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Exploring Limited Liability Companies (LLCs) in South Dakota

South Dakota, known for its stunning natural landscapes, has also made a name for itself in the world of business. One significant aspect of this is the creation and operation of Limited Liability Companies (LLCs). South Dakota’s approach to LLCs is unique, combining the best features of corporations and partnerships while also offering several advantages to business owners. In this article, we’ll delve into the key aspects of forming and managing an LLC in South Dakota, including the legal framework, operating agreements, taxation, and more.

NATURE

Limited Liability Companies (LLCs) created in South Dakota have legal personality separate from their members, and combine features of corporations and partnerships.

FORMATION

LLCs are created in South Dakota with the filing of the Articles of Organization with the South Dakota Secretary of State, and the issuance of the Certificate of Organization.

OPERATING AGREEMENT

The corporate governance rules for LLCs and the powers and duties of the Members and Managers, etc., are set-forth in an Operating Agreement, which is not required to be filed with the South Dakota Secretary of State.

ANNUAL REPORTING REQUIREMENTS

Annual Reports are filed with the South Dakota Secretary of State. There is no requirement to file a shareholder register with the South Dakota Secretary of State.

OWNERSHIP & MANAGEMENT

The shareholders of LLCs are typically referred to as “members”, whose ownership interest is reflected in a membership certificate. The Managers of LLCs are charged with executive responsibility, LLCs can be Member-Managed or Manager-Managed.

CHARGING ORDERS

Creditors of the member of a South Dakota LLC is a “Charging Order,” which gives creditors the rights to attach the proceeds of distributions, but creditors cannot force distributions.

IRS CHECK-THE BOX RULES

If the LLC elects to be treated as a “C” corporation by checking the box” and obtaining a Federal tax ID number, IRS Form SS-4, and completing IRS form 8832, it will be treated as a non-transparent US corporation subject to US tax on world-wide income, requiring the LLC to file a US corporate tax return, Form 1120.

SINGLE MEMBER LLCs

A single member US LLC with one member which does not “check the box” and does not elect to be treated as a corporation will be treated as a disregarded entity and considered fiscally transparent pursuant to IRS Default Classification Rules (Form 8832). From a US tax perspective, this means that the LLC is disregarded and “passes through” its profits and losses to its member. 

MULTIPLE MEMBER LLCs

An LLC with two or more foreign (non-US) members which does not “check the box” and does not elect to be treated as a US corporation may be treated as a US partnership (if the attributes of a partnership are present), and if so should obtain a US tax ID number.

US CORPORATE TAXATION

Domestic corporations, which are created or organized under the laws of any state, are subject to Federal income tax on worldwide income at a rate of 21%. There is no state corporate income tax in South Dakota.

US ESTATE TAXES REPORTING

Membership interests in US LLCs are considered US situs assets for purposes of US estate tax.  Non-US residents holding US LLC interests directly may be liable for US estate tax inclusion. 

REPORTING

Foreign owned US LLCs are required to file IRS Form 5472 annually with the IRS disclosing the foreign beneficial owner. FBARs must be filed for LLCs that hold foreign bank accounts. The Corporate Transparency Act (CTA) requires the disclosure of beneficial ownership to FINCEN.

In the heart of nature’s beauty, South Dakota offers a business-friendly environment that accommodates entrepreneurs and investors from around the world. The establishment of LLCs in this state comes with a range of benefits, from the separation of legal personality to flexible management structures and favorable tax treatments. However, it’s essential to navigate the regulations and reporting requirements diligently to ensure your LLC operates smoothly and remains compliant with both state and federal laws. As the corporate world continues to evolve, staying informed about South Dakota’s LLC regulations and taxation rules is crucial for anyone interested in forming or managing an LLC in this unique and picturesque part of the United States.

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