Start a South Dakota S Corp

Requirements and Limitations of a South Dakota S Corporation

Being able to “pass-through” incomes without paying corporate taxes is certainly a benefit to any corporation, but it comes with strings attached. You cannot transform your business into a South Dakota S Corp unless it:

• Issues only one class of stock
• Has fewer than 100 shareholders
• Is a domestic entity and
• Is not considered by the IRS as an ineligible corporation type, like domestic international sales corporations and insurance companies. 

Finally, your business’s shareholders must be only estates, individuals, and certain trusts. You cannot have a partnership, non-resident immigrant, or corporation serve as shareholders. If your business meets all these requirements, then it can qualify for S Corporation status, However, you should consult with financial and legal advisors before making this decision. For some businesses, the cost of meeting these requirements may outweigh the benefits. 

Weighing the Pros and Cons of Creating an S Corp

Forming a South Dakota S Corp, like any other business decision, comes with both pros and cons. The benefits of an S Corp include:

• Improved asset protection
• Pass-through taxation at your personal income tax bracket
• Favorable tax characterization of income

However, the cons of an S Corp include:

• More oversight from the IRS
• Limited flexibility in how you allocate income and losses
• More obligations and limitations regarding entity formation and maintenance
• Fewer options on issuing/owning company stock

Depending on your business’s situation, these limitations might outweigh the significant benefits of electing to become an S Corp. 

What to Know Before Creating an S Corp in South Dakota

As you can see, South Dakota S Corps are not right for everyone. That’s why it’s essential to understand the advantages and drawbacks before moving forward. Another thing that is vital to understand is that you cannot become an S Corporation when you first form a company. All corporations in South Dakota are C Corporations when they first form. 

What is an S Corporation?

S Corporations are small corporations that can avoid paying corporate taxes. In exchange for this special tax treatment, S Corporations agree to additional limitations on their structure and shares of stock.

What’s the Difference Between an S Corporation and a C Corporation?

As we mentioned earlier, a South Dakota S Corp avoids “double taxation,” which normal C corporations have to deal with.  “Double taxation” refers to the fact that C Corp shareholders have to pay both corporate taxes on the business’s income and personal income taxes on their earnings from the business.  

However, an S Corporation in South Dakota is taxed under Subchapter S of the Internal Revenue Code by the IRS (hence the name “S Corp.”) Qualified Subchapter S Corporations are not subject to double taxation. Instead, S Corps can “pass-through” their revenues to their shareholders without having to pay taxes at the corporate level. The only taxable event occurs when the S Corporation’s shareholders pay personal income taxes on their gains from the business.

It’s also worth mentioning that C Corporations can issue more shares of stock and more classes of stock compared to S Corporations. This may affect your company’s ability to raise funds. 

What Are the Requirements for Creating an S Corporation?

Once you have a C Corporation or an LLC, all you have to do is meet the eligibility requirements and file a copy of Form 2553 with the IRS.

Can LLCs Choose an S Corporation Election?

Yes. LLCs can elect to file taxes as an S Corporation. However, the primary benefit of S Corp status for LLCs (which already have pass-through taxation) relates to self-employment taxes. Because of this fact, an S Corp status may not be ideal for many LLCs. Take a moment to review our guide on LLC tax information if you’re curious about this topic.  

We can help 

Few businesses are made by just one person. Rather, business owners need a good support network to help them launch and expand their businesses. We’re dedicated to supporting business owners and helping them achieve their dreams. With our S Corporation Formation Service, we can show you how to set up an S Corp in South Dakota today. Even if your business has other needs, we can get you underway. Don’t wait. We’re here to help you!