Kentucky is not just a great state where you can watch championship horse racing and sip the finest bourbon in the world. It’s also an attractive location for entrepreneurs to start a new small business.
Kentucky is centrally located in the US. It has easy access to shipping and transportation. The cost of living is low. And the state runs many programs to develop the construction, technology, energy, medical, and aerospace industries.
Moreover, there’s already a burgeoning food, beverage, and restaurant industry. On top of all that, if you like college basketball, it is home to the eight-time national champion Kentucky Wildcats.
So if you are looking to form a limited liability company (LLC), Kentucky has a lot of potential.
Here are the steps you need to take to start a new business.
Steps to form an LLC in Kentucky
- Step 1: Choose a business name for your Kentucky LLC
- Step 2: Designate a registered agent
- Step 3: File the Kentucky LLC articles of organization
- Step 4: Obtain an Employer Identification Number from the IRS
- Step 5: Register with the Kentucky Department of Revenue
- Step 6: Prepare an LLC operating agreement
- Step 7: Open a Kentucky business bank account
Step 1: Choose a business name for your Kentucky LLC
The first step of LLC formation is choosing a name.
While naming can be a fun and creative task, there are some naming requirements to account for too.
The name of your LLC must be distinguishable from other business names already registered in Kentucky. Use the state-supplied name search tool to determine whether the LLC name is available.
Also, under Kentucky law, the LLC name must contain “limited liability company,” “limited company,” or one of the abbreviations — LLT, LLC, LC. So that the public is aware that they are dealing with an LLC.
There is no mandatory cost associated with choosing a Kentucky LLC name.
If you’re not ready to form your LLC just yet, you can place a name reservation for 120 days.
To do so, you must file form RES with the Kentucky Secretary of State. The state fee for a name reservation is $15.
Also, if you formed your LLC in another state and want to do business in Kentucky as a foreign LLC, you may register the name of your LLC in advance by filing an Application of Registered Name. The fee is $36.
There may be times when you want to use a name other than your LLC’s legal name.
For example, you may need to do this if your LLC was formed in a different state and is already being used by another business in Kentucky. Or if you have several brands under the LLC umbrella and want to market them separately.
In Kentucky, an alternative business name is called an “assumed name.”
Other states call it a “fictitious name,” “trade name, or “DBA” (doing business as) name. If you wish to use an “assumed name,” you must file a Certificate of Assumed Name. The state filing fee is $20.
Step 2: Designate a registered agent
As with other states, Kentucky requires every new LLC to appoint a registered agent.
A registered agent is a key point of contact for your business. Their task is to receive important mail or papers from the state and third parties. For example, for service of process in case of a lawsuit. The registered agent must have a physical address in Kentucky (not a P.O. box).
You may serve as your own designated agent free of charge. However, most businesses use a third party as the designated agent for reasons of privacy and convenience.
Generally, businesses don’t want a process server showing up at the registered office address. Also, a designated agent must have someone available during normal business hours to receive mail and papers. Not all businesses can be available during those times.
If you choose a commercial registered agent service, expect to pay between $50 and $150 annually. Your Kentucky registered agent should file form CRA – Statement of Consent of Registered Agent.
There’s no fee payable to the state to designate a registered agent.
However, there are fees if you change your designated agent or your principal office address.
Step 3: File the Kentucky LLC articles of organization
The Articles of Organization is the legal document that creates your LLC in Kentucky.
In other states, the name of this document can be “Articles of Formation” or “Certificate of Formation.”
Kentucky Articles of Organization contains basic information about your business entity:
- Registered agent name and address
- Operating address and mailing address
- County of operation
- Management structure (member- or manager-managed)
- Registered office location
- Industry and size
- LLC organizer signature(s)
The Articles of Organization can be filed by mail to the Kentucky Office of the Secretary of State. at:
Office of the Secretary of State
P.O. Box 718
Frankfort, KY 40602
Or you can submit the form online using the Kentucky One Stop Business Portal.
Online LLC registrations are usually processed within 24 hours. If filed by mail, the processing time can be much longer. Kentucky does not have expedited filing services.
Other LLC registrations
If you formed your LLC in another state and want to register to do business in Kentucky as a foreign LLC, you must file an application for Certificate of Authority with the Kentucky Secretary of State. The fee is $90.
Step 4: Obtain an EIN (Employer Identification Number) from the IRS
Once your new legal entity is formed, you should obtain an employer identification number (EIN) from the Internal Revenue Service.
An EIN is the business equivalent of a social security number. It is necessary to file federal tax returns for LLC members and employees. Also, some financial institutions may require an EIN for opening a business bank account.
Also, having EIN may help build the LLC’s business credit rating and protect against identity theft.
The application process is straightforward, and you may obtain an EIN online. There is no fee.
Step 5: Register with the Kentucky Department of Revenue
To register for state taxes, you must complete the Kentucky Tax Registration Application.
This form lets you get a state ID number for paying various local business taxes.
For example, if the LLC sells goods or has employees, it must register with the state for employer withholding tax, sales tax, and use tax.
You can send the form by mail or submit it via One-Stop Business Portal. No fee is due.
If the LLC has employees, it will have to pay state employment taxes. The above form also registers you for that.
Depending on the type of business your LLC operates, you may be subject to additional taxes. The Kentucky Department of Revenue website contains a summary of state taxes and forms.
Step 6: Prepare an LLC operating agreement
Like the by-laws of a corporation, the operating agreement governs the relations among the members as members and between the members and the LLC. Typical, although not always, it is in writing and signed and dated upon formation of the LLC.
