How to Form an LLC in Kentucky: The Affordable Way

Inspired by the story of Colonel Harland Sanders and KFC? Do you also have a unique idea for starting your own business in Kentucky? The first step you will need to take is to form a business entity.

A Limited Liability Company, or LLC, is a type of company that combines the benefits of a partnership and a corporation. It provides great tax benefits and, at the same time, affords you operational flexibility.

Kentucky has its own regulations and rules surrounding the formation of an LLC. Missing a step or making a mistake could lead to you having to restart the whole process. This article will guide you step-by-step on all the procedures involved in setting up an LLC in the State.

Name Your Kentucky LLC

Your business’s identity starts to take shape with its name. Even before your products can make an impression on the customer, they will notice the name of your company. So, you must choose a name that is appealing and distinguishable from other companies. Kentucky has certain guidelines that you must follow while naming your LLC.

Naming Guidelines

The name you choose for your LLC has to be ‘distinguishable’ from that of an already existing entity. Words and abbreviations that are used to indicate the nature of an entity, like LLC, Corporation, or Limited Partnership, will not be considered when evaluating names.

It is legally required for you to include either the term Limited Liability Company or any of its abbreviations (“LLC” or “L.L.C.”) in your company’s name to ensure people know your business is an LLC.

The name cannot include any phrase like treasury or police, which gives the impression that it is a state functionary. For example, you cannot name your LLC “Crazy Intense Avocados” and then abbreviate it to “CIA.”

Using certain restricted words like “Bank,” “Attorney,” and “University” will require additional paperwork for the LLC and a licensed professional like an attorney to be a member of the LLC.

Does Your Business Require a DBA?

A Doing Business As Certificate (DBA), or Certificate of Assumed Name in Kentucky, allows your LLC to conduct business in a name other than the one it is registered under. A DBA is opted for by businesses if they want to change their marketing strategy or enter a new industry. eBay and Nike are famous examples of DBA names. But remember, a DBA name alone will not protect your personal assets. To obtain the benefit of limited liability, you will have to get your LLC incorporated.

In Kentucky, you can apply for a Certificate of Assumed Name with the office of the Secretary of State. Once registered, an assumed name is valid for a period of five years. Thereafter, you will need to renew it online or by duly filling out the form and mailing it to the office of the Secretary of State. The filing fee for a renewal is $20. If you desire, you may cancel your certificate of assumed name at any time by submitting a duly filled copy of the Certificate of Withdrawal of Assumed Name. The fee charged is $20.

Doing a Name Search and Name Reservation 

Before finalizing the name of your business, it is advisable for you to ensure that the name you have chosen is available and not already taken up by some other business entity in the State. Kentucky provides you with a database where you can conduct a business name search for your desired name. This simple step can help you avoid facing rejection later on.

If you have chosen your name but would like to wait before forming your LLC, you can provisionally register and reserve the name for 120 days. Your reserved name will not be allowed for registration by another business for that duration. You can do this by submitting your application to the Business Services Division of the office of the Secretary of State.

Registering Your Business Domain

It is always advisable to register your business domain. You can check if your business name is available as a domain and register it. You might not want an online presence now, but it is good to have the option available with the world becoming increasingly digitized. 

Choose a Registered Agent in Kentucky

A registered agent acts as an intermediary between your LLC and the State. A Registered Agent is an individual or another business entity responsible for receiving all official communication on behalf of the LLC.

Being a company owner, you would not want to put your business in trouble by missing legal documents or other important communications addressed to your LLC. If you do not respond promptly to any communications addressed to your company by the authorities, it may cost you dearly.

The laws in Kentucky mandate every LLC to appoint a registered agent before you can commence your business.

Who Can Be a Registered Agent?

The law does not prescribe professional or technical requirements for becoming a registered agent. However, the agent you select for your LLC must be:

• In case of an individual – above 18 years of age and have a physical address in Kentucky
• If case of another entity – has the authorization to transact business Kentucky

A registered agent must be available during normal business hours. You are free to appoint yourself, a friend or family member, a member of your LLC, or any other person that meets Kentucky’s requirements.

Individual v. Registered Agent Service

While you can appoint yourself as the registered agent, having a registered agent service has many advantages. Registered agent services are professionals who bring expertise and experience to your LLC.

They notify you about the deadlines for filing tax returns, annual reports, and other necessary compliance documents. Thus they help to ensure that you are on the right side of the legal compliance requirements.

There might be sensitive documents that you would not want to receive in front of your employees or clients. Having a professional registered agent service helps you handle the situation discreetly. They receive such sensitive documents at their address and deliver them separately.

Generally, registered commercial agents have a presence in other states, making it easier for you to expand your LLC’s business. Also, the registered agent’s address is available for the public to access on the concerned websites. So if you work out of your home or a private office, having a professional registered agent service will help you maintain privacy.

