Start a Business in Kentucky
Starting a business in Kentucky is a great idea. Though the state has a smaller workforce than other states, it also has a lower-than-average tax rate and low business formation fees. All you have to do to start a business in Kentucky is sell something, and you're automatically a sole proprietor.
But if you want to make money, protect your assets, and stay aboveboard legally, you'll need to do more. Here's our guide to doing business in Kentucky.
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1. Pick a Business Structure
The first step is to choose a business structure. Sole proprietorships are the easiest to form since they don’t need to file paperwork with the Kentucky Secretary of State as long as they are offering products and services under their name. Once you start operating as a sole proprietor under another name, you need to file a Certificate of Assumed Name.
General partnerships are similar to sole proprietors but involve two or more people. For sole proprietors and general partnerships, there is no legal separation between the owner and the business. So if your business gets sued, you personally are getting sued. If your business goes into debt, that’s your personal debt. If you want to protect your personal assets, you need to create a legally separate business entity, like an LLC or corporation.
Kentucky Limited Liability Company (LLC)
A Kentucky limited liability company (LLC) is a business entity that provides you with liability protection and multiple tax options. When it comes to ownership, LLCs can be owned by one or more members. You can be taxed as a pass-through entity or elect to have your LLC treated as a corporation. Starting a Kentucky LLC requires filing Articles of Organization with Kentucky’s Division of Business Filings.
Kentucky Corporation
Kentucky corporations are complex business structures with stricter record-keeping rules and a more rigid management structure than LLCs, which makes them more attractive to investors. Corporations are managed and run by directors and officers. Unlike LLCs, corporations do not have pass-through taxation and instead are taxed as C-corps by default. To form a Kentucky corporation, you’ll need to file Articles of Incorporation with the Kentucky Division of Business Filings.
Can an LLC be just one person?
Of course! A one-person LLC is called a single-member LLC, sometimes referred to as an SMLLC. Single-member LLCs are one of the most common kinds of businesses in the country. For the most part, single-member LLCs are very similar to multi-member LLCs; however, there are a few notable differences. For example, SMLLCs are taxed as sole proprietorships, and multi-member LLCs are taxed as partnerships.
Read all about Single-Member LLCs.
What about a Kentucky nonprofit?
Thinking about starting a nonprofit in Kentucky? Nonprofits in Kentucky are formed for a greater good. Like for-profit corporations, nonprofits are managed by directors, but nonprofits have different tax requirements. For example, nonprofits can file for tax-exempt status. To start a Kentucky nonprofit corporation, you’ll have to file Articles of Incorporation, Non-profit Corporation with the Kentucky Division of Business Filings.
Want to learn more? Check out our Nonprofit Guide.
2. Name Your Business
Naming a business isn’t always straightforward. So, we’ll break down Kentucky’s naming requirements. If you’re a sole proprietor, your business name is your name, unless you register a DBA. LLCs and corporations must adhere to state law.
Basically, your business name must:
- Use an appropriate identifier or abbreviation like “Incorporation,” “Company,” or “Inc.”for corporations or “limited liability company,” “limited company,” “LLC,” “LC,” or “L.L.C.,” for LLCs.
- Not use words that describe government agencies, like “police” or “department of state.”
- Not use words that suggest a false business purpose, like “charity” or “nonprofit” (unless your business is a nonprofit).
- Not use words that describe a service that requires a professional license, like “architect” or “doctor.”
- Be unique in the state of Kentucky.
Find out if your desired name is available in Kentucky by searching the Kentucky Business Name Availability Database.
Can I reserve a business name in Kentucky?
Yes! To reserve a business name in Kentucky, file an Application for Reservation or Renewal of Reserved Name ($15).
What is a Kentucky DBA?
DBA stands for “doing business as.” In Kentucky, DBAs are referred to as assumed names. A DBA allows your business to have more than one name: a legal business name and one or more other names you can use to do business. To get a DBA in Kentucky, you’ll file a Certificate of Assumed Name ($20) with the Kentucky Division of Business Filings.
