The party split into political and colonization wings at its convention in 1898, with the political actionists establishing themselves as the Social Democratic Party of America (SDP).
After being jailed in the aftermath of the 1894 Pullman Strike, Eugene V. Debs became interested in socialist ideas. Despite supporting William Jennings Bryan in the 1896 presidential race, Debs announced his conversion to socialism in January 1897. In June of that year, he held a convention of his American Railway Union (ARU) in Chicago, where it was decided to merge the ARU with a faction of the Brotherhood of the Cooperative Commonwealth (BCC) and other elements to create a new organization, the Social Democracy of America. The newspaper of the ARU, Railway Times, was retitled to become official organ of the new organization, The Social Democrat. The convention establishing the SDA was opened on June 15, 1897 in Uhlich's Hall in Chicago—the former headquarters of the ATU during the Pullman strike. The session was attended by 118 delegates, predominately from the Midwest and the Western United States. The keynote address to the convention was delivered by Gene Debs.
Among the elements that joined in forming the new party was a faction of independent Midwestern socialists centered around Victor Berger. This mainly German American group kept up a loosely organized Social Democratisher Verein and published the oldest socialist daily in the country, the Milwaukee Vorwarts. This tendency emphasized electoral socialism, especially in local politics, in order to appeal to workers on issues of immediate, day-to-day importance. Prominent American adherents to this faction included Seymour Stedman and Frederic Heath.
While the SDA was being organized, there was some factional trouble within the older Socialist Labor Party (SLP). Some elements within the SLPs Jewish membership, concentrated in Manhattans Lower East Side, had objected to the party's dual unionism policy. As a consequence, the party's Yiddish language papers—the Dos Abend Blatt and Arbeter-Zeitung—were put under direct party control. When the dissidents responded by launching The Jewish Daily Forward and forming Press Clubs to influence party activity among Jewish members, the party leadership expelled the fourth, fifth and twelfth assembly district branches on July 4. The expelled branches held a convention July 31 to August 2, at which they decided to affiliate with the SDA. Among the prominent members of this faction were Abraham Cahan, Meyer London, Isaac Hourwich, Morris Winchevsky, Michael Zametkin, Max Pine and Louis E. Miller.
In St. Louis, the local SLP branch had published its own paper Labor in the early to mid-nineties, edited by Albert Sanderson and Gustav Hoehn, which showed independence from the SLP leadership and also opposed the dual union policy. This paper's editorial policy was condemned and the paper disaffiliated with the party at its 1896 convention, but ill feeling toward the party leadership continued. In January 1897, the St. Louis local readmitted a member named Priestbach into the party after he had left in 1896 to work for William Jennings Bryan's campaign. The vote for readmittance was 28 to 24 in Priesterbachs favor, which was less than the two thirds prescribed by the SLP constitution. On petition of loyal members the St. Louis local was reorganized and the dissident members went into the new SDA. This contingent was bolstered in August 1897 when the SDA was joined by the remnants of the Social Democratic Federation (SDF), a predominantly German-language group headed by Wilhelm Rosenberg which had split off the SLP in 1889. From the very beginning there were divisions in the group between those who saw its main purpose as winning office and introducing socialistic legislation and those influenced by the BCC idea of trying to "socialize" a Western state by planting socialist colonies there and eventually taking over its government. Nevertheless, a three-man colonization commission criss crossed the country visiting possible sites, especially in Colorado and Tennessee.