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
- 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
Disregarded Entity (Single-Member LLC)
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)
Options to Change Default Tax Classification
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.
Tax Classification Flexibility
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)
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|
|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 C-Corporation is subject to self-employment tax.||The Sole-proprietorship is subject to self-employment tax|
|Pass-Through Income/Loss||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
LLCs pay taxes in two ways, depending on their tax bracket and the amount of earnings they generate. The tax liability for LLC owners depends on their earnings, the amount of tax-deductible expenses, and their filing status. South Dakota requires LLCs to pay federal income tax on the profits they make. Other amounts are tax-free, such as healthcare and business expenses. Healthcare expenses may help offset the cost of retirement plans.
As for tax benefits, LLCs in South Dakota have some distinct advantages over other types of businesses. They offer a high degree of asset protection, as the business entity is separated from the owners. Furthermore, LLCs in South Dakota are eligible for Domestic Asset Protection Trusts, which help owners protect their assets from added taxes and administrative fees. Entrepreneurs looking to establish an LLC in South Dakota can take advantage of many small business resources in the state, including the U.S. Small Business Administration’s South Dakota District Office. They offer seminars on financial statements and funding programs for startups and small businesses.
An LLC must be named with a suffix ending in ‘Limited Liability Company’ or ‘LLC’. A name can not be too long as it is confusing to the public or confuses potential customers. You should also ensure that the name of your business does not conflict with another LLC’s name or imply a different purpose than that stated in its Articles of Organization.