There’s no need for aspirant entrepreneurs based in South Dakota to move elsewhere to launch their business venture: the Mount Rushmore State is one of the most affordable states in which to live and work, in addition to having one of the most business-friendly tax climates.
First off, South Dakota offers entrepreneurs a low-cost environment to grow their business: U.S. News ranks the state 14th in the nation in terms of overall affordability, and 10th in housing affordability.
Even more impressive is its tax climate: Tax Foundation ranks South Dakota 2nd in the nation in its 2020 State Business Tax Climate Index due to the fact that the state does not levy corporate or individual income taxes. Overall, South Dakota does a lot to mitigate the effects of the chief concern new businesses face: a lack of cash flow.
To help you in your endeavor, we’ve put together this comprehensive guide to starting a business in South Dakota. We’ll go step-by-step through each aspect of turning a business idea into a reality, from drafting a business plan to acquiring specialty licenses and permits, while pointing you in the direction of helpful resources that’ll increase your odds of success.
South Dakota small business statistics at-a-glance
- 86,550 small businesses are active in South Dakota, which is 99% of the state’s total businesses.
- 210,534 South Dakotans are employed by small businesses, accounting for 58.8% of the state’s workforce.
- The number of South Dakota small business proprietors increased by 1.5% in 2017.
- Tax Foundation ranks South Dakota as the 2nd most business-friendly tax climate in the U.S. for its lack of corporate and individual income taxes.
- 80.06% of South Dakota startups survive their first year of existence, which is above the national average.
- South Dakota startups create 4.05 jobs in their first year, on average.
- 94.05% of South Dakota entrepreneurs start a new business by choice, rather than necessity, which is the highest rate in the U.S.
Sources: Kauffman, Tax Foundation, U.S. Census: Statistics of U.S. Businesses
Starting a business in South Dakota in 12 steps
1. Develop an idea
Every successful business starts with a good idea. Ask yourself these questions:
Determine your personal strengths and interests: developing an idea that suits your personality and positive traits will provide motivation to put in the long hours necessary in addressing the myriad challenges you’ll face in getting your business off the ground.
Figure out how to market your expertise: if your business idea is not something you totally believe in and can sell effectively, it will be much harder to succeed.
- Which product or service can your business provide that doesn’t already exist on the market?
- How does your business idea refine an existing product or service?
2. Do the research
Once you have an idea, it’s time to put it through the wringer and decide if it’s viable in the market. Conduct market research to arrive at answers to these key questions:
Coming up with satisfactory answers may require refinement, or even a total overhaul, of your original idea. Be patient: you’ll only want to proceed with the next steps after determining that a niche exists in the South Dakota market for your business idea.
- Is there a demand for your product/service in South Dakota?
- Who is your target market?
- Do existing businesses in South Dakota offer a similar product/service?
- What makes your business unique compared to the competition?
3. Draft a business plan
Now it’s time to write the blueprint of your business. A great business plan should chart the path of your company from infancy to success while being able to attract investors to provide financing.
Your business plan ought to include the following sections:
- Executive summary – An overview of your business and why it will be successful
- Description of business – Explain the advantages of your business and the problems it solves
- Market research – Provide research on your industry, target market, and potential competitors
- Organization and staff – Detail the nuts and bolts of your business; how it’s structured and who will run it
- Product or service description – State what you are selling or offering
- Marketing plan – Explain your strategy for attracting customers
- Fundraising – The money you’ll need in the next five years to grow your business and how you’ll spend it
- Financial forecast – Data and balance sheets providing a financial forecast for your business
- Appendix – An optional section with supporting and/or requested documents like resumes, letters of reference, permits, etc.
4. Secure funding
Every business needs money to get off the ground. In fact 82% of businesses that fail do so because of a lack of cash flow, U.S. Bank found in a recent study. Your business plan should include a detailed estimate of the funds you’ll need to cover expenses for at least a year, so now it’s time to acquire the money.
If you aren’t wealthy enough to self-fund your business, you can choose from a number of other funding options. These include a loan from the U.S. Small Business Administration, taking out a loan from a commercial bank, launching an equity crowdfunding campaign, or securing funding from an angel investor or venture capitalist group active in South Dakota.
An angel investor is a wealthy individual who invests their personal finances in a startup, typically in the beginning stages, whereas a VC is a group of investors that will fund a business throughout its existence.
Which route you choose depends on the specifics of your business: angel investors typically invest smaller sums to help get a startup off the ground, while VCs invest larger sums of money in exchange for a greater say in the operations of a business. Smaller startups usually opt to pursue funding from angel investors. Plenty of both types of investors are operating in South Dakota.
South Dakota Angel Investors and VCs
- Annie Capital – A western North Dakota-based venture capital group with a focus on investing in women-led early-stage businesses in the region.
- Bluestem Capital – A private equity company based in Sioux Falls that has invested in over 20 companies in its existence.
- South Dakota Venture Capital – A firm established in 2010 that provides financing and expert consulting to early-stage businesses in the state.
Additional Investor Resources
- AngelList: South Dakota Angel Investors – An exhaustive directory of over 4,900 investors interested in funding South Dakota startups. Individual listings provide a bio of each investor with their professional background and areas of interest.
- The Enterprise Institute – A private non-profit that provides a range of services for South Dakota startups, in addition to managing several angel funds.
