Did you know that 99.3% of Kentucky’s economy stems from small businesses? Across retail stores to construction companies, nearly every Kentucky business started small, with fewer than 500 employees.
What you’ll learn
What you’ll learn
Key takeaways for Kentucky entrepreneurs
- Start by selecting a business structure that suits your risk and tax profile. Common options include sole proprietorship, limited liability company (LLC), or corporation.
- Register your business with the Kentucky Secretary of State, then request an employer identification number (EIN) from the IRS. The EIN acts as an identifier for your company.
- Create a Kentucky state tax account with the Department of Revenue. You’ll need an account to manage income, sales, and payroll taxes.
If you’re looking to join the ranks of Kentucky small business owners, this guide is for you. We cover choosing a business structure, how to register with federal and state governments, and putting accounting processes in place.
Choose a business structure for your goals
The business entity you choose has long-term personal liability and tax implications. It can also affect your start-up timeline and costs, as some business types require upfront registration and annual fees. Let’s take a look at the most common structures.
Sole proprietorship
- One of the most common structures is the sole proprietorship. Under this entity type, you retain sole control over the business, but you’re also personally responsible for its debts and liabilities. All business income and assets are taxed on your personal federal and state tax returns.
- Sole proprietorships are easy to start since they don’t require formal registration in Kentucky. However, if you operate under a trade name other than your legal name, you will need to file a Certificate of Assumed Name with your local county clerk.
Limited liability company (LLC)
- Another option is the limited liability company structure, or LLC. It gives you (and any other owners) full control of the business, but you also benefit from personal liability protection over organizational debts. So, if someone decides to sue your business, a single-member LLC can shield your home, car, and other personal assets from legal judgment.
- As with a sole proprietorship, LLC income and assets roll into your personal tax return, so you don’t have to worry about a separate business filing. However, Kentucky does require formal registration for LLCs.
Corporation
- If you hope to raise capital for your business, you may want to consider a corporate structure. It allows owners to sell company stock to raise funds.
- Corporations offer the strongest personal liability protection since they’re considered separate legal entities. Keep in mind that extra protection comes with a price. You’ll have to file separate business taxes, which can result in double taxation – since you must pay taxes on business income and dividend distributions (via your personal income tax return).
- Corporations have stricter record-keeping and compliance requirements.
Once you’ve decided on the appropriate entity type, it’s time to register your business.
Register your entity and obtain a federal tax ID
The Kentucky Secretary of State oversees business activities. It reviews all new business registration applications and decides whether to approve them.
- To register a business in Kentucky, you’ll submit Articles of Organization to the Secretary of State and pay a $40 fee.
- The easiest way to do this is through the online Fast Track Business Registration Portal. You’ll input details about your business, including its name, owners, and registered agent information. You can use the standard Articles of Organization provided by Kentucky or upload your own version. Alternatively, you can complete the paper version of the forms required for your business structure and submit them by mail.
- Once your registration is approved, request an EIN from the IRS. The EIN is an identification number used by federal and state agencies to track tax returns and communications. You can request an EIN online through the IRS at no cost. You’ll need it before you can set up a state business tax account.
Next, let’s find out more about some requirements you’ll likely need to pay attention to, depending on where you’re opening the doors.
Register for state and local taxes and permits
Kentucky provides a straightforward online state tax registration system. It’s available through the Kentucky Department of Revenue Taxpayer Portal.
- To create a state tax account, visit the website and complete the user registration.
- Prefer to register offline? You can download a paper application and submit it through the mail. Your state tax registration helps facilitate business-related payments for sales and use tax, employer tax, and other relevant taxes.
Keep an eye on occupational tax
Most cities and counties require businesses to obtain a local Kentucky occupational license or pay a special occupational tax. It’s a good idea to visit your local city or county government to find out which licenses may apply to your new business. If you plan to make sales in other Kentucky cities or counties, check with the local government to learn whether you’ll need an additional license.
What is the Kentucky Limited Liability Entity Tax (LLET)?
If you’re looking to start a business that will be protected by limited liability laws, you need to be well aware of Kentucky’s limited liability entity tax. It pertains to the following types of entities:
- Corporations
- Limited Liability Companies (LLCs)
- S Corporations
- Limited Partnerships
Who doesn’t have to pay?
