A limited liability company in general does not have to pay any business taxes. When we talk about the classification of LLC taxes in South Dakota, we know that it is a pass-through taxation structure. Typically, the profit LLC makes passes through the LLC to its members. Based on the profit share, members file their income tax returns. LLCs, unlike other corporations, do not have to pay income taxes based on profit or revenue.
IRS (Internal Revenue Service) allows LLCs to choose their preferable classification of tax at the beginning of the LLC formation. In general, a single-member LLC is taxed as a sole proprietor and a multi-member LLC is taxed as a partnership. As there is no fixed tax structure for LLCs, anyone certainly wants to opt for the most beneficial one. Keep reading till the end to know more about the tax structure of a South Dakota LLC and related aspects.
On this page, you’ll learn about the following:
- Classification of South Dakota LLC Taxes
- LLC Taxes to be Paid in South Dakota
- Default LLC Tax Classification Rules
- Options to Change Default Tax Classification
- Choosing a Classification for Your LLC
- Classification of LLC Taxes – At a Glance
Classification of South Dakota LLC Taxes
An LLC is considered a Pass-through Entity because it allows the income to pass through & become self-employment income. The members of the LLC have to pay Self-employment tax or Self-Employment Taxes on any income they earn through the LLC. The LLC has to pay Franchise Tax on its income. In addition to the Self-employment tax, there are some other requirements that an LLC has to consider, such as:
- Franchise Tax – Franchise tax applies to or levies upon LLCs, C-corporations, & S-corporations. Sole Proprietorship & Partnerships (directly owned by individuals) are exempted from the Franchise Tax. This tax is to be paid with the office of the Comptroller of Public Accounts.
- Federal Tax Identification Number – An LLC with employees must obtain a Federal Tax Identification Number. South Dakota does not have a separate State Tax Identification number.
- State Employer Taxes – If an LLC has employees on the payroll, it must pay state employer taxes in South Dakota. These taxes are handled through South Dakota Workforce Commission.
- Franchise Tax Report – In South Dakota, the LLCs file a Franchise Tax Report with the South Dakota Department of Revenue.
Federal Tax Classifications
When LLCs was recognized as one of the types of Business Corporations, IRS did not create a new tax classification just for the LLC. LLCs were allowed to choose from the current tax classifications.
LLC Taxes to be Paid in South Dakota
In accordance with South Dakota’s classification of LLC taxes, every LLC based in the state needs to pay the following types of taxes:
State Income Tax
South Dakota is listed among the nine states that do not levy income taxes.
State Sales Tax
Every LLC dealing in the leasing out, renting, and selling of products and services (as well as the digitally delivered products) within the boundaries of South Dakota is liable to pay the sales tax. Generally, at the point of purchase, this tax is collected. Sales tax in the state is chargeable at the rate of 4.5%.
State Use Tax
For those items and services that have not paid the sales tax, and are being used for your business within the state boundaries of South Dakota, you are liable to pay use tax. The rate of use tax is the same as that of sales tax, i.e. 4.5%.
Bank Franchise Tax
Several states levy franchise tax on the LLCs. This tax is applied to the organizations doing business in the state and having the right to be conferred as a separate entity. South Dakota also levies the bank franchise tax. Although, it is not applicable to all sorts of LLCs. As per the state regulations, only financial institutions based in South Dakota are subject to paying this tax.
Federal Self-employment Tax
The Federal Self-Employment Tax must be paid by each member or administrator of a South Dakota LLC who makes a profit. Each member’s or manager’s profits are subject to the federal self-employment tax. South Dakota has a 15.3% federal self-employment tax. You must compute the Self-Employment Tax your LLC owes in order to deduct your LLC’s expenses from the money earned.
Federal Income Tax
This tax applies to the profits you make in your LLC. The Federal Income Tax Rate is determined by your earnings, the industry in which your LLC operates, the applicable LLC tax bracket, deductions, and other factors.
Employee & Employer Tax
Any LLC with employees on the payroll is required to pay a variety of taxes that apply to all employees. Employee and employer tax effects are distinct from those of the other types. For example, at the time of receiving a salary, all employees of an LLC must collect and withhold the Payroll tax. Whether you have withheld the federal tax or not, each employee is required to file a separate tax return.
License and Permit
If you are dealing in the sales of some special products or services, you are liable to pay some additional taxes.
Coin-operated Washers and Dryers
Any business that involves coin-operated mechanical drying, washing, or cleaning services in South Dakota should get a license. If based in a municipality, each machine is charged $16 annually. For the machines based out of the municipality, the charges reflect $20 annually. Visit Coin Operated Washers & Dryers License.
