April 23, 2022
A Limited Liability Company in the U.S. is a specific form of a private limited company. It is a form of business that incorporates the pass-through taxation of a partnership or sole proprietorship and limited liability corporation. Limited Liability Companies are different and separate from Corporations.
Owners of LLCs are protected from the personal responsibility of liabilities and debts. Furthermore, Limited Liability Companies may sometimes be designed as non-profit organizations. In states such as Texas, businesses providing professional services that require a state professional license are not allowed to form a Limited Liability Company.
Instead, they may form a similar business structure known as a Professional Limited Liability Company. This article will highlight the significant benefits of an LLC in South Dakota. Let’s dive right into it!
The state of South Dakota has a continuously growing economy. Every year, 2,500 new LLCs are established in South Dakota. Currently, the state has over 11,000 active Limited Liability Companies. After considering both long-term and short-term business growth, the U.S Chamber of Commerce ranked South Dakota as follows:
● 1st for its sensible, predictable regulatory environment and small firms’ survival rate.
● 2nd for the tax environment for mature businesses and tax business climate.
● 4th for per capita income growth and productivity growth.
● 7th for growth, livability, productivity, and export growth.
Here are some superb benefits that come with having an LLC in South Dakota:
Like other states, if you establish an LLC in South Dakota, you are guaranteed the protection of your assets from your business creditors. Business creditors could be individuals who bring personal liability claims against your business, individuals with whom your company has entered into contractual relationships, or even your employees. Suppose you set up an LLC in South Dakota, you stand to benefit from inside-out creditor protection; it ensures that the creditors cannot take more assets than what is in the business.
South Dakota is widely recognized for its numerous protections for LLCs. Not only does it protect your personal assets in the business from your business creditors, but it also protects your business from your personal creditors. The laws in South Dakota limit the number of assets that your individual creditor can receive from the company. This is different from other states where a personal creditor can obtain the assets in the business or even ownership of the business.
In South Dakota, the most significant thing that a creditor can obtain from your business is a charging order that allows them to get any distributions made by the company to the owner and nothing beyond that. Section 47-34A-504 provides that, suppose a judgment creditor of a member receives a charging order against the member’s distributional interest, the charging order would act only as a lien of interests. This prevents the creditor from taking your business apart. A court of law may not foreclose the lien of interests.
This type of protection is known as outside-in protection and applies to both a single-member LLC and multiple members LLC. This remedy is often too disastrous for most creditors; it requires more time and extra expenses. Thus, most creditors would not bother to pursue it.
Further, Section 47-34A-601 provides that the membership of a person in a Limited Liability Company ends when such a person becomes a debtor in bankruptcy, makes an assignment to benefit the creditors, fails to contest a petition aimed at the appointment of a trustee, receiver, or the liquidator over their property. Such scenarios are known as the ‘events of dissociation.’
The South Dakota Limited Liability Company Act gives the members the authority to protect their business control. It states that operating agreements may bar the members from transferring their distributional interests. However, where the Limited Liability Company does not ban such a transfer, then the transfer would not dissolve the company or authorize the transferee to take part in the management or become a stakeholder.
Consequently, the transferee is not obligated to the transferor’s distributions entitlement, and if they want to become a member, then that would only be possible upon the unanimous consent of the non-transferring members for the transferee to become a member.
South Dakota stands out among the other few states that offer high-quality asset protection. South Dakota provides Domestic Asset Protection Trusts and Dynasty Trusts, among others. An interested investor planning to set up a Limited Liability Company in South Dakota could combine their business with these techniques to create the most effective asset protection strategy.
The laws in South Dakota provide that a Limited Liability Company in South Dakota must continuously keep a registered agent. Registered agents in South Dakota act as the point of contact for your business.
A Limited Liability Company in Dakota provides you with enhanced flexibility in management, taxation, and ownership in general. The state of South Dakota does not limit the number of owners or members that a Limited Liability Company can have. Even though most Limited Liability Companies have only one member, they are free to have as many as one hundred members and above.
