Converting Sole Proprietorship to LLC 2024: South Dakota Conversion Guide

How to Convert Sole Proprietorship to LLC in South Dakota

If you’re thinking of converting your sole proprietorship to an LLC in South Dakota, you’re making a smart move to protect your personal assets and boost your business’s credibility. At LLCBase, we’ll help you through this process by providing essential information and outlining the necessary steps for establishing a South Dakota LLC.

By starting an LLC in South Dakota, also known as The Mount Rushmore State, you’ll enjoy several benefits, including tax flexibility, limited liability protection, and a more professional image. Our comprehensive guide will equip you with the knowledge to successfully convert your sole proprietorship to an LLC in South Dakota, setting your business on a path to greater success and security.

Convert Sole Proprietorship to LLC

On this page, you’ll learn about the following:

What is a Sole Proprietorship and a Limited Liability Company?
- Differences Between Sole Proprietorship and LLC
6 Steps to Convert Sole Proprietorship to LLC
Cost of Changing From Sole Proprietorship to LLC
Why Change From Sole Proprietorship to LLC
FAQs

What is a Sole Proprietorship and a Limited Liability Company?

A sole proprietorship is a business structure in which a single individual owns and operates the business. The owner is solely responsible for all decision-making, profits, and liabilities associated with the business. There is no legal distinction between the owner and the business, making the owner personally liable for any debts or legal issues the business may encounter. This business structure is the simplest and least expensive, as it typically requires minimal paperwork and regulatory compliance.

An LLC, or Limited Liability Company, combines a corporation’s limited liability protection with the operational flexibility of a partnership or sole proprietorship. In an LLC, the business owner, known as a member, has personal liability protection, meaning their personal assets are not at risk in case of the business’s debts or legal issues. LLCs also have flexible tax options, as they can be taxed as a pass-through entity (like a sole proprietorship) or a corporation. This type of business structure is more complex and involves a higher degree of compliance than a sole proprietorship but offers greater legal protection and flexibility for the owner(s).

One of the reasons LLCs are popular in South Dakota is their tax flexibility. LLCs are typically taxed as pass-through entities, meaning the profits and losses flow directly to the member’s personal income tax returns, avoiding the double taxation that corporations face. An LLC in South Dakota has fewer strict administrative requirements, allowing simpler management and decision-making processes.

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Differences Between Sole Proprietorship and LLC

A sole proprietorship is the simplest form of business structure, making it an attractive option for many small business owners. It’s easy to set up and manage since there is no legal distinction between the owner and the business. However, this lack of separation also means the owner has no personal liability protection. In a sole proprietorship, if the business faces financial trouble or legal claims, the owner’s personal assets, such as their home or savings, may be at risk to cover the debts and liabilities.

On the other hand, an LLC, or Limited Liability Company, is a separate legal entity that provides limited liability protection to its owners, known as members. This means that the member’s personal assets are protected from the company’s debts and liabilities, as the business is considered a distinct entity from its owners. This protection is particularly beneficial in lawsuits, bankruptcy, or other financial challenges.

Another significant difference between a sole proprietorship and an LLC in South Dakota is an LLC’s tax flexibility. While a sole proprietorship’s income is reported directly on the owner’s personal tax return and subject to self-employment taxes, an LLC can be taxed as a sole proprietorship, partnership, or corporation. This flexibility allows LLC owners to select the most advantageous tax structure for their specific situation, potentially resulting in tax savings and a more manageable tax burden.

In addition, starting a business in South Dakota may also provide a more professional and credible image to clients, customers, and potential investors compared to a sole proprietorship. This enhanced reputation can attract new business opportunities and contribute to the overall growth and success of the company.

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6 Steps to Convert Sole Proprietorship to LLC

Are you a sole proprietor looking to level up your business structure? Our straightforward 6-step guide will walk you through converting your sole proprietorship to an LLC, providing enhanced liability protection, potential tax benefits, and a more professional image for your growing enterprise.

Step 1: Confirm the Business Name

Before changing your sole proprietorship to a South Dakota LLC, you must check if your desired business name is available in South Dakota. You can do this by using the South Carolina Secretary of State Business Filings Search to search the South Dakota’s official database for existing business names. If the name is available, you can reserve it for 120 days by paying the Not available for online reservations or the $25 for mail reservations. This ensures that no one else can register the same name while you complete the LLC formation process.

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Step 2: File Articles of Organization

Next, you’ll need to file the Articles of Organization with the South Dakota Secretary of State. This legal document officially forms your LLC in South Dakota and includes information such as the name of your LLC, the registered agent’s contact information, and the LLC’s purpose.