5. Decide on a legal business entity
The form of business entity you choose will affect many factors going forward. There are 3 main options to decide from:
Nowadays, LLCs are the option of choice for small business owners as they are easy to manage and provide the benefits of a corporation while lacking their complex structure. Taxwise, they operate more like a sole proprietorship.
You may want to consult with an attorney to help decide which entity works best for your business.
- Sole proprietorship – The name for running a business by yourself. Legally, you and your business are one and the same, with no separate legal entity for your business. A partnership is legally identical to a sole proprietorship, except that it comprises two or more people.
- Corporation – A complex legal structure that is a separate entity (providing legal protection to owners) from the owner and comprises directors, officers, and shareholders.
- LLC – AKA “Limited Liability Company”, this is a hybrid entity between a sole proprietorship and a corporation that possesses advantages of both. An LLCs provides the liability protection of a corporation, yet isn’t subject to double taxation as the profits go through your personal tax return.
6. Register your business
After settling on the structure your business will take, you are ready to register with the state of South Dakota. This process varies depending on your chosen business entity.
For sole proprietorships
Sole proprietors operating under their own name do not need to make any special filings with the state government. However, if you are using a name different from your legal name, the state requires you to register a fictitious name with the Register of Deeds office in the county in which your business is located.
First, use the Business Information Search provided by the South Dakota Secretary of State to make sure that your business name is available for use in the state. If your chosen name is available for use, you can register your fictitious name with your local county Register of Deeds office. Click here to find contact information for most South Dakota county offices.
For LLCs and corporations
The first step in forming either of these two entities in South Dakota is to appoint a registered agent to handle process notices and other government correspondence on your business’s behalf. The registered agent is required to have a physical address in South Dakota, although you can appoint yourself as the registered agent if you wish.
Next, perform a search to ensure that your chosen business name is available in the state. Then, you can proceed to file the necessary documents to form your business in the state.
To form an LLC in South Dakota, you must file Articles of Organization with the Secretary of State. This can be done online, or through the mail. The filing fee is $150 for filing online or $165 for a mail filing.
To form a corporation in South Dakota, you must file Articles of Incorporation with the Secretary of State, either online or via postal mail. Online filing costs $150, while those filing through the mail must pay an additional $15.
7. Acquire federal and state tax IDs
Now you should obtain a Federal Employer Identification Number (EIN), which is like a social security number for a business and allows you to open bank accounts, handle payroll, and file taxes.
For sole proprietorships, an EIN is optional, although it is required for corporations and LLC’s. You can apply online for your EIN through the IRS website, or fill out and mail this form.
Each state has its own laws and taxes regarding businesses. Visit the South Dakota Department of Revenue website for information on business taxes in the state, and to create an account to file returns electronically for your business.
8. Open business banking and credit accounts
Opening a bank account for your business is crucial because it allows you to separate company assets from your personal assets, and makes filing taxes a lot easier. This is a recommended step, even if you are operating a sole proprietorship.
It’s also a wise idea to obtain a credit card for your business because it will help you isolate business expenses and build up credit for your company, which may help in securing investment in later stages.
Banks operating in South Dakota good for small businesses
9. Get the necessary licenses and permits
Depending on the type of business you are opening, you may need to apply for a number of permits and licenses to operate legally. For example, a restaurant will need a liquor license, and a pawn shop will need a reseller’s license. The paperwork may prove a hassle, but it’s a necessary ordeal that will protect you from fines, lawsuits, and other legal hazards.
The South Dakota Governor’s Office of Economic Development has an excellent guide on licensing for business owners, which lists the agencies responsible for issuing a wide range of licenses and permits, along with the costs and requirements of the application. Simply follow the links to individual agencies in order to apply for the licenses you need.
10. Choose a location
Whether you are running an online business or opening a restaurant, location is everything. Be aware of the demographics of the neighborhood or town that you are considering: Are the local residents likely to visit your business? Will nearby competitors take a share of your potential profits?
South Dakota has only two cities, Sioux Falls and Rapid City, with populations over 30,000. Unless you don’t mind living in a small town, entrepreneurs are advised to seek opportunities in one of these two cities, both of which experienced population growth greater than 10% since the 2010 census.
11. Get insured
No matter what type of business you form, buying insurance coverage to protect yourself in the case of property damage or legal action is a good idea. In fact, businesses with employees are required by the federal government to have two types of insurance, while others are strongly encouraged, or required at the state level, depending on your business type. Consult with a licensed insurance agent to find out which types of insurance you should get.
Required forms of insurance:
- Workers’ compensation: Covers medical costs and disability benefits if an employee is injured or becomes ill on the job.
- Unemployment insurance: Provides benefits to workers after a loss of job through no personal fault.
Recommended forms of insurance:
- Professional liability insurance: Covers losses as a result of property damage, medical expenses, libel, slander, and negligence claims.
- Commercial property insurance: Covers property damage to business owned properties and possessions as a result of fire, theft, or storm.
- Disability insurance: Provides short-term benefits for employees suffering an illness or injury. Required in certain states such as California, New York, and Hawaii.
12. Develop an internet presence
Establishing an identity on the web is an important investment in a business’s future development. Here are some key steps in the process:
- Register a domain name for a company website (You can use domain.com, Bluehost, GoDaddy.com, Namecheap.com). Design the website and fill it with content.
- Create profiles on the popular social media services (Twitter, Facebook, Instagram)
- Register a Google profile for your business
- Create accounts on review sites such as Yelp, Google Reviews, and TripAdvisor
South Dakota small business resources