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How To Start A South Dakota Sole Proprietorship

By: Startup 101
Last Updated: November 15, 2024

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Starting your own business in South Dakota? One of the first steps is choosing your business structure. In simple terms, a business structure decides how your business will operate, how taxes are handled, and how you, as the owner, are responsible for decisions and debts.

In South Dakota, sole proprietorships are a common choice. This guide aims to help you understand if it’s the right structure for you. We’ll explain what a sole proprietorship is, its pros and cons, and how to register in South Dakota.

Related: South Dakota Business Startup Checklist

What is a sole proprietorship?

A sole proprietorship is a straightforward option where you are the single owner, fully in charge of decisions and responsibilities. Your business’s profits and losses are yours alone, and the structure itself doesn’t have to be registered. This ease of operation attracts many to this structure. Yet, it’s crucial to understand that with this simplicity comes the exposure of your personal assets to business risks because there is no legal distinction between the owner and the business.

Apart from sole proprietorships, it’s good to know about other structures too:

  • General partnership: Similar to a sole proprietorship, but instead is owned by two or more people sharing responsibilities and profits.
  • Corporation: A more complex structure, offering liability protection but with more expense and specific requirements to follow.
  • LLC (Limited Liability Company): This type of entity combines elements of sole proprietorships and corporations, offering some liability protection while maintaining simplicity.

Related: Business Structure Comparison

Sole Proprietorship Advantages

Starting a sole proprietorship in South Dakota has its perks:

  • Ease of setup: The process is straightforward as no formal registration or business formation documents are required.
  • Lowest startup costs: Launching a sole proprietorship is very affordable, with no formation documents to file or fees to pay (unless a DBA is needed), making it popular for first-time founders.
  • Tax simplicity: Your business profits are taxed only once, directly to you, avoiding complex corporate tax structures.

Sole Proprietorship Disadvantages

However, there are some downsides:

  • Unlimited personal liability: This is a big one. If your business faces debts or legal issues, your personal assets could be at risk.
  • Less business continuity: Your business’s future is tied to you. If you decide to stop or if anything happens to you, the business ceases, too, which can impact long-term contracts and relationships.
  • Potential tax disadvantages: While taxes are simpler, self-employment might result in higher taxes than other structures.

In summary, while a sole proprietorship in South Dakota is easy to start and manage, it lacks the liability protection an LLC offers. An LLC in South Dakota might be a better choice if protecting your personal assets is a priority.

Related: How To Form A South Dakota LLC

Steps to Start a Sole Proprietorship in South Dakota

Starting a sole proprietorship in South Dakota involves taking care of a few steps to ensure your small business is legally set up and operates smoothly.

Step 1: Come up with a business name

In South Dakota, sole proprietors can operate their business using their full first and last name. However, if you prefer a specific business name, you’ll need to register it. For example, if Mark Johnson wants to open a coffee shop and operate under the name “Mount Rushmore Brews,” he’ll need to register his DBA name “Mount Rushmore Brews.”

Step 2: File the DBA form

Suppose you want to operate your business under a specific name. In that case, getting a DBA (Doing Business As) in South Dakota is quite simple. Visit the South Dakota Secretary of State’s website to complete the DBA application. The requirements for registering an Assumed Business Name are listed under South Dakota Statutes SD Code § 37-11-1.1

Related: How To Register For A South Dakota DBA

Keep in mind that registering a South Dakota assumed name doesn’t prevent other businesses from using it. If you want exclusive rights to your business name, apply for a trademark through the U.S. Patent & Trademark Office (USPTO).

Step 3: Research Business License Requirements

Business licensing and registration requirements vary depending on your business’s nature and location, but they’re often necessary for all types of structures, including sole proprietorships. Some common licenses include:

  • Local business license: While South Dakota doesn’t require a state business license, your city or county may require a local business license. Consult your city officials or economic development office for more information.
  • Sales tax license: Retailers selling, renting, or leasing tangible personal property or products delivered electronically or providing certain services within South Dakota must register for a South Dakota Sales Tax License (sales tax permit) from the South Dakota Department of Revenue.
  • Professional license: Several professions in the state are regulated and must be registered before offering specific services. Common professions requiring licensing in South Dakota include architects, plumbers, barbers, and others. The South Dakota Department of Labor & Regulation provides detailed information, fees, and licensing requirements for various professions.
  • Employer Identification Number (EIN): The Internal Revenue Service (IRS) requires some businesses to have an EIN for tax reporting purposes. Sole proprietorships must get an EIN if they plan to hire employees. Additionally, some banks may require an EIN to open a business bank account. Otherwise, they’ll use the owner’s Social Security Number.

Sources

  1. South Dakota Statutes SD Code § 37-11-1 ↩︎

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