You can file the Articles of Organization either online or by mail, using the Create an account/Log in to the SOS site, get the online form, fill it, and submit online for online filing or the Send the form by mail to Secretary of State Office, 500 E Capitol Ave, Pierre, SD 57501 for mail filing. The $150 for online filing, and $165 for filing by mail. must be paid when submitting your documents. When starting an LLC, we recommend hiring one of the best LLC formation services in South Dakota to help you!

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Step 3: Execute an LLC Operating Agreement

Although not legally required in every state, creating an LLC operating agreement is highly recommended. This document outlines the ownership structure, management roles, and operating procedures for your South Dakota LLC. It helps establish the rules and expectations for business operations, which can prevent misunderstandings and disputes among owners. An operating agreement should cover profit and loss allocation, voting rights, management structure, and procedures for adding or removing members.

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Step 4: File Form SS-4 to Obtain an EIN

An Employer Identification Number (EIN) is required for your LLC in South Dakota. You can apply for an EIN by filing Form SS-4 with the Internal Revenue Service (IRS). This nine-digit number is used for tax reporting, employee payroll, and other business-related activities. Obtaining an EIN is crucial for maintaining the separate legal identity of your LLC and ensuring proper tax compliance.

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Step 5: Apply for a New Bank Account

Once your South Dakota LLC is formed, you must open a separate bank account for your business. This is essential for maintaining the limited liability protection offered by your LLC, as it helps separate your personal finances from those of your business. Mixing personal and business finances can jeopardize the legal protection provided by an LLC, so it’s crucial to establish a dedicated bank account for your company.

Step 6: Apply for Business Licenses and Permits

Depending on the nature of your business, you may need to apply for South Dakota business licenses and permits to operate legally in South Dakota. These requirements vary by industry, location, and products or services. You can contact the South Dakota Secretary of State to inquire about the specific requirements for your industry. Examples of licenses and permits may include professional licenses, zoning permits, sales tax permits, and health department permits. Ensuring your business fully complies with all relevant regulations is essential for your LLC’s smooth operation and ongoing success in South Dakota.

We’ve also compiled a list of the best business attorneys in South Dakota to assist you in acquiring your business licenses, securing permits, and other South Dakota requirements!

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Cost of Changing From Sole Proprietorship to LLC

The cost of changing from a sole proprietorship to an LLC in South Dakota includes the following fees:

$165 (by mail and $150 online) for filing the Articles of Organization
$50 for the annual report filing (every 1 year (first day of the anniversary month) years)
South Dakota Department of Revenue fees, which may include state income tax at 0%; South Dakota has no state corporate income tax and state sales tax at 4.50%
No franchise tax annual franchise tax fee (if applicable)
in South Dakota, there is no late filing annual franchise tax late filing fee (if applicable)
Business license and permit fees, which vary depending on the type of business and the location

Why Change From Sole Proprietorship to LLC

There are several reasons why business owners choose to change from a sole proprietorship to an LLC in South Dakota:

Personal asset protection: One of the primary reasons for converting a sole proprietorship to an LLC in South Dakota is the added layer of personal asset protection. As an LLC is considered a separate legal entity, the owner’s personal assets, such as their homes, cars, and savings, are protected from the company’s debts and liabilities. In contrast, a sole proprietor’s personal assets are at risk if the business faces financial or legal challenges. Thus, forming an LLC provides a safety net for business owners, ensuring that their personal finances are not jeopardized by their business dealings.
Tax benefits: Another advantage of converting to an LLC in South Dakota is the potential tax benefits. An LLC offers flexible tax options, allowing the business to be taxed as a sole proprietorship, partnership, or corporation, depending on the most beneficial structure for the owner’s specific circumstances. For example, an LLC can avoid the double taxation that corporations often face by being taxed as a pass-through entity, where the business’s profits and losses directly flow through to the owner’s personal tax return. This flexibility can lower the owner’s overall tax burden and provide additional tax planning and savings opportunities.
Improved credibility: Forming an LLC in South Dakota can also enhance the credibility and professional image of the business. Clients, customers, and potential investors may view an LLC as more stable and established than a sole proprietorship. This improved perception can help attract new business, secure funding, and enhance the company’s overall reputation. Additionally, having an LLC in South Dakota may provide more opportunities for growth and expansion, as the legal structure can be more easily adapted to accommodate new partners, investors, or business ventures.

FAQs

What is a sole proprietorship in South Dakota?

A sole proprietorship is an unincorporated business owned and operated by a single person.

How can a sole proprietorship in South Dakota be converted to an LLC?

A sole proprietor can convert to an LLC by filing articles of organization with the South Dakota Secretary of State.

What are the advantages of converting a sole proprietorship to an LLC in South Dakota?

The advantages of converting a sole proprietorship to an LLC in South Dakota include protection of personal assets, tax flexibility, and ease of management.

What is required to convert a sole proprietorship to an LLC in South Dakota?