Having a registered agent service also helps you focus on growing your business without being worried about missing any official communications.

File the Articles of Organization

The Articles of Organization is the most important document in your LLC formation process. It is the first official document you submit to Kentucky in order to register your LLC with the State. Once this is completed, your LLC is registered and is recognized in the eyes of the law. 

Articles of Organization require the following details:

• Name of your LLC.
• Your LLC’s street address.
• Name and address of your registered agent/service.
• The mailing address of the LLC.
• Nature of management: manager-managed (employee-managed) or member-managed (managed by you or another member of the LLC).
• The effective dates from when these articles would come into effect.
• Signature of the organizer (the person who files the Articles of Organization with Kentucky is called the organizer) and the registered agent.

Expedited Filing

Kentucky does not offer an option for expedited processing of your application. Online applications are usually processed within 24 hours, while applications submitted via mail take anywhere between 7 to 10 days to get processed.

Publish Notice of Formation

Public notice of formation is not required in the State of Kentucky.

Create an Operating Agreement for your Kentucky LLC

An operating agreement is a document that outlines how your LLC will function. It is important that your LLC be prepared for any internal disagreements. Even though Kentucky laws do not require you to have an operating agreement, it is a good practice to have one in place, as it streamlines your LLC’s operations in the day-to-day as well as in the long run.

Additionally, it offers credibility to your enterprise. You will need an operating agreement for opening an account with the bank. More importantly, it helps protect the LLC’s limited liability status by reinforcing it.

Though there are no prescribed templates, an operating agreement should ideally provide for the following:

• Organization Details 
• Ownership 
• Duties of Members and Managers
• Management and Voting 
• Capital Contributions
• Division of Profit and Losses
• Bookkeeping Procedures
• Procedure for adding new members
• Requirements concerning Meetings and Procedures thereof
• Dissolution

The above list is only illustrative, and you are free to create an operating agreement that you deem fit for your LLC.

Writing the Operating Agreement Yourself v. Hiring a Service

You can draft your LLC’s operating agreement after consulting with the other members of your LLC. Alternatively, you can purchase templates at reasonable rates that you can customize to draft the operating agreement of your LLC.

However, if your LLC needs a complex operating agreement, or you are simply not comfortable with drafting it yourself, you can always avail a professional’s services. Most commercial registered agents also offer services to draft operating agreements.

Limits of Operating Agreement

There is no fixed format for this agreement. But, you cannot include therein any provisions that are prohibited by the laws of Kentucky. For example, an operating agreement cannot be used to curtail members’ and employees’ legal liabilities.

Obtain an EIN for your Kentucky LLC

EIN stands for Employer Identification Number. It is a unique nine-digit number allotted to your LLC by the Internal Revenue Service and is mainly used for tax purposes. You can think of it as the Social Security number of your business entity.

EIN is mandatory for your LLC to apply for a bank account or credit card, hire employees, and for getting licenses and permits. The IRS issues an EIN, and you can apply for it online or through the mail.

File Annual Reports in Kentucky

An annual report is a document used by the authorities to get the latest and updated information about all the business entities operating in the State. Kentucky requires every domestic and foreign entity authorized to transact business to file an annual report. This report should contain details such as:

• the name of the entity and the state law it is organized in, 
• the address of the entity’s registered office, 
• name and street address of the registered agent, 
• address of the principal office. 

In case the LLC is a manager-managed one, the name and business address of the manager are also required. 

You will start filing your annual report in the year that comes after the year in which you form your LLC. Suppose you formed your LLC in 2021. You will not be required to file the report in that year. Instead, you will file your first report between 1st January and 30th June the next year, i.e., 2022.

After that, you will have to file the reports between 1st January and 30th June in subsequent years. In case the report does not contain the requisite details, the same will be returned by the State to you for corrections along with a notice.

If you want to amend the details filed in the last annual report in the event of some changes in the LLC, you can do it by filing the concerned form provided by the State.

The Secretary of State’s office will mail in a reminder postcard to the address of your principal office every year between January and February. If you miss the deadline, you risk the possibility of your business getting shut down by the State.

The fee charged by the State is $15. However, under the “Boots to Business” scheme, if at least 51% stake in your LLC is owned by honorably discharged veterans and/or by persons on active duty, the fee is fully waived for the first four years after the formation of the LLC.

You can file your Annual Returns with the Kentucky Secretary of State online or by mailing them to the following address:

Kentucky Secretary of State P.O. Box 1150 Frankfort, KY 40602-1150.