Learn how to get a DBA in Kentucky.
What about trademarked names?
It’s a good idea to check with the US Patent and Trademark Office (USPTO) to make sure your business name hasn’t been trademarked by someone else. If it has, and you use it anyway, there’s a chance that you could be sued for infringement.
3. File Formation Paperwork
Sole proprietors and general partners don’t need to file formation paperwork in Kentucky. LLCs and corporations are required to file paperwork with the Kentucky Secretary of State Division of Business Filings.
- To form a Kentucky LLC, file Kentucky Articles of Organization ($40)
- To start a Kentucky corporation, file Kentucky Profit Corporation ($50)
Note: The information you list on those forms will become part of the public record. This means that the names and addresses you provide will be posted online on the Kentucky Secretary of State site.
How can I keep my information off the public record?
The best way to keep your information off the public record is with a registered agent. If you hire Northwest, you can list our address on your filings instead of yours wherever applicable.
What is a registered agent?
A Kentucky registered agent is the person or entity who is responsible for receiving state and legal mail on behalf of your business. By law, your registered agent is required to have a physical address in Kentucky where they’re present during business hours to accept service of process.
4. Draft Internal Records
Now that you’ve formed your business, it’s time to draft your internal records and documents. These are the documents that allow you to outline how your business will operate and function. Your Kentucky internal records give you control over your business in a way that’s legally binding.
Though these documents are internal, you’ll likely need to show them to third parties like the bank or—if you start a nonprofit—the IRS. Because you’ll most likely have to share these documents with third parties, you may want to have an attorney review them to make sure you are within Kentucky state law.
Here are the major internal documents you need to organize for LLCs and corporations:
Kentucky LLC Operating Agreement
This is your LLC’s rule book. It defines how your LLC will do things like make decisions, distribute money, manage operations, and appoint members. Your operating agreement plans for every big picture scenario your LLC is likely (or unlikely) to face, including dissolution.
Drafting an operating agreement is hard, and the internet is full of shabby templates that have been copy and pasted from who knows where. So we had our attorneys draft a Kentucky LLC Operating Agreement template that you can use as a solid foundation.
Kentucky Corporate Bylaws
Bylaws are the rules your corporation will adopt and follow internally. Bylaws detail how your corporation will appoint directors and officers, hold shareholder and board meetings, and handle emergencies, among other things. Kentucky requires all corporations to draft corporate bylaws (KY Code § 271B.2-060).
As with operating agreements, you can find plenty of bylaw templates online. But bylaws are serious, so you don’t want to just use the first template you come across. Our attorneys drafted a free Kentucky Corporate Bylaws template you can use to get started.
Starting a nonprofit? Learn about Kentucky nonprofit bylaws.
5. Get Kentucky Business Licenses
While filing formation documents gets the process of forming a business in Kentucky started, your business registration doesn’t end there. Depending on your industry and the services you plan on providing, you may need a business license to legally operate in Kentucky. Here are the most common licenses you may need:
Kentucky State Business License
Kentucky does not have a state-wide licensing requirement for business owners. Still, some businesses, like those in the environmental sector or construction industry, will need to have special licenses or permits in order to legally operate. If you plan on opening a business location, you will also need to check local zoning requirements and building codes to get the required approvals before opening your business or breaking ground.
Professional Business Licenses
Professional services are ones that require specialized training or education to perform safely. Think careers in art therapy, commercial driving, fire alarm inspection, or construction, just to name a few. To get a professional license, you have to apply with the board that regulates your industry in Kentucky. For instance, insurance agents get licensed by the Kentucky Department of Insurance, while car dealers are overseen by the Kentucky Motor Vehicle Commission. Each board has its own licensing process.
Learn more about How to Get a Business License.
Local Business Licenses
In Kentucky, local cities and counties are able to impose a Business License Tax on businesses. You’ll need to contact your local county government where your principal business location is based to see if you need a local business license. You’re also going to need to obtain a Commonwealth Business Identifier, a unique number used by the Secretary of State to identify your business.
