Do you want to form a limited partnership (LP) in South Dakota, but you’re not familiar with the formation process?
A limited partnership can be a great alternative to a general partnership, but the LP is definitely more difficult to form compared to the more casual nature of the general partnership. In this guide, we’ll discuss all the crucial details of forming this business type in South Dakota.
What Is a South Dakota Limited Partnership?
There are several significant differences between the general partnership and the limited partnership (LP), starting with the roles of the partners themselves. With a general partnership, the partners split profits evenly and take equal responsibility when it comes to liability ― general partners are personally liable for the company’s debts and settlements.
With a limited partnership (not to be confused with the LLC), there is at least one general partner and one limited partner, which is the term for a partner that does not have managerial responsibilities, and their liability is limited to the amount of money they invested in the partnership.
Sometimes, you’ll hear limited partners referred to as “silent partners” due to their lack of direct involvement in the day-to-day operations of the company.
Another major difference is that the general partnership is not a formal business structure, which means you don’t even need to file formation documents with the state of South Dakota, or pay any sort of formation fee. The general partnership is simply formed when the partners begin transacting business together.
On the other hand, a limited partnership does have a formal formation process with the South Dakota state government, and there is also a formation fee involved.
How to Form a South Dakota Limited Partnership (in 6 Steps)
Step One) Choose an LP Name
Whereas the state of South Dakota allows general partnerships to operate under the individual names of the partners, that is not the case for limited partnerships, which must have a distinct business name.
Your limited partnership’s name is often the first impression you get to make on potential customers, and therefore it goes without saying that this is an important step. There are a few different aspects to take into consideration when selecting a name for your business:
As mandated by the South Dakota Secretary of State, all limited partnerships registered in the state must include the words “limited partnership” in the name. The abbreviations “L.P.” or “LP” are also permitted. In addition, you cannot include any words that refer to other business types (like “corporation” or “incorporated”), and you also can’t use words that are typically used to refer to specific kinds of businesses (like “bank” or “law office”).
Another aspect to consider is including language that explains what your business does ― for example, if you’re a realtor, put the phrase “real estate” in your LP name. Additionally, if your business has strong values like being environmentally friendly, you can indicate that by including the word “green.”
Do You Like It?
At the end of the day, this is your business, and you should choose a name that makes you proud. You should also make sure your limited partnership’s name both sounds good when spoken out loud, and looks good when written down.
The most important consideration for naming an LP is to not get too attached to any one business name until you have either reserved the name with the state of South Dakota, or you’ve officially formed your business.
To reserve a name in South Dakota, you must first check the name availability with the Business Name Search Tool. After you have confirmed that another business entity is not using your desired name, you may reserve it by completing the Application for Reservation of Name document and submitting it to the South Dakota Secretary of State.
Get Your Business Domain
To fully embrace the business name, register your URL. With GoDaddy you’ll be able to quickly build a company website so that nobody else can use or take it.
Step Two) Designate a Registered Agent
Every limited partnership in South Dakota is required to designate a registered agent, which is the individual or registered agent service that receives government correspondence on behalf of your business, then forwards those documents to you.
According to the South Dakota Secretary of State,
South Dakota law permits the registered agent to be either: A) a noncommercial registered agent (this may be an individual) or B) a commercial registered agent.”
Without a registered agent in South Dakota, you could lose your good standing and the state also has the right to dissolve your LP if they decide to. In a worst-case scenario, the state could fail to alert you regarding a lawsuit against your company, which could even lead to a judgment against your business because you didn’t defend yourself.
At the end of the day, we recommend designating a registered agent service to handle these requirements. Doing so will help eliminate junk mail and more importantly, keep your personal and/or business address off public record.
Step Three) File the Certificate of Limited Partnership
At this point, it’s time to legally form your new limited partnership.
To establish it with the South Dakota Secretary of State you’ll need to file a form known as the Certificate of Limited Partnership. It requires the following information:
- Name of the limited partnership
- Street address of the office at which the LP’s records are kept
- Name and address of the LP’s initial registered agent
- Name and business address of each general partner
- The limited partnership’s dissolve date
- Any other matters the general partners choose to include
Cost to Form an LP: The state of South Dakota charges a filing fee of $125 to form a limited partnership.
Processing Time: The South Dakota Secretary of State lists no standard processing time.
