How To Start A South Dakota Sole Proprietorship

Starting your own business in South Dakota? One of the first and important 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, the sole proprietorship is 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 get registered in South Dakota.

Related: How to start a business in South Dakota

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): 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 there’s no formal registration or business formation documents required.
• Lowest startup costs: With no formation documents to file or fees to pay (unless a DBA is needed), launching a sole proprietorship is very affordable, 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: The future of your business 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, you might end up paying more in self-employment taxes compared to other structures.

In summary, while a sole proprietorship in South Dakota is easy to start and manage, it lacks the liability protection that 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.

Wrapping Up

Starting a sole proprietorship in South Dakota is a straightforward and cost-effective way to launch a business. Even though it may be met with some challenges, such as unlimited personal liability, it is still a simple and accessible option for many entrepreneurs. As you consider which business structure is the right fit, be sure to weigh the advantages and disadvantages of each option carefully.

We hope this guide has provided you with the knowledge and confidence you need to take the next step in your entrepreneurial journey. If you’ve made a decision or have any questions about the different business structures, we’d love to hear from you! Please share your thoughts and questions in the comments below.

Sources

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