To convert a sole proprietorship to an LLC in South Dakota, you’ll need to file articles of organization with the South Dakota Secretary of State and obtain any necessary licenses or permits.

What do I need to include in the articles of organization when converting my sole proprietorship to an LLC in South Dakota?

The articles of organization for your South Dakota LLC should include your business name, address, purpose, management structure, registered agent information, and other required information.

How much does it cost to convert a sole proprietorship to an LLC in South Dakota?

Fees to convert a sole proprietorship to an LLC in South Dakota may vary depending on your individual circumstances. The filing fee for articles of organization in South Dakota is currently $150.

How long does the process take to convert a sole proprietorship to an LLC in South Dakota?

Processing times for LLC filings in South Dakota can vary, but typically it takes 7-10 business days to receive your LLC formation documents from the Secretary of State.

Who should I contact for help with converting my sole proprietorship to an LLC in South Dakota?

You may want to consult with an attorney or accountant familiar with LLC formation in South Dakota. Additionally, the South Dakota Secretary of State’s office is available to answer any questions you may have.

Do I need to reapply for permits and licenses when converting my sole proprietorship to an LLC in South Dakota?

Yes, you will need to update any applicable permits and licenses with your new LLC information.

Will I need a new EIN number when converting my sole proprietorship to an LLC in South Dakota?

You will not necessarily need a new EIN when converting a sole proprietorship to an LLC, but you may want to update your existing EIN to reflect your new LLC structure.

What are the tax implications of converting my sole proprietorship to an LLC in South Dakota?

As a pass-through entity, an LLC does not pay federal or South Dakota income taxes. Instead, profits and losses are passed through to the members.

What is the ongoing maintenance required for an LLC in South Dakota?

Ongoing maintenance for an LLC in South Dakota includes filing an annual report with the Secretary of State and meeting any other requirements for maintaining your LLC status.

Can a South Dakota sole proprietorship convert directly into an S-corporation instead of an LLC?

Yes, a sole proprietorship in South Dakota can be converted directly into an S-corporation, but the process is different than conversion to an LLC.

Is there a limit to the number of members an LLC can have in South Dakota?

No, there is no limit to the number of members an LLC can have in South Dakota.

Can I choose to be taxed as an S-corporation after converting my sole proprietorship to an LLC in South Dakota?

Yes, LLCs in South Dakota can choose to be taxed as an S-corporation by filing Form 2553 with the IRS.

What are the liability protections for an LLC in South Dakota?

An LLC in South Dakota provides liability protection for its members, shielding them from personal financial responsibility for business debts and lawsuits.

Can an LLC in South Dakota have a non-US citizen as a member?

Yes, an LLC in South Dakota can have a non-US citizen as a member.

How does converting my sole proprietorship to an LLC affect my existing contracts and agreements in South Dakota?

Converting a sole proprietorship to an LLC in South Dakota may require updating existing contracts and agreements to reflect your new LLC structure.

Can I change the name of my business when converting my sole proprietorship to an LLC in South Dakota?

Yes, you can choose to change the name of your business when converting your sole proprietorship to an LLC in South Dakota.

Will my South Dakota business licenses and permits be automatically updated after converting my sole proprietorship to an LLC?

No, you will need to update any applicable business licenses or permits with your new LLC information.

Does South Dakota require an operating agreement for an LLC?

Although not legally required, it is highly recommended that you create an operating agreement for your South Dakota LLC.

Is there a residency requirement for LLC members in South Dakota?

There is no residency requirement for LLC members in South Dakota.

Can an LLC in South Dakota have a corporate entity as a member?

Yes, an LLC in South Dakota can have a corporate entity as a member.

How are LLCs taxed in South Dakota?

An LLC in South Dakota is taxed as a pass-through entity, which means that its profits and losses are passed through to its members for tax purposes.

Can an LLC be formed without a registered agent in South Dakota?

No, an LLC in South Dakota must have a registered agent designated to receive official legal and tax documents on behalf of the company.

Can an LLC in South Dakota be treated as a disregarded entity for tax purposes?

Yes, a single-member LLC in South Dakota can make an election to be taxed as a disregarded entity and report business profits and losses on your personal tax return.

How often do I need to file an annual report for my LLC in South Dakota?

You will need to file an annual report with the Secretary of State each year to keep your South Dakota LLC in good standing.

Are there any residency or citizenship requirements for owners or managers of an LLC in South Dakota?

No, there are no residency or citizenship requirements for owners or managers of an LLC in South Dakota.

What is the first step I need to take to convert my sole proprietorship to an LLC in South Dakota?

You will need to choose a name for your LLC and file Articles of Organization with the South Dakota Secretary of State.

Can I reserve the name of my future LLC before I convert?

Yes, you can file a Name Reservation Request with the South Dakota Secretary of State for a fee.

