Fact Checked by Editorial Staff 
In general, a Limited Liability Company (LLC) in South Dakota does not pay any taxes like corporations and other business structures. It has a pass-through taxation instead of business or corporate tax. Besides, the LLC tax structure includes state and federal mandatory taxes. LLCs are required to choose the tax structure at the time of filing the company.
IRS (Internal Revenue Service) allows an LLC in South Dakota to choose its preferred classification of tax at the beginning of the LLC filing. For example, 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, everyone certainly wants to opt for the most beneficial one. On this page, LLCBuddy editors shared all about the tax structure in South Dakota LLC.
How Does Taxation Work in a South Dakota LLC
For an LLC in South Dakota, the tax structure is very simple and flexible. First of all, every LLC has the advantage of a pass-through taxation. On the other hand, an LLC can choose the desired tax structure at the time of formation. There are two ways an LLC can be taxed,
As a Sole Proprietorship
A single-member LLC is usually considered a sole proprietorship company. Hence, by default, it is taxed as a sole proprietorship. 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.
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.
As a Partnership
Any LLC with more than one owner is referred to as a 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 those of the Single-Member LLC. If the Partnership LLC is directly owned by individuals, it is exempt from the Franchise Tax. All the members of the Multi-Member LLC are liable to pay Self-Employment Tax & Federal Income Tax.
Pass-through Taxation for South Dakota LLC
A Limited Liability Company (LLC) is a form of business structure that consists of members and/or managers (owners). The biggest advantage of an LLC in South Dakota is the pass-through taxation. The limited liability company does not pay any federal income taxes based on the revenue of the company. Instead, the tax liability passes through to each member of the LLC. Furthermore, the members will have to pay individual income tax based on their income.
Both for a single-member LLC and a multi-member LLC in South Dakota, the tax burden passes through to the member(s). In other cases, if an LLC chooses to be taxed as a Corporation, the LLC will have to pay federal income tax based on its revenue and profit. There is no pass-through taxation for C-Corp and S-Corp.
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:
C-Corporation
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.
C-Corporation Taxes
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 subject to Federal Income Tax.
S-Corporation
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 an 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.
S-Corporation 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.
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, 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 a franchise tax on 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 in 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.
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 to 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 the 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 were recognized as one of the types of Business Corporations, the IRS did not create a new tax classification just for the LLC. LLCs were allowed to choose from the current tax classifications.
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.
Liabilities
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, C-corporation, or S-corporation. A corporation can choose to be treated only as a C or S Corporation.
Taxation
As mentioned earlier, the LLC can choose to be treated as a corporation; the Corporation does not have the option of being treated as an LLC. A South Dakota LLC is subject 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 subject 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 an LLC is not subject 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 | 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 the 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. |
FAQ
C-Corporation. It taxes the dividends of the shareholders at the corporate level as well as at the individual level.
An LLC is often referred to as a 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.
How Do LLCs Pay Taxes in South Dakota
LLCs in South Dakota are considered pass-through entities for tax purposes, which means that the profits and losses of the business are passed through to the owners and reported on their personal tax returns. This is in contrast to traditional corporations, where the business itself pays taxes on its profits before distributing them to shareholders.
One of the key advantages of owning an LLC in South Dakota is that the state does not impose a corporate income tax, which can be a significant benefit for small businesses looking to minimize their tax burden. Instead, LLCs in South Dakota are subject to a state business tax based on the business’s total income, which is typically a flat rate regardless of the company’s size or structure.
Another important factor to consider when it comes to LLC taxation in South Dakota is the federal tax treatment of LLCs. By default, a single-member LLC is treated as a disregarded entity for federal tax purposes, meaning that the business’s income is reported on the owner’s personal tax return.
For multi-member LLCs, the default tax treatment is as a partnership, with each member responsible for reporting their share of the business’s profits and losses on their individual tax returns. However, LLCs also have the option to elect to be treated as a corporation for federal tax purposes if they prefer to be taxed at the corporate level.
It’s worth noting that while South Dakota does not have a state income tax, LLC owners are still responsible for paying federal income taxes on their share of the business’s profits. Additionally, LLCs may be subject to other taxes such as self-employment tax, sales tax, and payroll taxes, depending on the nature of the business’s activities.
Overall, the tax treatment of LLCs in South Dakota is relatively straightforward compared to other states, making it an attractive option for small businesses looking to simplify their tax compliance requirements. However, it’s essential for LLC owners to work with a qualified tax professional to ensure they are meeting all necessary filing requirements and taking advantage of any available tax deductions or credits.
In conclusion, understanding how LLCs pay taxes in South Dakota is essential for LLC owners to comply with state and federal tax laws and maximize their tax savings. By staying informed and working with a tax professional, business owners can navigate the complexities of LLC taxation and make informed decisions for the financial health of their business.
In Conclusion
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.