Kentucky Limited Liability Corporation: The Essentials of Limited Liability Corporations

A Kentucky LLC is a business privilege under the 2009 plan of the merger of KRS Chapter 275. A Kentucky LLC, also called a limited liability corporation, is a form of a business entity that allows for owners to select how many classes of individuals own an interest in the company and what percentage of ownership each class will have.

In some cases, one owner can control 100% of an individual class. In other cases, more than 50% ownership must be held by another class or class. If any member fails to use certain formalities then that member’s portion of ownership could be jeopardized by others who act correctly.

In this post, you’ll learn about the creation of a Kentucky LLC, its advantages and disadvantages, and everything you need to know for successful LLC formation.

How do I form an LLC in Kentucky?

Step 1: Name your Kentucky LLC

Before you can create a Kentucky LLC, you must decide on an appropriate name. Under KRS 275.405(1), the name of the company is restricted to two options depending on whether it is run by a single owner or multiple owners:

  1. A business entity’s name shall be distinguishable upon the records of its county clerk;
  2. If your business has multiple owners (members), then one option is to use all names of members.
  3. If your business will have only one member then it should end in “LLC” after the personal name of that individual owner (or his/her initials).
  4. Names that are deceptively misdescriptive, likely to mislead, or conflict with another registered LLC may result in rejection by the Kentucky Secretary of State.

FAQ: Naming a Kentucky LLC

Q. How can I make my business name “distinguishable” from other names on the Kentucky Secretary of State’s records?

A. One way to distinguish your LLC from others is by adding a geographic identifier for the location of your business to the LLC name, such as Louisville Plumbing and Heating Company, Inc., Lexington Property Management Service, Riverside Consulting Associates, L.L.C., et al.

Q: Is it okay to abbreviate or use acronyms in the business name?

A: No! The name must be spelled out completely and correctly with no abbreviation so as not to mislead customers as to what type of entity they are contracting with. For example, ABC Mortgage Corporation is acceptable while MORTGAGE CORP INC is not.

Step 2: Appoint a registered agent in Kentucky

Before you form a Kentucky LLC, you must select an agent to receive any legal documents that are required via the Kentucky Secretary of State.

Your registered agent’s name and address must be on file with the state. This is typically where your company will receive all service of process papers if it meets the definition of “domestic” under KRS 365.010(1)(a).

FAQ: Nominating Registered Agent Services

Q. How do I appoint a registered agent?

A. A Kentucky LLC must have an individual or business entity designated as the registered agent for service of process by filing a Statement of Registered Agent with the Kentucky Secretary of State. The form may be filed online, by mail, or in person at 301 Sower Blvd., Frankfort, KY 40601.

The registered agent does not have to be a member nor an employee of the company unless the principal office is outside this state and not within 75 miles from Frankfort.

Q. Who should serve as my LLC’s registered agent?

A. It is recommended that you appoint someone who has regular contact with your company but does not need to be associated with the company in any way.

Step 3: File Kentucky Articles of Organization

The next step is to file your Kentucky Articles of Organization which is executed by the company Members, not the managers or employees.

The person who creates and files this form with the Secretary of State on behalf of the LLC is called an “organizer”.

FAQ: Filing LLC Documents

Q. Where can I find the Kentucky LLC Articles of Organization form?

A. A sample copy of the Kentucky Articles of Organization may be found on page 35 of the Commercial Division Document Packet.

Please note that under KRS 275.520, an Articles of Organization must include:

  • name;
  • address (of where to receive official documents);
  • amount and nature of each member’s contribution;
  • if all members are natural persons, whether or not they are to receive or have received any share in distributions from profits;
  • if some are to receive a share, the time period within which it is to be determined what shares shall be allocated to each person who will share in such distribution.

Step 4: Create an operating agreement

An LLC operating agreement may be used to establish the business rules, regulations, and procedures. This is not filed with the Secretary of State but instead can be amended in the future if any changes are made.

FAQ: Creating a Kentucky Operating Agreement

Q. What is an operating agreement?

A. This is not filed with the Secretary of State but instead can be amended in the future if any changes are made.

Generally, this document outlines how ownership interests will be divided, what rights members (owners) have including management and member voting rights, and other issues relevant to you and your business

Q: Is it really necessary to file an operating agreement?

A. Yes! If you do not create a written Operating Agreement for your LLC, you risk having no established rules about how to run your company or even who owns what percentage of interest.