The Kentucky Secretary of State also recommends business owners check the local county requirements in locations where you plan on transacting business and not just where you plan on having your business location.
For example, if you operate a bakery in Paducah, but you have a smaller office location in Owensboro, you’ll need to obtain a Business License from Owensboro and one for Paducah, along with adhering to any other local licensing requirements for both cities.
How do I get a local Kentucky Business License?
To get your local Kentucky Business License, you’ll need to check your local city or county’s requirements to see if they require businesses to have one. If your business is located in a city that requires a Business License, then you’ll need to contact the local city hall, file forms, and pay fees. In Paducah, for example, you’ll file an Annual License Tax Application with the City of Paducah and pay the applicable fees.
How do I get a Kentucky Commonwealth Business Identifier?
To get a Kentucky Commonwealth Business Identifier, you’ll need to register online with the Kentucky Department of Revenue through the Kentucky Business OneStop portal.
How do I get a professional license in Kentucky?
The process for getting a professional license in Kentucky varies depending on your profession and the specific service your business provides. Professional licenses are issued by the regulatory board that oversees your industry in Kentucky. For example, barbers are regulated by the Kentucky Board of Barbering and pay an assortment of initial fees, like a fee for having a barber shop ($25), getting a barber school license ($100), and more.
6. Organize Your Money
The liability protection you get from forming an LLC or corporation is only as strong as the separation between you and your business. At a minimum, you’ll need to open a bank account for your business. And if you’re going to hire employees, you’ll need to tackle payroll, too. Below, we get into what you need to know to organize your Kentucky business’s money in a way that works for you.
Open a Business Bank Account
To keep your business spending separate from your personal spending, you’ll need to open a business bank account. If you don’t, a court could find that your business is not actually separate from you, under the Alter Ego Doctrine. Also known as piercing the corporate veil, this is the outcome when a judge finds that a company is not a separate entity but rather an alter ego of the owner. If this ever happens, you could lose your limited liability status.
Opening a business bank account as a sole proprietor is important, too. Though sole proprietors and general partnerships have no limited liability status to protect, both will benefit from organizing their business finances come tax season.
How do you set up a business bank account?
LLCs and corporations will need to provide the bank with their formation documents, operating agreement or corporate bylaws, EIN, and in some cases, a Corporate Resolution to Open a Bank Account or LLC Resolution to Open a Bank Account.
Do I need a business bank account to accept credit card payments?
Probably. Payment processors require you to provide them with a bank account. This is where they’ll deposit funds from transactions. Most of the time, this needs to be a business bank account.
Some payment processors may let you get away with listing a personal bank account, but it’s not a great idea. Mixing your business finances with your personal finances erodes the separation between you and your business, weakening your liability protection. It also turns tax season into a nightmare.
Learn more about Payment Processing.
Set up Payroll
Processing payroll can be complicated and hard to understand. But it doesn’t have to be. Let’s get into some basics of what you’ll need to run payroll in Kentucky:
- get an EIN
- register your business with the Secretary of State
- register for a Withholding Account Number with the Kentucky Department of Revenue
- get your Kentucky employer number from the Kentucky Office of Employment & Training
- determine whether you’re hiring employees or independent contractors
- prepare the forms your employees will fill out
- choose a payroll service or software
- decide on a payroll schedule
You’ll also need a reliable and secure payroll service, system, or software to keep track of employee payments. A good one will withhold payroll taxes, file state and federal returns on your behalf, and pay your employees either by check or direct deposit.
What forms do my employees need to fill out?
Your new employees will need to fill out a W-4 to determine how much you’ll withhold and an I-9 to verify that the employee is eligible to work in the US.
How do I get a Kentucky Employer Account and Withholding Account Number?
You’ll file the Kentucky Tax Registration Application to get both your Kentucky Employer Account Number and Withholding Account Number.
What’s the difference between an independent contractor and an employee?