Carriers Alcohol Licensing
If your business deals in selling or furnishing alcohol to consumers by paying any person for the delivery services, then you are required to get a carrier license. You can obtain it from the South Dakota Department of Revenue by paying the license fee of $100. You can check out Taxes on Alcohol for further details.
Default LLC Tax Classification Rules
By default, the LLCs are categorized as below (In both the categories, separate filing of income is not required):
Disregarded Entity (Single-Member LLC)
A single-member LLC is usually disregarded from the taxes. Hence a single-member LLC is also called a disregarded entity. Under the U.S. tax law, it is assumed that a single-member LLC is owned by an individual (& not by another LLC), so the U.S. tax law levies rules on it as a Sole Proprietor. Single-member LLC’s owner (Sole Proprietor) has to report all the income of the LLC via his own income tax return.
Sole Proprietorship Taxes
As mentioned earlier, the single owner of the LLC is treated as the Sole proprietor of the LLC & has to file the Self-Employment Tax on all of the LLC’s earnings. South Dakota does not levy State Income Tax, so a single-member LLC must file only the Federal Income Tax.
Partnership (Multi-Member LLC)
Any LLC with more than one owner is referred to as Multi- Member LLC & it is taxed as a partnership by default. Similar to the Single Owner or Single Member LLC, this LLC is also a pass-through entity. This means that the income of the LLC passes through the income of the members & they have to file taxes through their own earnings.
Partnership or Multi-Member LLC has to pay taxes similar to the Single Member LLC. If the Partnership LLC is directly owned by individuals, it is exempted from the Franchise Tax. All the members of the Multi-Member LLC are liable to pay Self-Employment Tax & Federal Income Tax.
Options to Change Default Tax Classification
The LLCs are categorized either as sole proprietorships or as partnerships, depending on the number of members the LLC has. This is the default tax classification applicable to LLCs. However, the LLCs have an option of changing the default classification & opting to register under the following categories for taxation purposes:
An LLC can prefer to be treated as a C-corporation by filing form 8832 (the Entity Classification Election Form) with the IRS. The C-corporation is a regular corporation that is subject to corporate taxes & it is not a pass-through entity.
An LLC taxed as a C-Corporation is not a pass-through entity. In a C-corporation, the members/shareholders/ owners are taxed separately. The shareholders of the C-corporation are taxed twice on the dividends that they earn. The dividends of the shareholders are taxed at the corporate level – with a Corporate Tax filed with Form 1120 & at a Shareholder level – an Income Tax filed with Form 1040. Shareholders are subjected to Federal Income Tax.
The S-Corporation is the most common type of corporate structure used by small businesses. It was created to provide corporations with limited liability protection while maintaining the benefits of being a separate legal entity. An LLC can prefer to be treated as S-Corporation by filing Form 2553. S-corporations are small business corporations, that choose to pass through the corporate income, losses, deductions, & credits to the shareholders for the purposes of Federal Taxes.
An S-Corporation is similar to an LLC except that it is treated by the IRS as a corporation for tax purposes. S-Corps do pay corporate income taxes; however, they are still considered disregarded entities for federal tax purposes.
Like an LLC, an S-Corp reports its annual earnings on a separate Schedule E on the member’s personal account. An S-Corp is treated by the IRS much like a partnership for tax purposes. Unlike Partnership, in S Corporation, the shareholders are required to pay Federal Self Income tax on their share of the company’s profits.
Choosing a Classification for Your LLC
In terms of owners’ protection against liability, perpetual existence, & savings in Taxation, Both LLCs (Limited Liability Companies) & Corporations are very much alike. However, with regard to formalities, Taxation, & capital, LLCs & Corporations differ in South Dakota.
Both LLCs and Corporations provide liability protection to their owners. The LLC provides protection against inside liability (towards the employee) & outside liability (towards the creditor). The Corporation usually provides only the inside liability.
Tax Classification Flexibility
For taxation purposes, an LLC has a choice of being treated as a sole proprietorship, Partnership or C-corporation or S-corporation. A corporation can choose to be treated only as C or S Corporation.
As mentioned earlier, the LLC can choose to be treated as a corporation; the Corporation does not have the option of being treated as the LLC. A South Dakota LLC is subjected to Franchise tax, Federal Income Tax, Sales & Use Taxes & State Employment Taxes (for LLCs that have employees)
A regular corporation or a C- Corporation is subjected to corporate tax, which can be filed through Form 1120 every year. The shareholders have to pay the Income-tax, only when they receive dividends from the Corporation. These dividends are taxed twice at the corporate level (on a corporate form)& at the shareholder level (on shareholder form).