All the stakeholders can do the management of a Limited Liability Company. However, choosing a specific person to run the business's day-to-day operations is also the alternative. The manager of a Limited Liability Company in South Dakota can be a member, non-member, or a group of both members and non-members.
Moreover, Limited Liability Companies have the option of deciding on how they should be taxed. On almost all occasions, Limited Liability Companies are taxed as Partnerships or Sole Proprietorships. However, Single Member Limited Liability Companies and Multi-member Limited Liability Companies can choose to be taxed similarly to corporations. Suppose they decide to be taxed like corporations; they only need to fill an election with the IRS to facilitate the process.
Limited Liability Companies can choose how to be taxed, either as an S corporation or a C corporation. A Limited Liability Company that chose to be taxed like an S corporation remains a pass-through entity and will have its profits passed through the business to the stakeholders hence taxed at the owners’ rates.
An S corporation is beneficial and facilitates tax saving since the tax distributions are not subject to either Medical taxes or Social Security taxes. On the other hand, suppose the owner(s) of a Limited Liability Company chooses to be taxed similarly to a C corporation; they will stand to pay taxes subject to the business profits based on corporate tax rates. The corporate tax rates of a C corporation are about 21% and significantly below most of the individual rates. Lastly, when you start a Limited Liability Company in South Dakota, you will have the ability to choose from the different ways of profit distribution. This is different from a partnership where the profit distribution is equal among the partners.
If you register a new business in the state of South Dakota, you will be able to access various financial programs; these programs have been initiated by South Dakota’s Governor of Economic Development. Financing options are essential for the sustainability of a business, especially at the earlier stages of development. Some of the financing programs available for a Limited Liability Company in South Dakota include:
● South Dakota WORKS
● Revolving Economic Development and Initiative Fund
● SBA 504
● South Dakota Jobs Grant Program
● South Dakota Microloan Express
● Dakota Seeds
● Proof of Concept Fund
● Reinvestment Payment Program
How are these programs beneficial? Let us have a look at a few examples.
● South Dakota WORKS is a program that avails business or commercial loans to firms that need working capital as part of their payroll, construction of new buildings, or start-up costs.
● The Reinvestment Payment Program seeks to help businesses offset their upfront expenses or costs related to the expansion projects and the upgrade of machinery and equipment. Whoever applies for these programs should receive a reinvestment payment not more than South Dakota's sales tax or use tax paid on project costs that are eligible. If you are interested in this program, you will be required to apply to the Board of Economic Development.
● Another Program is the Economic Development Finance Authority. It was established to assist in capital-intensive projects. With this program, an LLC can benefit as a small business aiming to buy new machinery and equipment or issuing tax-exempt bonds targeting a start-up company in South Dakota.
● New South Dakotans Initiative is another program targeting specific high-impact industries and high-need companies. The program ensures the provision of employee recruitment costs.
According to the Limited Liability Company Agreement, the South Dakota Limited Liability Company Act offers members of a company contractual freedom to customize each party’s duties owed to the other party. Section 47-34A-409 enshrined the default rules stating that managers and members owe limited fiduciary duties of care and loyalty.
Such duty of care restrains the members and managers from taking part in ‘grossly careless or irresponsible conduct, intentional misconduct, or a knowing violation of the law.’ On the other hand, the duty of loyalty obligates the members and managers not to participate in any kind of competition with the Limited Liability Company or grab a business opportunity from the company.
It also restrains them from dealing with the company in a way likely to injure it or on behalf of other parties who have an intention to harm the business and as the Limited Liability Company property’s trustees. However, the Act provides managers and members with the contractual freedom and authority to vary the contractual rules. Section 47-34A-103 states that a Limited Liability Company may ‘identify certain types or categories of activities that do not infringe on the duty of loyalty, if not manifestly unreasonable.'
In addition to specifying the number or percentage of members or disinterested managers that may permit or ratify, after complete disclosure of all material facts, a specific act or transaction that would otherwise breach the duty of loyalty.’ Primarily, these rules provide the members or managers and the Limited Liability Company a high level of certainty in business planning and the Possibility of using beneficial mutual opportunities to their advantage.
