There are approximately 7,118 organizations in South Dakota’s nonprofit sector. These nonprofits hire 125,101 people and bring in more than $8 billion in revenue each year.
People from nonprofit organizations are motivated by compassion and desire to meet an unfulfilled need in the community. Ultimately, they hope to improve the quality of life for disadvantaged people, be it on a state, federal or global level.
Starting a nonprofit corporation in South Dakota could take anywhere between two weeks to three months. You’ll need to file the relevant paperwork and comply with the relevant laws to help the process along.
Once you receive tax-exempt status from the IRS, your organization will enjoy various advantages such as the ability to give tax-deductible donations, limited liability, access to grants and funding from public and private foundations, as well as perpetual existence.
The following step-by-step guide will give you an idea of how to go about starting a nonprofit in South Dakota.
1. Select a name for your organization
The first step in the process of incorporating a nonprofit with the state is deciding on a name for your organization. It’s an important step as the name of the nonprofit ultimately defines its brand and image.
Additionally, it will need to comply with state laws and naming requirements. Ensure that the name you choose is also easily searchable by potential stakeholders, sponsors, and donors.
South Dakota has the following naming guidelines to help you along:
Choose a name that is distinguishable from other South Dakota business entities
Choose a name that doesn’t imply that the organization is formed for any other purpose other than what is stated in the Articles of Incorporation
When it comes to naming South Dakota-based organizations, the South Dakota legislature’s official guidelines are your go-to guide.
If you plan to create a website to give your nonprofit more exposure, it’s recommended that you also perform a web domain search to make sure that the name is available as a web domain.
2. Nominate a South Dakota registered agent
A registered agent, also referred to as a statutory or service of process agent, is an individual that’s appointed to accept legal documents on behalf of a business.
Your South Dakota nonprofit will need to appoint a registered agent to accept official mail, legal documents, and service of process in the event that your organization is sued.
You may choose to appoint any individual as a South Dakota nonprofit registered agent; however, they must meet a few requirements:
- Your South Dakota registered agent must be a resident of the state
- Your South Dakota registered agent must have a physical address in the state
- Your South Dakota registered agent must maintain usual business hours
- Your South Dakota registered agent must be at least 18 as of age
- Your South Dakota registered agent must consent to the appointment
3. Recruit your board members
The board of directors is the governing body of the nonprofit organization. Every South Dakota nonprofit needs a board of directors to help oversee the organization’s running.
You also need to appoint an incorporator who will be tasked with signing the Articles of Incorporation. You only need to nominate one incorporator; however, you may have more if you choose.
When it comes to nominating directors, you need to nominate at least three directors who have no relation to each other. They do not need to be residents of South Dakota, nor do they need to be members of your South Dakota nonprofit. The term of service for directors is one year.
Lastly, you need to appoint officers to take on the responsibilities of the president, secretary, and treasurer. You may also choose to appoint one or more vice presidents.
4. Consent to bylaws and conflict of interest policy
Prior to submitting Articles of Incorporation, the organization needs to prepare and adopt bylaws. The bylaws are the governing documents for your nonprofit organization. Ultimately, it contains the procedures and rules that will be used to operate the nonprofit.
The bylaws will be referred to when it comes to holding board meetings, electing officers and directors, and taking care of various corporate formalities required by South Dakota nonprofits.
A part of this process is compiling a conflict of interest policy. This policy is put in place to ensure that decisions made regarding the nonprofit organization always further the organization’s cause or purpose and never benefit members’ individual agendas.
These documents do not need to be submitted to the South Dakota Secretary of State; however, they will need to be kept on file and used as the nonprofit’s internal operating manual.
5. Select a South Dakota nonprofit startup corporation structure
The following organizational structures or types of nonprofits are available in the state of South Dakota:
- Charitable organizations or charities: These nonprofits are regarded as 501(c)3 under the Internal Revenue Code and are exempt from taxes. These nonprofits come together for one or more of the following purposes:
- Religious, charitable, educational, literary, scientific
- Fostering national or international amateur sports competition
- Testing for public safety
- Prevention of cruelty to animals or children
Some examples of charitable organizations include food banks, low-income housing organizations, daycare centers, mental health organizations, and environmental groups.