An S- Corporation in LLC is not subjected to corporate taxes. But the shareholders are subjected to Taxation – even if they do not receive any dividends. A member of a South Dakota S-corporation has to pay Federal Self employment Tax only on his salary; any other profits that he makes through the LLC are not subject to the 15.3% Self Employment Tax.
Classification of LLC Taxes – At a Glance
|Points of Difference||LLC||S- Corporation||C-Corporation||Sole Proprietorship|
|Taxation||As an LLC, by default, there is no tax levied at the entity level. The members’ income or even the loss is passed through to members or owners.||Similar to LLC, no tax is levied on an S-Corporation at the entity level. The members’ income or even the loss is passed through to members or owners.||The C-Corporation is often taxed at the entity level. The Dividends are taxed at the shareholders’ level.||The Sole- proprietorship as an entity is not taxable. The Sole Proprietor pays taxes as an Individual.|
|Double Taxation||The LLC does not have Double Taxation||There is no Double Taxation in S-Corporation||There is Double Taxation in C-Corporation, only when the Shareholders earn in the form of dividends.||No Double Taxation in a sole proprietorship.|
|Self Employment Tax||The net income of the members or owners is subject to self-employment tax.||The salaries of the shareholder are subject to self-employment tax, but any other profits that the shareholder makes are not subject to the employment tax.||The C-Corporation is subject to self-employment tax.||The Sole-proprietorship is subject to self-employment tax|
|Pass-Through Income/Loss||An LLC is often referred to as a Pass-through entity because its income passes through/ passes to its members.||Yes, An S Corporation is a Pass-through Entity.||No, A C-Corporation is not a Pass-through Entity.||Yes, A Sole-proprietorship is a Pass-through Entity.|
How Do LLCs Pay Taxes in South Dakota
Any LLC operating in South Dakota is liable to pay 2 kinds of taxes- state taxes as well as federal taxes.
A South Dakota LLC must obtain an Employer Identification Number (EIN). This number is similar to a social security number and is necessary to register a business, open a bank account, or apply for a business loan. You can apply for an EIN online or by mail. Your application must include the name and address of the business, and the reason for requesting the number.
LLCs that sell goods in South Dakota must collect and pay sales tax. The DOR website provides information about this process. Once you’ve registered, you can download a sales tax return form and submit it periodically. The DOR also provides a sales tax license. The DOR website can help you file your tax returns online.
In South Dakota, you can opt to be taxed as a corporation or a personal. In either case, the money generated by your business should go into a separate business account. The only time you should send any funds from your business to your personal account is when you need to pay yourself.
If you’re a South Dakota corporation or LLC, you must file an annual report with the Division of Corporate and Consumer Services. The filing fee is $50 online and $15 for paper. There’s no personal or corporate income tax in South Dakota, but many businesses in South Dakota need an occupational license or a local license/permit. If you’re unsure of how to file, a CPA can help you.
While a South Dakota LLC is not a C-Corporation, it still needs to obtain an Employer Identification Number (EIN). An EIN is required for any South Dakota LLC that has employees. The company must also file an annual report if it employs other people.
In order to create an LLC in South Dakota, you will need to decide on a name for your company. A name must end in the phrase “limited liability company” or “LLC”. However, if the name is similar to a name owned by another LLC, it may be rejected. You should also choose a name that doesn’t imply any other purpose than the one stated in the Articles of Organization. In addition, LLCs are required to have a minimum of one member in order to be a legal entity.
An LLC should file an annual report with the SOS. This report must be filed by the first day of the second month after the month in which the LLC was formed. The filing fee is $50, and you should receive notification from the SOS 30 days before the due date. The majority of LLCs are pass-through tax entities, meaning that federal income tax obligations pass through an LLC and fall on individual members.
The amount of tax collected by an LLC is based on its taxable payroll. The state calculates the taxable payroll by comparing the amount of money collected in the prior three fiscal years that ended on June 30. The rates for established businesses vary between 0.00% and 9.45%. There is an administrative fee that is added to the amount collected by the state.
C-Corporation. It taxes the dividends of the shareholders at the corporate level as well as at an individual level.
An LLC is often referred to as the pass-through entity because the income or the assets pass through the members or owners of the LLC.
The LLCs have two default classifications. It can be termed as a single-member LLC or a multi-member LLC.
When choosing a different classification for taxation, it is essential to understand the liabilities & taxes applicable in that classification.
Every Tax classification has its own set of benefits & restrictions. Every state will have different taxation rules for each of the categories of business corporations. Depending on the objective of formation of the business entity (Eg. To avoid dual Taxation- one can choose S Corporation, for more flexibility, one can choose the LLC format). It is essential to understand the taxing structure of each country & each Classification; to decide how you wish to treat your LLC.