In South Dakota, you cannot give your Limited Liability Company a name similar to that of a business that is already in existence. Not even a name close enough to raise questions is allowed. One can easily apply for assistance with choosing a unique name for a Limited Liability Company. Suppose your Limited Liability Company has a unique name. In that case, it enables you to protect your identity and improves your company’s reputation, thus helping to build your brand in the diverse market.
One of South Dakota’s best LLC benefits is that there are no residency requirements. To set up a Limited Liability Company in South Dakota, you don't need to be a citizen or reside in South Dakota. However, it is best that you process and acquire all the necessary business licenses, permits, and tax registrations. Do not worry about the state laws. You can get professional help with abiding by the state laws.
How about other requirements?
South Dakota does not have any age restrictions for one to start a Limited Liability Company. However, a Limited Liability Company in South Dakota must have at least one member as per the laws governing the formation of corporations.
Furthermore, it is not a requirement that the names and addresses of the owners and members of the Limited Liability Company appear in the initially filed documents. In contrast, if managers operate the Limited Liability Company, then the names and addresses of the managers must appear in the incorporation documents such as Articles of Organization.
If you want one of the most tax-friendly states in America, then South Dakota is your best bet. South Dakota offers a variety of tax incentives to investors who would like to set up a Limited Liability Company. Some of the available tax incentives available in South Dakota include:
● No personal property tax
● No corporate income tax (the state charges corporate taxes only on banks and other financial institutions)
● No personal income tax
● No business inventory tax
● No inheritance tax
In addition to these tax incentives, there are also other types of tax incentives and credits that business owners benefit from in South Dakota. For example, South Dakota does not charge state and local taxes on motor vehicles.
The South Dakota Limited Liability Company Act supplies company members with the freedom to create voting and non-voting classes of membership. It also allows them to modify their capital contributions, losses, and shares of profits. Section 47-34A-404.2 allows for the future formation of new classes.
It also provides that the rights and duties of the new classes may be superior to those of the existing classes. Since one can create voting and non-voting classes of membership, they enjoy the ability to see through complex and multi-billion dollar businesses, estate planning through gifts of non-voting interests, and succession planning in family businesses.
Similarly, members enjoy contractual flexibility to control their income and risks of losses to enhance their asset management strategies since they can specify the means of allocating profits and losses in a Limited Liability Company agreement which is superior to or lesser than the member’s capital contributions’ portion.
The South Dakota LLC Act provides for a Limited Liability Company’s unlimited life. This means that a Limited Liability Company in South Dakota enjoys being a perpetual entity. Therefore, the death or incapacitation of the owner of the company will not necessarily result in a halt in the operations of the business.
In South Dakota, the ending of your business name with ‘LLC’ or ‘Inc’ gives you enhanced business credibility. Customers will know that your business is real and that you are here to stay for a long time. Even investors and suppliers can have enough confidence in you and desire to continue working with you.
Lastly, as a Limited Liability Company owner in South Dakota, you will enjoy the security of operating while being guided and protected by the laws of the United States.
If you are a non-US resident, forming an LLC is your first opportunity to open a bank account in the United States. As a business person with a United States bank account, you are enabled to open a merchant service account and get easy access to a debit card. Similarly, the bank account will make it easier for you to access e-commerce. This is because established companies like eBay, Amazon, and PayPal will consider you a more qualified vendor.
If you decide to start a Limited Liability Company in South Dakota, you will be able to reap the benefits of limited liability similar to those enjoyed by a corporation.
South Dakota is well known for its benefits to Limited Liability Companies. The state offers more flexibility and protection for the members of LLCs. It is quite easy to start an LLC in South Dakota, not to mention the lower capital required.
Suppose you want more information concerning LLCs in South Dakota, business compliance, and getting a registered agent for your business. In that case, you can contact a professional in South Dakota to help with the whole process. Moreover, you can enlist a licensed mail forwarding service to ensure that any company documents get to their destination promptly.