“Sole proprietorships and general partnerships aren’t required to pay LLET since they don’t have limited liability protection. Also, if your business has total gross receipts or total gross profit of $3 million or less from all activities, you only have to pay a minimum LLET of $175. In the next section you’ll see how the math works.”
— Tom Brock, CFA, CPA, OnPay contributor
How to calculate LLET in three steps
Determining the numbers entails establishing the breakdown between your business’ Kentucky gross receipts/profit and total gross receipts/profit.
Step 1: Calculate your Kentucky gross receipts and profit.
First, figure out your total gross receipts earned strictly in Kentucky (after returns and allowances). Depending on your industry (i.e., manufacturing, wholesaling, or retail), you can then subtract your Kentucky-specific cost of goods sold to find your Kentucky gross profit.
Good to know
Kentucky’s definition of cost of goods sold is different from the IRS’s, so it’s a good idea to consult with a CPA.
Step 2: Determine your total gross receipts and profit.
Next, calculate your total gross receipts and profit from all business activities regardless of location. As outlined below, these numbers determine whether you qualify for an exemption.
- $3 million or less: You pay the $175 minimum LLET.
- Between $3 million and $6 million: Tax is calculated on a sliding scale.
- Over $6 million: You pay the standard LLET rate.
Step 3: Apply the tax rate.
Now, if total gross receipts or profit exceeds the $6 million threshold, the LLET liability is figured as follows:
- Kentucky gross receipts multiplied by 0.095%
- Kentucky gross profit multiplied by 0.75%
That said, you’ll only need to pay the smaller of these two calculated amounts. Furthermore, if your business also owes Kentucky corporate income tax, you can reduce your income tax liability by the amount of your LLET (minus the $175 minimum).
Now that we’ve covered this important tax calculation, let’s take a look at the importance of establishing a business bank account and an accounting system to optimize your administrative framework.
Organize your business finances and accounting systems
It’s best practice to open a separate bank account for your business. Doing so helps prevent the commingling of business and personal funds, which can chip away at the personal liability protections of an LLC or corporation. It streamlines the monitoring of business-related income and expenses, since all transactions are handled through a single bank account.
It’s also useful to set up a basic accounting system.
- Spreadsheets work if you have a handful of monthly transactions, but upgrading to a small business accounting platform prepares you to scale.
- With a platform, you can easily track revenue, expenses, and payroll, which comes in handy at tax time.
Many small businesses hire contractors in their start-up phase to provide short-term support for a variety of tasks, including marketing, systems maintenance, and other administrative functions. Be sure to follow IRS requirements when hiring a contractor, including filing annual 1099-NEC forms for payments over $2,000. Your contractor handles paying their own self-employment and income taxes.
Integrating an accounting platform with payroll management software is usually the most effective way to set your business up for success. Doing so can help you address financial challenges and maintain compliance with the myriad of federal and state reporting and taxation requirements you’re bound to face.
Built for small businesses
“As a small business owner, I highly recommend OnPay! Reliable payroll, well-designed interface, reasonable price, and excellent customer service. And those few times I really need something, the support staff are always happy to help, sometimes even going above and beyond.”
— Michael Blossom, Florodora
Maintain ongoing compliance and annual reporting requirements
Kentucky has fewer compliance requirements than some other states. However, you’ll still need to stay abreast of your responsibilities to avoid potential legal repercussions and fines. Typical tasks are as follows:
- Filing an annual report with the Secretary of State. The annual report applies to registered businesses, including LLCs and corporations.
- Filing and paying federal taxes. Personal returns are usually due on April 15, but business owners should make quarterly estimated tax payments to avoid penalties.
- Filing and paying state taxes. Businesses make quarterly income tax payments and remit monthly sales taxes to the Kentucky Department of Revenue. You may owe other taxes depending on the products or services you sell.
Taking the next step for your Kentucky small business
Making your mark as an entrepreneur in KY requires perseverance and organization. From picking an entity type to handling state tax registrations, getting these foundational pieces in place sets you up for success. As your business scales and you start hiring contractors or employees, OnPay’s software makes payroll simple. Onboard your team, run payroll in minutes, and confidently maintain your Kentucky compliance. Get started with OnPay today.
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.