How to Form an S Corporation in South Dakota

Introduction

Forming an S Corporation in South Dakota is a good option if you want to form a corporation that can enjoy the liability protection of a corporation but have pass-through taxation for the shareholders. Your S Corporation will still be subject to corporate tax and shareholders will still be required to pay income tax on dividends. There is a strict criteria to qualify as an S Corporation. The process isn’t difficult, but you should consult with a South Dakota attorney beforehand to make sure you don’t run into any problems along the way.

Eligibility Criteria

To be eligible, your business must meet all of the following requirements:

• Have 100 or fewer shareholders.
• Have no more than 50 nonresident alien shareholders who own 10% or more of your stock.
• Not be an ineligible entity such as a foreign government or political subdivision, tax-exempt organization, insurance company, financial institution, broker/dealer in securities registered under Section 15(b) of the Securities Exchange Act of 1934 and certain publicly traded partnerships (PRPs).

What you Need to Know About S Corporations

While an S Corporation is exempt from paying federal corporate taxes, it will still be subject to state and local taxes. Shareholders of an S Corporation are not required to pay income tax on dividends, however, they are still required to pay normal income tax for any other earnings.

Strict Criteria to Qualify as an S Corporation

An S Corporation is a subchapter S corporation that is eligible to elect, or choose, to be taxed as an S Corporation. To qualify, a business must meet the following requirements:

• Only natural people may be shareholders. The following entities cannot be shareholders of an S corporation: individuals living outside the United States; corporations, partnerships and other non-natural persons; estates of decedents and trusts.
• Each shareholder must own at least one share of stock on the date that he or she becomes a shareholder (called the “acquisition date”), and continue owning at least one share after becoming a shareholder. It doesn’t matter how many shares are outstanding—the only requirement is that each one own at least 1 share herself or himself on their acquisition date.

Forming an S Corporation

When forming an S corporation in South Dakota, you’ll follow the same steps as you would with any other corporation. You’ll need to file an application and pay a fee with the Secretary of State’s office. The process is not difficult, but it’s important that you consult with a South Dakota attorney beforehand to make sure you don’t run into any problems along the way.

Requirements to Form an S Corporation

In order to form an S Corporation in South Dakota, you must meet the following:

• The business must not be already incorporated and must be eligible for S Corporation status.
• You must have at least one employee that earns more than $100,000 per year. This amount will change with inflation every year on January 1st. It’s also possible to become an S Corporation if you’re a single member LLC or sole proprietor (in which case no employees would be needed), but this option is usually used only by family members who want to incorporate together.
• The business can’t have any foreign corporations listed as shareholders or investors on its IRS Form 1120S (the tax return filed annually by all corporations).

Tax Benefits of Forming an S Corporation

Forming an S Corporation in South Dakota can provide some tax benefits for your corporation. An S Corporation is a pass-through entity, meaning that it is not taxed on its own. Instead, the income from the business is reported on the owner’s personal income tax return and subject to personal income taxes at their marginal rate. This means that there is no double taxation of corporate profits like there would be with a C corporation (C Corp).

Pass-through taxation also has some benefits for shareholders who receive distributions from an S Corp: they are not subject to self-employment taxes or federal income tax withholding.

Conclusion

Forming an S Corporation in South Dakota is a good option if you want to form a corporation that can enjoy the liability protection of a corporation but have pass-through taxation for the shareholders.