead to identity theft and other problems, which are easily avoided with an EIN.
Open a business bank account
The final step is also optional, and it is opening a business bank account. Again, this isn’t required for a sole proprietorship, but many find it helpful to have one as it can help keep business income and personal expenses separate.
Pros
- No business forms are needed and you can start your business immediately.
- If you want to use your own name, there is nothing to file on a yearly basis.
- The business owner retains complete control over the business and all decisions.
- Taxes are simple because the business and the owner are the same legal entity and the individual pays personal income tax over the business profits
- EINs and a business bank account are optional.
- Although you are the only legal owner of your business, you can hire employees if you need.
- Low-stress setup for small business owners just starting out
Cons
- There are no legal protections. The liability of your business becomes your personal liability.
- You cannot apply for grants or government services like Medicare
- You cannot have a business partner.
- Some customers might not see your business as reputable since it isn’t an LLC
- If you don’t use your legal name, your DBA must be re-filed every 5 years.
FAQs
Do you need to register a sole proprietorship in South Dakota?
You don’t need to complete a registration process to become a sole proprietor in South Dakota. This means there is no paperwork required, and you don’t need a registered agent or lawyer.
What is the minimum income for a sole proprietor?
There is no minimum income requirement to be declared a sole proprietor in South Dakota, but for tax purposes, if you make over $600 from a side hustle, it is considered to be a sole proprietorship, and you will need to declare this income on your taxes.
What are the three limitations of a sole proprietorship?
The three limitations of the sole proprietorship setup are that you have unlimited liability for any business assets and business debts which may occur, you cannot use legal avenues to obtain capital, and you must make every business decision on your own.
Does South Dakota require a business license?
No general business license is required to operate a business in South Dakota; however, depending on your industry, you may need a license from the South Dakota Department of Revenue in order to collect sales tax which must be submitted to the government on a regular basis.
Do you pay extra taxes when you have a sole proprietorship?
When you work as a sole proprietor in South Dakota, you are taxed based on your income, just like you would be for any industry. You may also be subject to a self-employment tax depending on how much you make. You’ll find this information when you file your income tax return.
Is a sole proprietorship good for a startup?
Sole proprietorships make it easy to start a business and are generally good for startups because they are an unincorporated business type, but if you think your business wants to apply for government grants in the future, then it is better to obtain an LLC or other business schema.
How does a sole proprietorship pay taxes?
When you operate as a sole proprietor, you will pay pass-through taxes, meaning any tax payments you owe the government will be reported on your personal tax return. This means you don’t need to file business taxes or make any changes to your current tax situation, and taxes are paid at your individual tax rate. You will need to include one additional form when you submit it to the IRS, known as a Schedule C.
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