Tax Liability For Your Kentucky LLC

The way your LLC will be taxed depends upon the number of members in your LLC. There are four ways in which LLC will be taxed:

• Sole-proprietorship: a business owned by a single person
• Partnership: a business owned by multiple people
• C – Corporation: income is split or segregated for taxation
• S – Corporation: tax liability is split between the business and its owners

Federal Tax Liability

If you start an LLC alone, i.e., your LLC is single-membered, you will be taxed like a sole proprietorship. The IRS ignores your tax structure, and you will report the income from the LLC to be the owner’s income. Depending upon your LLC’s functioning, you will have to fill out certain forms for reporting the income from your business. If you receive a salary, i.e., pay yourself, you must file for self-employment tax. You will file this form for any other income coming from rentals or investments.

A multi-member LLC is by default taxed as a partnership and will file your taxes under Form 1065 and provide information in K-1 of each partner.

Filing as a C-Corp entails your LLC and its members being taxed separately. If you file as an S-Corp, the tax liability is split between the members of the LLC. If you would like your LLC to be taxed like a C-Corp or S-Corp, you can do so by filing Form 8832 and Form 2553, respectively.

State Tax Liability

The state of Kentucky imposes sales tax and use tax on the sellers. Sellers are authorized to collect this tax from the consumers and remit the same to the Department of Revenue. Sales tax is imposed on tangible personal property and digital property sold, leased, or rented in Kentucky. Use tax is also levied on the same category of goods. Property purchased or leased anywhere else but used in Kentucky is subject to use tax. Here is a brief list of sales or businesses on which sales tax is applicable:

• The sale of tangible personal property and digital property.
• Sales of admissions.
• Communication services.
• Lease or rental of tangible personal property and digital property.
• Hotel and Motel rentals to transients for less than 30 days.
• Natural gas transmission and distribution services.
• Furnishing of sewer services.

However, there are three exemptions. These are sales for resale, inter-state sales, and property sales exempted from sales and use tax.

You need to register for a seller’s permit to charge the sales tax. For resale business, you will have to file for a resale certificate. 

The sellers should charge the correct amount of tax to avoid the whip of the state, i.e., penalty. For your benefit, make sure you calculate the tax.

Kentucky levies the sales tax, and there is no specific tax for any county or city. Kentucky will charge store sales and in-state sales with a flat rate of 6%.

Miscellaneous Tax Liability

If your LLC is employing people, it will have to register for the Unemployment Insurance Tax. In addition, on behalf of your employees, you will need to register for Employee Withholding Tax.

Based upon the specific industry in which your business falls, you might be required to pay certain other taxes also.

Permits & Licenses

The government requires you to apply for certain permits and licenses for a specific business you undertake. Accordingly, your business will be subject to three licensing jurisdictions: Federal, State, and Local.

Federal Licensing requirements will depend on the business activity carried on by your LLC. If your company is engaged in any area of business regulated by the Federal Government, you will be required to obtain relevant Federal Licenses and Permits.

Some business activities requiring Federal Licenses and Permits are 

• Agriculture 
• Alcoholic beverages 
• Aviation 
• Firearms, ammunition, and explosives 
• Fish and wildlife 
• Commercial fisheries 
• Maritime transportation 
• Mining and drilling 
• Nuclear energy 
• Radio and television broadcasting
• Transportation and logistics

At the State level, you are required to obtain a seller’s permit if your business is engaged in selling or leasing tangible personal property, services, or digital property that are subject to sales tax.

Depending on where you operate, you may also need licenses or permits from your county or city government. For example, in Lexington, most businesses need to obtain an Occupational license. To know more about local licensing requirements, get in touch with the office of your city or county government office.

Business Bank Account & Phone Number

While running a business, you must keep your assets separate from your LLC’s assets. Mixing them up might lead to your assets being seized in debt-related disputes. Therefore, it is important to have a separate bank account. The bank of your choice will need your LLC’s EIN, along with other information, to open a business bank account.

A separate phone number for your business is a good practice, as you would not want your number to be in the public domain. Having a dedicated business phone for your LLC will help streamline communications between your LLC and its customers. Most network providers offer good enterprise/business plans. You are free to choose one that best suits your LLC and its operations.

Final Thoughts

Kentucky has a good regulatory environment and is home to some of the biggest companies in the country, such as KFC, Humana, and Fruit of the Loom.

The State offers many business incentive schemes that are aimed at supporting and helping small and medium enterprises. The Kentucky Small Business Tax Credit (KSBTC) program, Kentucky Business Investment (KBI) Program, and Kentucky Small Business Loan Program are some such incentive schemes. Get in touch with your local county or city government office to determine if your LLC is eligible for any of these incentives.

Make sure you thoroughly check any document before filing it with the State for incorporating your LLC. Give some thought to what best suits you and how you wish to ensure timely filings. We recommend you talk to your registered agent about making sure your LLC files its documents on time.

You have successfully set up your LLC in the State of Kentucky; we wish you and your LLC luck in becoming Kentucky’s next multi-billion dollar business!