This document governs the rights and duties of LLC members, manager(s) around the business activities done by your company. Kentucky laws apply when the operating agreement doesn’t address a particular issue.
The operating agreement may be written, oral, or implied.
Further, it is not required to be filed with the Kentucky Secretary of State. When in writing, a copy of the operating agreement should be given to all members of the LLC and kept with the LLC books and records.
Although not required by Kentucky law, whether your LLC has one member or multiple members, a written operating agreement specifically addressing the operations of the LLC and the rights and obligations of the members is strongly recommended.
A written operating agreement may provide greater liability protection for the LLC and its members than the Kentucky LLC statutes. Further, it allows new investors to see how the LLC will be managed. Also, a written operating agreement helps prevent conflicts between members.
A properly drafted operating agreement will include the incorporation of, at a minimum, the following member issues:
- Member identity
- Member interests
- Member capital contributions
- Allocation of profit and loss among the members’
- Amount and timing of member distributions
- Management responsibilities
- Voting rights
- Procedures for changing the LLC ownership structure
- Financial reporting responsibilities
- LLC dissolution procedures
The cost of drafting an operating agreement can range from $0 (if you draft your own agreement) to thousands of dollars for a complicated multi-member LLC.
Several websites offer operating agreement templates. The fees start at $49.
Step 7: Open a Kentucky business bank account
Opening a business bank account is another key step of business formation.
If your LLC operates in several states, you may want to use a national bank such as Bank of America or Chase. If your business will be confined to Kentucky and you live in the state, opt for a more affordable local bank.
Local banks usually offer more personal services and lower fees than national banks. Citizens National Bank, Farmers National Bank, United Citizens Bank, Taylor County Bank, and First State Bank have excellent reputations in Kentucky.
To open a business account, you will usually need to provide:
- A certified copy of your Articles of Organization
- A company resolution authorizing the opening of a bank account
- Your EIN from the IRS.
If you are a single-member LLC and report your income on your Federal 1040, you aren’t legally required to obtain an EIN. However, the bank may require it anyway.
Fees will vary depending on the amount of activity in your account and the deposit cash. Overall, plan to pay $0 to $35 monthly.
Kentucky LLC taxes, costs, and fees
To maintain an LLC in Kentucky, you must file an annual report with the state. The annual renewal fee is $15.
When it comes to LLC taxes, you’ll have to factor in both federal and state taxes.
For federal tax purposes, LLCs are viewed as a “disregarded entity.”
Meaning that no corporate income taxes are due on business profits. Instead, company profits and losses pass through to LLC members and are reported on personal income tax returns.
In this case, you’ll have to pay applicable federal income taxes based on your tax brackets. Also, as a Kentucky resident, you’ll have to pay a 5% personal state income tax.
All Kentucky LLCs are also subject to the minimal annual franchise tax.
An LLC with gross receipts less than $3 million pays a minimum Limited Liability Entity Tax (“LLET”) of $175.
The minimum tax for LLCs with gross receipts greater than $3 million is based on a percentage of revenue.
As for other state taxes, you may also be subject to:
- Sales & Use tax of 6%
- Employer taxes
Your initial and annual costs will vary according to the type of business you operate and the revenue you generate.
The Secretary of State website contains a comprehensive list of fees associated with filing documents.
Kentucky business permits and licenses
On a state level, there isn’t a general business license. But if you operate in a regulated industry, you may need to apply for a professional license.
In some cases, more than one license may be required. The Kentucky One Stop portal provides a search function to help businesses determine which licenses or permits may be required.
For example, to practice as a Certified Public Accountant, a license from the Board of Accountancy is required. The fee is $100 for a two-year renewal. Also, a license is required to practice as an architect. The fee is $125 for a one-year renewal. A registered occupational therapist must pay an application fee of $50.
Occupational licenses may also be required at the local and state levels.
For example, the city of Owensboro requires all businesses to obtain an occupational license. The fee is $75. The same is true in Hopkinsville. The initial fee is $100 and increases to a minimum of $250. Bowling Green and Covington have similar requirements.
So be sure to research all the requirements for your area.
Pros and cons of forming an LLC in Kentucky
Operating an LLC in the bluegrass state has many positives, such as low formation costs and a favorable business climate. However, there are some cons too.
Here’s a quick summary.
Kentucky LLC pros
- Relatively low company formation and maintenance costs
- Pro-business government
- State-sponsored programs for startups
- Diverse economy
- Business investment tax incentives
Kentucky LLC cons
- LLC annual report requirement
- Kentucky does not allow series LLCs
- Minimal annual franchise tax of $175
- Kentucky is a low-tax state with business-friendly laws and a low cost of living.
- Forming an LLC in Kentucky is similar to other states and is relatively easy.
- The fee for filing an LLC Articles of Organization is $40, and the annual report fee for an LLC is $15.
- You can complete company formation online using Kentucky One Stop Business Portal.
- Kentucky does not have a state-wide general business license, but some cities impose local licensing requirements.
- The LLC may be required to collect and remit sale, use, and employment taxes to the Kentucky Department of Revenue.
Kentucky LLC FAQs
Below are some of the most frequently asked questions (FAQs) about forming an LLC in Kentucky.
This material is provided for informational purposes only. The provision of this material does not create an attorney-client relationship between Paul Donovan and/or Donovan Legal PLLC and the reader, and does not constitute legal advice. Legal advice must be tailored to the specific circumstances of each case, and the contents of this article are not a substitute for legal counsel. Do not take action in reliance on the contents of this material without seeking the advice of counsel.