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How to Start an LLC in Kentucky
Doing a business venture is never easy. But choosing a safe form of business structure, like LLCs, can reduce the risk of financial loss to a great extent. LLCs offer various attractive benefits for small as well as high-risk businesses.
Kentucky entails easy and minimum LLC laws and requirements to help businesses prosper faster. Moreover, Kentucky costs $0 to form an LLC. This means that Kentucky is an inexpensive place to set up an LLC with minimum fuss.
Let’s dive deeper and learn more about Kentucky LLC, its advantages, requirements, formation process, costs, and everything you should know to start it.
Definition
What is an LLC?
A limited Liability Company, abbreviated as LLC, is a form of a business entity characterized by asset protection and pass-through taxation. The owners of an LLC enjoy the combined features of a sole proprietorship, partnership, and corporation. LLC is popular for its limited liability coverage, due to which the owners get an opportunity to invest and conduct business without fearing a loss of personal assets.
Kentucky is home to many LLCs since it provides all the facilities and resources needed to sustain this business structure. The state charges $0 for LLC formation. You need to pay small fees for additional requirements, like name reservation, submission of the Articles of Organization, etc. Moreover, the maintenance of LLCs is also a low-cost process.
Starting an LLC in Kentucky proposes several benefits at the cost of simple law compliance. Apart from rules, the requirements are also less complicated than those outlined by other US states. The owners can choose to pay the taxes in the method they are comfortable with.
Usually, single-member LLCs are treated as sole proprietorships for taxation, while multi-member LLCs as partnerships. However, the options of S corporation and C corporation taxation are always open to choose. You will get many more advantages upon establishing an LLC in Kentucky, which we will discuss below in detail.
Advantages
Advantages of an LLC in Kentucky
LLCs attract business owners quickly due to the benefits it offers, such as:
Flexible tax filing methods
In LLCs, the state imposes no corporate taxes at the company level. Instead, the owners pay taxes on their individual share of profits. If an LLC has only one owner, it will pay a tax in a way similar to a sole proprietorship. Multi-member LLCs are taxed as partnerships. In both ways, pass-through taxation allows LLCs to grow faster by avoiding company taxes.
However, pass-through taxation can be converted to double taxation at any point by the will of LLC owners. If the owners find double taxation more favorable for their business goals, they can file a form for the corporation tax method. After that, the state will tax their LLC twice. The business entities and individual owners will pay taxes separately.
Converting the tax method to a corporation will not change the integrity of an LLC. The form of business remains unchanged, no matter which type of tax treatment you select.
Protection of personal assets
An LLC allows you to separate business and personal assets to ensure the latter’s protection. This means that no financial loss or legal issue will be able to use or harm assets personally owned by LLC members. However, business assets, such as office equipment, business bank accounts, and cash, may be directly affected by business risks.
For example, if a business faces a lawsuit or incurs an operational or reputational loss, the state authorities and LLC members are not allowed to use personal assets to overcome the issue or compensate for the loss.
Only business assets will be usable in the event of an operational loss, litigation, and debt. This liability protection ensures that all your assets, such as real estate property, vehicles, stocks, and non-business accounts, are always safe, no matter what.
Unlimited membership
A Kentucky LLC can have as many members as you want. If you are the only member, you can form a single-member LLC in which you alone will act as an owner. The members can also be added after the formation of an LLC.
The rules, requirements, and privileges are the same for single- and multi-member LLCs. The difference lies in the tax filing method. Single members and multiple members pay taxes as sole proprietors and partners, respectively.
Quick low-cost process
Kentucky features a super convenient process for creating an LLC. The process comprises a few steps that include preparing and filing necessary documents. Kentucky receives most of the documents via both online and mail services. So you can file the documents at your convenience.
The LLC formation is very cheap in Kentucky. The state and EIN fees are $0. The expenses come in with additional formalities, such as filing the Articles of Organization and name reservation. Nonetheless, the overall costs are nominal compared to other big states of the US.
Management structure options
Like LLC formation, managing the LLCs is also easy due to the flexible management structure. Whether it is a single-member or multi-member LLC, there are two choices for the manager. Either a member can fill the position, or you can hire a professional for this job.
Hiring a manager will keep you satisfied that the business operations are always in full swing. However, you can also serve as the manager to save on salary expenses.
Disadvantages
Disadvantages of an LLC in Kentucky
If you’re new to starting a business and considering setting up an LLC in Kentucky, it’s important to be aware of some potential disadvantages that come along with this decision. While LLCs offer several benefits, such as limited liability protection and flexible management structures, there are also some drawbacks to consider:
Inconvenient ownership transference
An LLC is not much simpler in terms of ownership transference. For example, in a corporation, the members have to look for an interested individual and transfer the stocks, powers, and privileges to that person. But LLC requires you to carry out members’ voting when deciding to add and remove members.