It’s important to understand the difference between an independent contractor and an employee. That’s because, for employees, you’ll need to withhold and pay income, social security, and Medicare taxes. Independent contractors pay these taxes on their own.
An independent contractor is self-employed and not an insured member of your employee base. Independent contractors are held to a contract for a specific type of work or project, usually with a specified end date or target budget. An employee is hired by your business as a regular full- or part-time employee insured through your business and required to follow your internal documents, handbooks, and operating practices.
You can file Form SS-8 with the IRS and let them decide if you are unsure.
Learn more about hiring independent contractors.
7. Get Business Insurance
Forming an LLC or corporation protects your personal assets. But if anything disastrous befalls your business—like a lawsuit, burglary, flood, or fire—your business is on the hook to pay. Business insurance can help cover the costs. While you aren’t required to purchase most types of business insurance in Kentucky, workers’ compensation insurance is required. Let’s dive into the most common types of business insurance:
Workers’ Compensation Insurance
Workers’ compensation insurance gives benefits to your employees when they suffer work-related injuries or illnesses. In Kentucky, workers’ compensation insurance is required for most employees.
The exceptions to Kentucky’s workers’ compensation insurance laws are agriculture workers, domestic workers employed at home with less than two regular employees, and certain religious organizations. Many insurance companies offer workers’ compensation insurance policies along with other kinds of business insurance.
Liability Insurance
Liability insurance covers the costs of claims against your business for injuries or damage to the property of others, like clients or customers. This includes medical expenses, legal fees, settlements, and judgments. Whether or not you need it depends on whether your business is likely to be sued and how many assets your business needs to protect. If it’s just you and your computer in your basement, you might feel comfortable skipping liability insurance. Or maybe you won’t.
Beyond general liability insurance, you can purchase or add on more specific types, like professional, cyber, commercial, home-based business, or product liability insurance.
Do business owners need workers’ compensation insurance in Kentucky?
No, business owners aren’t required to cover themselves on a workers’ compensation plan. However, you might consider insuring yourself against work-related accidents.
Do I need business insurance for my home-based business?
Probably. You can’t count on your homeowners’ or renters’ insurance policy to cover damages related to your business. Most insurance companies offer a home-based business insurance plan.
8. Understand Your Tax Burden
Who likes paying taxes? No one, especially not business owners. Even so, your business will need to pay federal, state, and local taxes if you want to avoid paying the IRS way more than you owe in penalties. We get into all the details below to help you avoid any mishaps.
Federal Taxes
- LLCs. Single-member LLC? By default, you’re taxed similarly to a sole proprietor. More than one LLC owner? You’re taxed as a general partnership. Either way, your default tax status is “pass-through,” which means you don’t pay corporate taxes. Instead, your LLC’s owners report profits and losses on their personal tax returns. Good news: Kentucky has a low individual income tax rate of 5%, which you’ll pay along with the 15.3% federal self-employment tax rate. An LLC can file paperwork with the IRS to be taxed as an S-Corp or C-Corp instead.
- Corporations. Corporations are taxed as C-Corps by default. This means that corporations pay the 21% federal corporate tax rate and the 5% Kentucky corporate tax rate.
To pay your federal taxes (and take a good deal of the other steps required to start a business), you’ll need to get an Employer Identification Number (EIN). You can apply for an EIN with the IRS or hire us to get one for you.
Local Kentucky Business Taxes
Taxes don’t end at the federal and state level. Kentucky allows local cities and counties to exercise an occupational tax against businesses called a Business License Tax. Owensboro and Paducah are two such places that require businesses to pay a yearly occupational tax based on their gross receipts.
Do I need an EIN if I’m self-employed?
If you’re operating a sole proprietorship or single-member LLC that doesn’t employ anyone else and you don’t need to file excise or pension plan returns, you don’t legally need an EIN.
However, you can still get one—and you probably should. Otherwise, you’ll have to use your own social security number to do business. Plus, you’ll likely need an EIN to open a business bank account.
How do I get an EIN?
To get an EIN, you can either apply online with the IRS or file form SS-4 by mail with the IRS. Getting an EIN is free.
