Around 1883 a Swede named Carl August Carlson moved into the country west of Twin Lakes, and established a homestead.  In 1904, the Soo Line Rail Road built its track through Carlson's farm and bought a townsite from him. The new town needed a name.  Some suggested Klingville, then Clayton, finally Karlstad, honoring both Mr. Carlson and the city of Karlstad in Sweden.
 
Pelan, a village to the east, busy during the stagecoach days, moved its buildings to Karlstad.  Among the early businesses were:  Raier Olson's blacksmith shop; Nordin's Hotel, managed by the Wicklund Bros.; Ole Harstad's livery barn; Peter Lofgren's general store; Turnwall Mercantile; Te Commercial Hotel, owned by Jonas Anderson; L.E. Anderson livery barn; a lumber mill; flour mill; and an elevator.  The Knute Hodne store building was moved in from Fir, about three miles southwest of Karlstad.  The first business actually built in Karlstad was the Pearson Hotel.