- Trade and professional associations: These types of nonprofits are considered 501(c)6 organizations under the Internal Revenue Code. They are usually business alliances and the likes. Some Trade and Professional Associations organizations are retail Chambers of commerce, merchants associations, real estate boards.
- Social and recreational clubs: Under the Internal Revenue Code, these nonprofits are described as 501(c)7 organizations. They encompass country clubs, garden and variety clubs, hobby clubs, amateur hunting, fishing, and sports clubs.
- Civic needs and social welfare organizations: These types of nonprofits are regarded as 501(c)4 under the Internal Revenue Code. They are formed to improve people’s overall good and welfare in the community.
Examples of civic leagues and social welfare organizations include downtown improvement associations, healthcare, housing, civic groups, and social action organizations.
6. Prepare and file nonprofit Articles of Incorporation
After completing the initial steps in the process, it’s time for your South Dakota nonprofit to file the Articles of Incorporation.
The application requires the following details:
- Corporations name
- Office address
- The registered agent’s name and address
- The names and addresses of incorporators
- The names and addresses of directors
- The election process of directors
Additionally, you’ll need to include two important causes or statements in order to have tax exemption eligibility:
- A statement describing the organization’s mission or purpose which must be limited to the categories provisioned by the IRS. Think of this as your organization’s mission statement.
- A dissolution clause stating what will happen to the nonprofit’s assets in the event of liquidation or dissolution
7. File an initial report
South Dakota nonprofits do not need to file an initial report with the state.
8. Secure an EIN (Employer Identification Number)
All nonprofits will need an Employer Identification Number. This is irrespective of whether you plan on hiring employees or not. The EIN is a nine-digit number assigned to business entities by the IRS.
It is used to identify nonprofits in the state; however, it is also useful in opening up corporate bank accounts, applying for tax exemption, and submitting tax returns to the Internal Revenue Service.
The Employer Identification Number may be obtained from the IRS website completely free of charge. You’ll need to fill in IRS Form SS-4 and submit the form online. This is the quickest way to obtain your Employer Identification Number.
However, please note that the IRS website operates during specific hours; therefore, you need to print your Employer Identification Number before closing the session.
Further reading and guidance regarding obtaining an Employer Identification Number may be found on the IRS Pub 1635: Understanding your EIN.
9. Apply for federal tax exemption
Once you’ve formed your nonprofit organization in South Dakota, the next step involves seeking tax exemption from the IRS. This is also referred to as getting 501(c) status. Most organizations are regarded as 501(c)3 organizations due to their charitable purposes.
In order to obtain federal tax exemption, you will need to complete and file Form 1023 and submit it to the Internal Revenue Service. This form will take a detailed look at your nonprofit’s programs and structure.
Alternatively, you may fill in Form 1023 -EZ, which the IRS introduced in July of 2014. This form may only be submitted online and is only available to small business organizations that meet the relevant criteria.
Upon completion, the form needs to be submitted to the Internal Revenue Service. They will review and approve the application. In this case, you’ll receive an IRS Determination Letter.
The letter means that your nonprofit is now one of the existing organizations that is also an exempt organization. In other words, you are not liable for federal income/corporate tax.
Alternatively, if the application is declined, you’ll receive a letter of explanation from the IRS stating why it was declined.
10. Apply for South Dakota state tax exemption
With your Internal Revenue Service Determination Letter in hand, your South Dakota nonprofit is automatically exempt from state income tax. So there’s no need to file to obtain an exemption from South Dakota income tax.
However, you will still need to file to obtain a sales tax exemption. In order to do this, complete the Sales Tax-exempt Status Application Form and submit it to the South Dakota Department of Revenue.
11. Other applicable permits and licenses
While South Dakota nonprofits do not need a statewide business license in order to conduct activities in the state, you may need one or more permits depending on your nonprofit’s services and geographical location. Therefore, it’s best to check with your town or county’s licensing divisions to determine if additional licenses and permits are required to operate your nonprofit in the state of Dakota.