What is an S-Corp?
An S-Corporation is a federal tax election. Registered business entities like LLCs and corporations start out with a default tax status, but can file paperwork with the IRS to be taxed as an S-Corp. Like LLCs, S-Corps are taxed as pass-through entities. Like corporations, S-Corps can make distributions that aren’t subject to the 15.3% self-employment tax.
Learn more about the S-Corp tax election.
What is a C-Corp?
A C-corporation is the default federal tax election assigned to corporations. Most corporations are taxed as C-Corps, but LLCs can also apply for C-Corp tax designation by filing paperwork with the IRS. C-Corps file federal corporate income taxes and state corporate income taxes (in Kentucky, the corporate tax rate is 5%). C-Corps can pay their shareholders in distributions, and the shareholders report those profits on their personal tax returns.
Learn more about the C-Corp tax election.
9. Build Your Business Website
If you want Kentuckians to find your business, they have to be able to find you online. This means you’ll need a website, a business email account, and social media accounts. Don’t worry if you’re not especially tech-savvy—you don’t have to be a web developer or an influencer to establish a robust online presence. You’ll just need the following:
- Domain name. Your domain is the address where your website will live. You’ll want a domain name that is short, unique, local, and—most importantly—available. If your domain is trademarked, you could face legal trouble.
- Domain registrar. Once you’ve decided on a domain name, you’ll want to register it with a domain registrar. Some domains are more expensive than others. Some domain registrars also offer hosting and most will provide you with a business email that includes your domain name (“[email protected]”).
- SSL certificate. An SSL certificate signals to your users that your website is secure. If your website will use forms—like a sign-up form or a “contact us” form—an SSL certificate is critical. But even if you don’t use forms, you’ll still probably want one—it allows an encrypted connection, which means your users’ data is transported securely. There are several types of SSL certificates, and you can often get one through your domain registrar.
- Site design. The easiest option is to use a free website creation tool—there are a number of free options available. Most are easy even for a newcomer to use, with styles and built-in templates. For a more custom design, you can hire a web designer to work on your website, but this would be much more expensive.
10. File a Kentucky Annual Report
All Kentucky business entities must file an annual report each year with the Secretary of State. Your Kentucky annual report is due between January 1st and June 30th of each year. You’ll file online through the state website and pay a $15 fee.
Read more about How to File a Kentucky Annual Report.
What if I don’t file an annual report in Kentucky?
If you don’t file a Kentucky annual report, your business will be placed in bad standing. You are then given 60 days to file your annual report. Once the 60 days are up, the Secretary of State can revoke your authority to do business or administratively dissolve your business.
11. Apply for Trademarks
A trademark is a design, symbol, word, phrase, or any combination thereof that represents a brand’s goods or services exclusively. Only some businesses register trademarks.
You can apply to register your trademark with the state of Kentucky or federally with the U.S. Patent and Trademark Office (USPTO). Registering your trademark in Kentucky is cheaper and easier than registering with the USPTO, but doing so only protects your trademark in Kentucky.
You can only register a trademark once you’ve started using it (so slap it on that website you just made), and not all applications are approved. Trademark law is complex, and the strength of a trademark application (and the trademark itself) depends on many factors.
Our attorneys can review your application, offer advice, and prepare and submit the application for you. Check out our Trademark Service.
How do I register a trademark in Kentucky?
To register a trademark in Kentucky, you’ll need to file a Trademark/Service Mark Application ($10 per class entered) with the Kentucky Secretary of State. Your trademark is then good for five years. You can renew within six months of the expiration date.
Can I register a trademark before I use it?
No. But you can file an application with the USPTO under Intent-to-Use status. This gets your application in line before you’ve actually used the mark, which could be helpful if you’re worried someone else might register your mark before you’ve had a chance to use it.
For your trademark to become official, you’ll eventually need to show proof that you’re using it. An Intent-to-Use application buys you some time to do that.
Learn more about filing an Intent-to-Use Trademark.
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