Continuation of an LLC after the death of an owner
When an LLC owner dies, the rest of the owners have no other choice but to terminate the company unless their operating agreement proposes a solution for this problem. Generally, LLCs have no specific rules about how to continue after the death of a member.
Less anonymity
When you register an LLC in Kentucky, certain information about your business, such as the names and addresses of the members or managers, will be publicly available. If maintaining privacy is a concern, this may be a disadvantage.
Limited liability protection
While an LLC provides limited liability protection for its members, this protection is not absolute. In some cases, members may still be held personally liable for business debts or legal issues, especially if they are found to have engaged in fraudulent or illegal activities.
LLC Formation
How to Form an LLC in Kentucky
Creating an LLC is advantageous in many ways. It keeps payable taxes fairly low to promote business growth. Interestingly, it is extremely simple to set up, especially in Kentucky. The entire formation process completes in a few steps.
If you are going to form a domestic LLC in Kentucky, you have come to the right place. Here are the detailed steps with all the requirements you need to follow for a Kentucky-based LLC.
- Decide on a suitable LLC name
- Hire an eligible Registered Agent
- Submit the Articles of Organization
- Apply for an EIN
- Create an LLC Operating Agreement
Decide on a suitable LLC name
Before finally filing the formation application, there are many tasks, such as naming your company. The LLC must have a good name that is not only unique but also appropriate for your business niche. Repeated names are not acceptable.
Also, keep the Kentucky business naming rules in mind when deciding on a name. The state has certain rules for naming an LLC that you must abide by to get your application accepted.
According to naming rules, including a designator in the name is a must. Use a Limited Liability Company, Limited Company, or a suitable designator. The abbreviations of these words are also allowed.
The naming rules restrict the use of certain institute-specific words, such as banking, financing, attorney, college, etc. However, you can obtain permission to use them from the Kentucky Secretary of State by filing a form and paying the required fees.
Also, avoid adding words that imply that your firm is associated with a political, federal, or state department in any way. Several business name generators are widely available online to help you search for attractive and unique name ideas. After selecting a name, check if it’s available on the Secretary of State’s website.
Amid all this, ensure that the trademark is also unique by searching it on the official website of the US Patent and Trademark and the Trademark and Service Marks page of the Secretary of State. Using an existing trademark in your name can result in the application rejection or a name infringement notice.
Once you finalize the LLC name, secure it for 120 days for $15. Kentucky features a name reservation system for those who want to reserve the desired name until they sort out other priority tasks. If you need additional time, you can extend the reservation for another 120 days for an additional $15. You can fill out the Reservation or Renewal of Reserved Name form with the Kentucky Secretary of State.
Hire an eligible Registered Agent
Once your LLC is formed, you will need a registered agent to receive legal notices, notifications, and official documents and manage legal matters. Now is the time to appoint a dedicated person for this job so the business functions smoothly from the beginning. You can hire a professional or contact a registered agent service company.
Kentucky LLC formation guideline has some rules regarding the appointment of a registered agent. Any Kentucky resident with a genuine business street address can be appointed a registered agent. It is mandatory to present an acceptable form signed by the registered agent along with the formation application. The form is evidence that the person is willing to perform the duties of a registered agent for your LLC. The Secretary of State is likely to reject your LLC application if submitted without the registered agent acceptance form.
Hiring professional registered agent services is also a wise idea. The availability of the registered agent during office hours is essential to ensure uninterrupted business operations. Therefore, registered agent company services are more reliable as they have an office address and are always available when needed. The dedicated agents are always there to receive legal documents and notifications.
Mention the hired registered agent service company in the LLC form with their correct contact information. According to Kentucky LLC rules, the state will reject your LLC formation request if you choose an unauthorized company. So, confirm the authorization status of the company before hiring them.
An LLC member can also act as a registered agent. If you can cope well with the role of a registered agent while also working as an owner, go ahead. Although the state has no issues with an owner being a registered agent simultaneously, our advice is to leave this job for a non-member person.
Submit the Articles of Organization
Now comes the most critical step in an LLC formation. This step requires filing the Articles of Organization with the Kentucky Secretary of State. The document, referred to as the Articles of Organization, informs the state of the important details of your LLC plans, size, and members.
It contains information like the name and duration of the LLC, the registered agent’s address, members’ and managers’ contact information, etc. Whether you apply for a profit LLC, non-profit LLC, or professional LLC, filing the form costs $40 only.