Additional state registration and reporting requirements
While many states require you to register your nonprofit with the state prior to fundraising or participating in charitable solicitation, South Dakota is not one of them. South Dakota nonprofits are not required to register with the state prior to conducting fundraising activities. However, if you plan on engaging in out-of-state solicitations, you’ll need to check with the laws in the relevant states prior to setting up any fundraising events.
12. Submit an annual report
All South Dakota nonprofits are required to file an annual report with the South Dakota Secretary of State in order to remain in good standing. The annual report should contain basic information regarding the nonprofit organization‘s details such as:
- It’s address
- The registered agent’s name and address
- The directors’ names and addresses
You may file the annual report online.
Costs of starting a new nonprofit in South Dakota
The following filing fees apply to all South Dakota nonprofits:
- Filing Articles of Incorporation: $30 + optional $50 expedite fee
- Application for federal income tax exemption or 501(c): $275 or $600 IRS fee
- Annual report filing fee: $10
After you’ve started your nonprofit, there are a few necessary steps that you should take to keep your organization running smoothly. Let’s take a closer look at them below:
Open a business bank account
- Maintain accounting and tax filing
- Ensure that your personal assets are kept separate from your nonprofits’ assets
To open a bank account, you will need to provide:
- Your EIN
- A copy of your articles of incorporation
- A copy of your organization’s bylaws.
Hire a business accountant
- Simplify payroll and bookkeeping
- Prevent your nonprofit from avoiding penalties and tax errors
- Manage your nonprofit’s funding
- Focus on growing your nonprofit
- Manage risks
You may opt for General liability, Personal liability, or Worker’s compensation insurance.
Build a website
As we mentioned earlier, you may want to create a website for your organization to legitimize your business or give it more credibility. A dedicated website is also one of the best ways to share your nonprofit’s vision, mission, and story with supporters. Consequently, it’s also a great way to announce upcoming events and goals.
Sign legal documents
One aspect that tends to get overlooked is signing legal documents in your personal capacity instead of as an authorized representative of your nonprofit.
If you’ve appointed yourself as a registered agent of the nonprofit, then the following tips will help avoid personal liability:
- State the registered name of your nonprofit
- Use your name and signature
- State your position/role in the organization as its authorized representative
When signing legal documents on behalf of the nonprofit, it is important that you do so in your capacity as the registered agent, as opposed to your capacity as an individual.
Example: Instead of signing your name only, state the name of the nonprofit and then your name and position within the organization before signing.
For-profit companies are allowed to raise money from private investors. The money must be given back in the form of dividends to shareholders. However, returns on investment are expected. A nonprofit organization may seek donations from foundations, individuals, and other corporations. In most cases, nonprofit organizations qualify for federal tax exemption and do not need to pay taxes on income earned, while for-profit companies are liable for all taxes.
Public charities are nonprofit organizations who have a mission to help the poor and ease community tensions. They do this by advancing education, science, and religion, among other ways. Some examples of public charities include universities, churches, hospitals as well as medical research facilities.
Writing out a business plan for the nonprofit organization will help narrow down the details and help you assess the viability of your purpose. It also helps you outline potential risks, understand costs and manage cash flow for your nonprofit organization. The business plan will also help potential donors and sponsors understand your mission thereby helping you to raise funds to further your nonprofit’s cause.
The primary role of the National Council of Nonprofits is to help nonprofits that advance their missions. They do this by helping nonprofits operate effectively and have access to timely and trustworthy information. Another crucial role that the National Council of Nonprofits fulfills is helping the community understand how nonprofit organizations operate, the value they contribute to society, and the challenges they face.
Nonprofit organizations are legally required to comply with both state and federal laws. This includes registering before any fundraising activities. It’s also essential to bear in mind that the board of directors serves a crucial role. One of the board or directors’ purposes is to ensure that the organization remains compliant. For further guidance on keeping your nonprofit compliant and avoiding having your tax-exempt status revoked, refer to the IRS Compliance Guide.