Step Four) Create a Limited Partnership Agreement
While not legally required by the state of South Dakota, a limited partnership agreement outlines some of the key operating principles of the business. Even though you don’t have to submit it to the state to form your LP, it’s still a vital document that describes the exact nature of the agreement between the general partners and limited partners.
The information included in a limited partnership agreement does vary depending on the nature of your business, the size of your company, and some other variables. In general, it’s good to get the following information down in writing:
- The term (in years) of your partnership
- Identities and roles of general and limited partners
- Initial capitalization and ongoing capital contributions
- Allocation of profits/losses
- Management structure
- Voting rights and meeting plans
- Accounting and record-keeping practices
- Conditions for transfer and dissolution
Step Five) Handle Taxation Requirements
Limited partnerships require a federal tax ID number, or EIN. An EIN is basically the business version of a social security number, and it’s used for a variety of important LP functions.
For instance, you’ll need an EIN if you want to hire any employees, and many banks require them to open business bank accounts as well. You’ll also need one for tax purposes, hence the name federal tax ID number. Get an EIN for your LP for free through the IRS.
Most state taxes in South Dakota are levied depending on what goods or services or your limited partnership offers.
Most LPs are required to register for sales tax, use tax, and several other general taxes. These may include excise tax, tourism tax, manufacturer’s tax, and others. Most of these taxes can be registered for by applying for the appropriate tax-related state business license when you complete the Department of Revenue’s Online Tax Application.
Registering online with the DOR will help you pay a majority of the important state taxes, but there may be other taxes for which your LP is liable. More information on South Dakota business taxation can be found in the Business Section of the State Government website.
Depending on where in South Dakota your business is located, you may also need to pay local taxes.
Especially if your LP owns property or tangible goods in a specific municipality, it’s likely you will owe local taxes in that jurisdiction. To be sure you’re meeting all local taxation requirements, check with the tax section of your municipality’s website.
Step Six) Obtain Business Licenses and Permits
Like most states, South Dakota has no general business license; instad, businesses operating in the state may be required to obtain several other specific licenses, permits or certifications.
For example, those working as contractors, dentists, accountants, or any other regulated line of work will need to obtain the appropriate occupational and professional licenses.
Many other necessary South Dakota licenses come from a wide variety of entities, which can make determining what licenses your LP needs quite difficult. To aid in the confusion, the South Dakota Governor’s Office of Economic Development has compiled a list of various licensing and reporting areas and the agencies which provide them.
Would You Prefer a Professional Form Your LP?
If you would rather have a professional take care of your formation paperwork for you, you have a couple of options. The less expensive choice is to hire a business formation service to create your limited partnership.
While some service providers stick to less complicated business entities like limited liability companies, some of our favorite options also provide LP formations ― namely, LegalZoom and BizFilings. Either one of them should do a great job forming your new LP.
If you want the maximum possible degree of expertise, you should also consider hiring a business attorney to form your limited partnership. This is certainly a more expensive route, but if you want the peace of mind that every step is completed correctly ― and that all of your options have been thoroughly explored ― hiring a lawyer is a great option.
Next Steps: What to Do After Creating a South Dakota LP
Open a business bank account
We highly recommend that you establish a business bank account so that your business and personal finances are maintained separately. This is important because it helps protect your personal assets, and also makes filing taxes much easier. Once you receive your EIN from the IRS, you’ll be able to use it to establish an account at the bank or credit union of your choice.
If your South Dakota LP has any employees, you’ll be required to carry unemployment insurance. While workers’ compensation isn’t mandated by the state, it is highly recommended as well. More information on both can be found on the Department of Labor and Regulation website in either the Workers’ Compensation or Unemployment Insurance pages. After you obtain these legally required policies, it’s probably also a good idea to pursue general liability insurance, as well as some industry-specific policies.
Income reportingLimited partnerships do not file business tax returns. Instead, the income is passed through the business entity to the partners, who then claim their share of profits or losses on their personal tax returns. Still, LPs do need to file an annual information return with the IRS, in which you report your business income, deductions, gains, and losses for the year.
Unlike many other states, South Dakota does not require its limited partnerships to file an annual report; LLCs and corporations, however, are required to do so.
We don’t recommend that you attempt to manage your business finances without the help of a professional. There is too much room for error, and a professional can ultimately save you time and money by guiding you on how to manage your business finances. At a minimum, enlist professional help to set you up with software and the steps for keeping up with your finances on a regular basis. Then, consult back with your accountant at least a couple of times per year – and especially at tax time – to ensure you’re keeping track of everything correctly.