Foreign members must file a different form, named the Certificate of Authority, with the Kentucky Secretary of State. Their form filing fee is $90.
After the submission, the department processes your application within 5 to 6 working days. When it is approved, you get official ownership of your Kentucky LLC. If you want to correct or change information in the Articles of Organization, file an amendment form for additional costs.
Apply for an EIN
An EIN is the Employer Identification Number that holds a similar value to a Social Security Number. It enables the state to identify your business for state and federal taxation. It is obtained from Internal Revenue Service (IRS) free of cost. File the EIN application online or by mail.
EIN is necessary to open bank accounts, appoint employees, and pay taxes. Many special business licenses also require an EIN. Therefore, you should apply for your business EIN soon after LLC formation to begin business activities as soon as possible. The sole proprietors must also get a new EIN when creating an LLC.
Create an LLC Operating Agreement
This last step is highly recommended but not mandatory. Sometimes, the LLC members face conflicts due to business issues, differences of opinion, and misunderstandings. It happens because many crucial business aspects, like member roles and profit distribution, are left unaddressed when forming a multi-member LLC.
This is where an operating agreement comes into play. This document clearly defines every matter that may cause potential disputes among the owners in the future. Some of the primary contents include the duration of an LLC (if created for a particular time span), roles of owners, the share of profit and loss, the dissolution process, ownership powers, member addition/removal rules, and so on.
An operating agreement in Kentucky informs all LLC members of their boundaries, rights, and responsibilities to minimize the risk of confusion and an unpleasant work environment. This document also helps save single members from misunderstandings and provides them with a road map to follow in the events of confusion. Also, it enables new members to acknowledge the terms and conditions of your LLC.
Types of LLC
Which type of LLC is available to me?
If you’re new to starting a business and considering forming an LLC in Kentucky, it’s important to understand the different types of LLCs available to you. Here’s a brief explanation of the most common LLC structures:
- Single-member LLC: This type of LLC is owned and operated by a single person. It provides additional tax benefits and liability shielding compared to a sole proprietorship.
- Multimember LLC: These are standard LLCs with more than one member. They can be further categorized as either manager-managed or member-managed entities. In a manager-managed LLC, one or more managers handle day-to-day operations, while in a member-managed LLC, all owners participate in running the business.
- L3C: Also known as “low-profit liability companies,” L3Cs serve as a bridge between nonprofit LLCs and for-profit LLCs. The primary focus of L3Cs is the business cause rather than earnings.
- Series LLC: Series LLCs are tiered business structures where the topmost LLC owns a series of lower-tiered LLCs. Each LLC in the series operates independently, with separated assets.
- PLLC: This is a specialized LLC formation type available only to certain licensed professionals, such as doctors, lawyers, architects, or accountants. It allows professionals to follow their industry’s rules and licensing requirements while enjoying the benefits of an LLC.
- Restricted LLC: Restricted LLCs are not taxed during the first 10 years of formation and cannot make distributions to members. The restriction on taxation and distributions must be stated in the articles of organization.
It’s important to check the latest information from the Kentucky Secretary of State’s website and consult with a legal or business professional to determine the right structure for your needs.
LLC Taxes
Applicable LLC taxes in Kentucky
Owning an LLC in Kentucky will make you incur the following taxes.
LLET
Kentucky imposes an LLET (Limited Liability Entity Tax) on LLCs. The LLET features two taxation principles based on the annual earnings of a business. If the annual earnings of an LLC fall below $3 million, the owners will have to pay $175 at least. Businesses that earn more than $3 million must calculate taxes according to gross receipts or gross profits.
For example, the owners will be taxed $0.095 per $100 gross receipts. Similarly, if you consider gross profits, calculate $0.75 per $100 of gross profits. The resulting figure will be your payable tax amount.
Sales and Use Tax
Companies selling goods and services as retail businesses pay a tax of 6% on their income. This tax is called the Sales and Use Tax.
Costs
Cost of forming an LLC in Kentucky
The state charges $0 for LLC formation. However, fees payable for filing different forms and formalities make up an overall LLC expense.
LLC Costs
Articles of Organization filing fee
$40
Name reservation (optional)
$15
Registered Agent fees (annual, up to)
$300
Kentucky Annual Report (annual)
$15
Business permits and licenses
Varies
Employer Identification Number (EIN)
$0
Operating Agreement (optional, up to)
$200
Comparisons
Is LLC The Best Entity For Me?
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LLC vs Corporation (C-Corp)
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LLC vs S-Corp
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