Choice of entity refers to choosing the legal form for operating your business. A business may be operated as (1) a corporation; (2) a general partnership or limited partnership; (3) a limited liability company (LLC); or (4) a sole proprietorship. Each state has its own laws for the formation, operation, and maintenance of these business entities.

The primary considerations in choosing the best form for operating your business are (1) protecting your personal assets from the liabilities of the company; (2) tax strategies designed to deduct early losses, avoid double taxation, and convert ordinary income into long term capital gain at a lower tax rate; (3) an entity that will be attractive to potential investors and lenders; (4) an entity that allows you to offer equity incentives to employees (stock options); and (5) the cost of forming the entity and properly maintaining it—including filing the required documents with state agencies.

In South Dakota, the choice of entity for operating a business is an important decision that affects legal liability, taxation, investment attractiveness, employee incentives, and administrative requirements. The options include corporations, general partnerships or limited partnerships, limited liability companies (LLCs), and sole proprietorships. Corporations offer limited liability protection but may lead to double taxation, whereas LLCs provide liability protection with pass-through taxation, avoiding the double tax. Partnerships can be general or limited, with the latter offering limited liability to some partners. Sole proprietorships are the simplest form with no separate legal entity from the owner, thus no liability protection. South Dakota law requires entities like corporations and LLCs to file organizational documents with the state, such as Articles of Incorporation or Articles of Organization, respectively, and to comply with ongoing maintenance such as annual reports. Tax considerations, costs of formation and maintenance, and the ability to attract investors and offer equity incentives are key factors influencing the choice of entity. It is advisable to consult with an attorney and a tax advisor to determine the most suitable business structure for your specific needs in South Dakota.