How much does it cost to file Articles of Organization in South Dakota?

It costs $150 to file Articles of Organization for an LLC in South Dakota.

How long does it take for my LLC to become official in South Dakota?

It usually takes about 7-10 business days for your LLC to be formed in South Dakota after the Articles of Organization have been filed.

How do I obtain an EIN for my new LLC in South Dakota?

You can apply for an EIN online through the IRS website or by mail/fax using Form SS-4.

Can I be the only member of my new LLC in South Dakota?

Yes, an LLC can have one member in South Dakota.

Do I need a Operating Agreement for my new LLC in South Dakota?

Although it is not required by the state, it is highly recommended to have a Operating Agreement to outline the management and ownership of your LLC.

Can I change my existing business bank account to my new LLC in South Dakota?

Yes, you can change your existing business account to your new LLC by contacting your bank.

Do I need to notify my customers or clients when I convert to an LLC in South Dakota?

No, it is not required, but it may be helpful to inform your customers and vendors of the change in entity.

How do I dissolve my sole proprietorship once my LLC is formed in South Dakota?

It is recommended to close out any open accounts and file any necessary final tax returns before dissolving your sole proprietorship.

Can I change the name of my existing sole proprietorship when I convert to an LLC in South Dakota?

Yes, you can choose a new name for your LLC.

Do I need to register my LLC with any other state agency in South Dakota?

Depending on your business activities, you may need to register with certain state agencies such as the Department of Labor and Regulation or the South Dakota Department of Revenue.

Will changing to an LLC change the way my business is taxed in South Dakota?

No, an LLC can still be taxed as a sole proprietorship and file on the owner’s personal tax return.

What if my business has outstanding debts or taxes before I convert to an LLC in South Dakota?

It is recommended to resolve any outstanding debts or taxes before forming your LLC to avoid potential legal issues in the future.

Is my personal liability limited by creating an LLC in South Dakota?

Yes, forming an LLC in South Dakota can limit your personal liability and protect your personal assets from business debts and liabilities.

Do I need to have a physical office or registered agent in South Dakota to form an LLC?

Yes, your LLC must have a registered agent who is available during regular business hours to receive legal and other official documents on behalf of the LLC.

Can I form an LLC online in South Dakota?

Yes, you can submit your Articles of Organization and other necessary documents online through the South Dakota Secretary of State website.

What if another business has a similar name to my LLC in South Dakota?

It is recommended to check for existing business names before filing your Articles of Organization. If there is a similar business name, you may need to choose a different name to avoid potential legal issues in the future.

Do I need to file an annual report for my LLC in South Dakota?

Yes, you must file an annual report with the South Dakota Secretary of State and pay a fee of $50 per year after the first year.

Can I convert my nonprofit business to an LLC in South Dakota?

Nonprofit businesses and LLCs have different tax and legal implications, so it is advised to consult with a professional before converting a nonprofit to an LLC in South Dakota.

Can I form a Series LLC in South Dakota?

Yes, South Dakota is one of the few states that allows for the formation of Series LLCs.

Can I transfer my existing assets and liabilities to my new LLC in South Dakota?

Yes, you can transfer your existing assets and liabilities to your new LLC.

How much annual income do I need to form an LLC in South Dakota?

There is no minimum annual income requirement to form an LLC in South Dakota.

Do I need to publish notice of my LLC formation in a newspaper in South Dakota?

No, you do not need to publish notice of your LLC formation in South Dakota.

Can I convert or merge my LLC with another entity in South Dakota?

Yes, it is possible to convert or merge your LLC with another entity, but it is advised to consult with legal and tax professionals before doing so.

Are there any additional taxes or fees I need to pay when converting to LLC in South Dakota?

Aside from the $150 fee for filing the Articles of Organization and the $50 annual fee for filing an annual report, there are no additional fees or taxes to form an LLC in South Dakota.

Can I change the ownership structure of my LLC in South Dakota at a later date?

Yes, you can change the ownership structure of your LLC by amending your Operating Agreement and filing any necessary state paperwork.

What if I have more questions about converting my sole proprietorship to an LLC in South Dakota?

You can visit the South Dakota Secretary of State website or consult with a legal or tax professional for assistance.

Conclusion

Converting your sole proprietorship to an LLC in South Dakota offers numerous advantages, including personal asset protection, tax benefits, and improved credibility. By following the six steps outlined in this guide, you can confidently navigate the process of forming an LLC and enjoy its benefits to your business. Remember, investing in the right legal structure can provide long-term benefits and peace of mind as you grow and expand your business.

If you’re ready to take the next step and change your sole proprietorship to an LLC in South Dakota, visit LLCBase for more detailed information and guidance. Don’t wait any longer – start your journey toward a more secure and prosperous business today!