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The Commonwealth of Kentucky offers a variety of benefits for entrepreneurs looking to start a business—local investment and direct loan programs, tourism development funds, small business funding networks, to name a few. This guide will walk you through the steps to launching your LLC in Kentucky, thereby potentially taking advantage of these exciting state programs.
What is an LLC?
A limited liability company, or LLC, is a common business entity that shields a business owner’s personal assets from liability in the event of a claim against their company. This means the owner of a company won’t be held personally liable for legal and crediting claims against the company, and their personal assets are safe.
The way LLCs are treated when it comes to taxation is also a major advantage of this company structure. The federal government classifies LLCs as “pass-through” entities, much like a sole proprietorship or partnership, meaning any income they generate is taxed only once, at their members’ individual tax rates. Corporations, on the other hand, pay federal taxes on the company’s profits, and again at shareholders’ personal-income levels.
Is an LLC the right business structure for you?
There are a few different types of business structures to choose from for your Kentucky small business. Whether you choose an LLC or another format ultimately will depend on your business goals and needs. An LLC might be right for you if:
- You want to limit your personal liability. LLC members usually won’t be held personally liable for business debts and legal damages incurred against the company.
- You’re looking to limit your tax liabilities. At the federal level, LLCs avoid taxation on business income; profits are only taxed once, at members’ personal-income levels.
- You don’t need to fundraise by issuing shares. Unlike C corporations, LLCs are not able to issue stock or have shareholders. While this limits a business’s ability to raise investment funds, it can simplify its regulatory treatment overall.
1. Name your Kentucky LLC
Selecting a name for your business is a critical decision you’ll need to make when starting your Kentucky LLC. There are two main Kentucky LLC naming guidelines:
- Your name must be unique. Your LLC’s name must be totally unique from any other business in Kentucky. You can check to see if your preferred name is available through the Kentucky Secretary of State’s office.
- Your name must include the entity type. All LLCs in Kentucky must contain the phrase “Limited Liability Company” or “Limited Company,” or one of their abbreviations: LLC, L.L.C., LC, or L.C. The word “Limited” may be abbreviated as “Ltd.,” and the word “Company” may be abbreviated as “Co.”
2. Create a business plan
A solid business plan will help set your Kentucky LLC up for success. A good business plan will include your LLC’s name, along with a brief and clear description of its purpose. The plan should also offer thorough market analysis and a competitor analysis of other similar companies, lay out the business’s organizational structure, describe the products or services you plan to offer, identify one or more target customer profiles, and summarize plans for financing and marketing your company. New to writing business plans? Here’s a free business plan template to work from.
3. Get a federal employer identification number (EIN)
To pay federal and state taxes, your Kentucky LLC must be assigned a federal employer identification number (EIN). You can apply for an EIN, which identifies your business to both state and federal tax authorities, by applying for free through the US Internal Revenue Service (IRS).
4. Choose a Kentucky registered agent
Every LLC in Kentucky must appoint a registered agent to receive legal correspondence and official documents on the business’s behalf. This can be a person (including yourself) or it can be an entity offering registered agent service, as long as they meet the following requirements:
- The individual or professional service must have a physical address in the state of Kentucky (not a PO box).
- The agent or service must be available to accept documents on your company’s behalf during regular business hours (9 a.m. to 5 p.m., Monday to Friday).
5. File your Kentucky Articles of Organization
To establish your LLC in Kentucky, you must file Articles of Organization with the Secretary of State’s office. These articles, if accepted by the Secretary, make your business authorized to operate in the state. You will need to fill out a form with the following information:
- The LLC’s name
- The name and address of your Kentucky registered agent
- The physical street address of your LLC’s main office
- An explanation of whether your LLC will be managed by its members or by a manager hired by the members
- Your signature and the signature of your registered agent
6. Obtain business licenses and permits
Although Kentucky doesn’t have a statewide, general business license, some types of businesses require special licensing (such as businesses that sell liquor or tobacco products). You can check Kentucky’s One Stop licensing portal to see what requirements may apply to your LLC. Additionally, the state’s cities and counties may require your LLC to register for a business license to operate locally.
7. Understand Kentucky state tax requirements
Members of Kentucky LLCs pay self-employment taxes on all business profits, as well as state income tax and federal income tax. LLCs that sell products at retail are also subject to a 6% sales tax. If your LLC employs people, you will have to pay payroll tax on wages paid, and those employees may have to pay other federal and state taxes on those earnings. Additionally, Kentucky imposes a limited liability entity tax (KY LLET) of either 95¢/$100 of gross receipts in Kentucky or 75¢/$100 of gross profits in the state, with a minimum of $175 a year, no matter which calculation method you choose.
8. Prepare a Kentucky LLC operating agreement
An operating agreement is a document that outlines the LLC’s ownership structure, organizational layout, and standard operating procedures. LLCs in Kentucky are not required to file operating agreements with a government agency, but they can be helpful for administrative purposes, company goal-setting, and in the case of any ownership dispute between LLC members. A solid operating agreement includes:
- How ownership interests are distributed between members
- Members’ roles and responsibilities in running the business
- Procedures for when a member wants to pull out of the LLC, or for when the LLC terminates
9. Examine business insurance options in Kentucky
Purchasing insurance for your Kentucky LLC is an important part of managing business risk. It can also conveniently free up your mind to focus on growing the business. Kentucky requires workers’ comp and unemployment insurance for all businesses, and commercial auto insurance for those that operate commercial vehicles. While not required by the state, many businesses may be required to obtain general liability insurance due to clauses in their commercial lease.
- Workers’ compensation insurance. Workers’ comp insurance covers injuries and illnesses employees may incur on the job. LLCs with one or more employees in Kentucky are required to purchase workers’ comp insurance.
- Unemployment insurance. Unemployment insurance is operated by both state and federal governments to provide temporary assistance to people who lost their job through no fault of their own. Kentucky LLCs must set up an account with the Kentucky Office of Unemployment and pay into it on behalf of their employees.
- Commercial auto insurance. If your LLC operates commercial vehicles, such as a semi-truck, delivery truck, or a food truck, state law requires that you purchase commercial auto insurance to cover the vehicle(s) for damage and theft.
- General liability insurance. General liability insurance protects LLCs more broadly from legal costs and some financial losses resulting from damage to the LLC’s property, as well as some injuries in the workplace (for example, if a customer slips and falls on your property). You’re not obligated to buy it under Kentucky state law, but if you want to rent an office or storefront, many commercial leases require you to.
10. Understand financial considerations
Aside from buying insurance, you will likely have to make other investments into your Kentucky LLC. These might include rent towards a lease on a brick-and-mortar storefront or warehouse, paying for a professionally designed web presence, purchasing equipment, or licensing software. In addition to paying employees, you also may wish to hire other professionals to support the business, like lawyers and accountants. Shopify offers resources to help entrepreneurs raise startup funding to defray some of these costs.
11. Market your LLC
Launching your Kentucky LLC is only the beginning of your journey as a business owner. Once the Kentucky LLC formation process is complete, it’s time to market your business, ensuring it stands out. A solid marketing plan for your Kentucky LLC should include:
- Market research. It’s important to understand your target customer(s) before you devise how to best market your LLC, which you can do through market research.
- Advertising. Promote your LLC through paid advertising, which you could handle yourself or by hiring an advertising agency.
- Social media. A strong social media presence can help your company reach an audience that can then become customers. To reach as many people as possible, your Kentucky LLC should have an active profile on a wide array of platforms, including Facebook, Instagram, TikTok, and YouTube. Try to tailor your content to each platform and its different demographics so your message resonates with your different audiences.