You should always create Operating Agreements before filing any LLC forms with the state.

Step 5: Apply for an EIN

The next step is to get an Employer Identification Number or EIN. This is also known as a Federal Tax Identification Number.

It’s basically your company’s social security number which you will need to open up a bank account in your new LLC’s name.

FAQ: Getting an EIN for Your Kentucky LLC

Q. How do I apply for an EIN?

A. You may apply online using the IRS website

You can choose not to receive future mailings from the IRS by checking the appropriate box on line 6a of the application. If you are establishing or adding activities to an existing LLC, you will be required to complete lines 6b through 6d

Q: What are the benefits of having an EIN for my LLC?

A. An EIN serves as a tax identification number that is used by the IRS to identify your company. It is required for some business activities, including opening up a bank account, applying for business licenses or permits, and filing business tax returns.

Benefits and Drawbacks of an LLC

Benefits:

  • Creates limited liability for business owners, protects personal assets from lawsuits and business liabilities
  • Easy to establish with low startup costs and more tax flexibility than a corporation
  • Less record-keeping requirements than a corporation
  • Pass-through taxation, meaning LLCs are not taxed as a company
  • LLC owners (called members) can take profits in the form of distributions without paying any self-employment taxes

Drawbacks:

  • Liability protection is limited in that creditors with a charging order may be able to seize and liquidate an owner’s interest and in some states, creditors with a court judgment can do the same thing. However, most states allow for an “assignment of membership interest” which allows an interest holder to sell off his or her percentage interests by assigning them to someone else
  • The decision-making process will require more time than if you were operating with a corporation where you could quickly make decisions through voting by management

How much does it cost to form a Kentucky LLC?

To form a Kentucky LLC, you will have to file Articles of Organization with the state. This is done by filing an electronic application with the Secretary of State for $45. If you are unsure whether or not your proposed business name is available, there is also a $5 search fee.

Separate Your Personal and Business Assets:

If you decide to go with a Kentucky limited liability company, it is important to separate your personal and business assets. This will protect both your personal and LLC accounts from any liabilities.

1. Opening a business bank account:

One important thing to do after you have an LLC is to open a business checking account. You will want a separate checking account for your new business in order to keep track of your business income and expenses, especially if you receive 1099 from other businesses at the end of the year.

2. Getting a business credit card:

Another important thing to do after you have an LLC is to get a business credit card. When you are starting out your new business it is important that you don’t put too much of a financial burden on yourself.

By having a separate account for your business, if something were to happen and you needed access to the funds in that account they would be readily available without any complications.

3. Hiring a business accountant:

Another great way to separate your business and personal accounts is by hiring a business accountant. An accountant will be able to help you with many things such as tax returns, bookkeeping, payroll processing, consulting services, and also filing limited liability entity tax forms on time.

Get Business Insurance for Your Kentucky LLC:

When starting a business it is important to make sure that you have the proper insurance for your company. You’ll want to contact an insurance broker or agent who can provide you with all of your options and help you choose the best policies based on what type of business you will be operating.

Types of insurance:

1. General liability insurance

This will protect your business from third-party injuries and property damage. This is a must for any small business to have. I recommend getting $1,000,000 in general liability insurance which would cover all of the physical assets that your business has.

2. Commercial property insurance

This type of insurance will protect the physical building that you use as well as any personal property such as computers and equipment that you may need for your business. I recommend choosing an amount that will provide protection for at least twice the cost of replacement or rebuilding your buildings and equipment.

3. Workers’ compensation:

Workers’ compensation is required by law and it provides protection to employees who may be injured on the job. It also protects your business from being sued by your employees if they have a work-related injury.

In most cases, it is required that you have 2 x the average salary paid to all of your employees as a deductible before any type of benefits can be provided to them.

4. Auto insurance:

You will want to carry auto insurance for any automobiles that are used exclusively for business use as well as those that may occasionally be used for personal reasons, such as an employee’s vehicle. I recommend carrying commercial auto insurance with limits equal to at least twice the value of your vehicles or more depending on what you feel is appropriate for your needs and financial situation.

Kentucky LLC Permits & Licenses

Starting a new business in Kentucky requires the same basic permits and licenses that are needed in most other states.

You’ll need to make sure that you have all of these licenses and permits before you can begin operating your new business.

Employer’s Identification Number (EIN)

This is also referred to as a “Federal Taxpayer Identification Number” which must be obtained by filing an SS-4 form with the Internal Revenue Service. Utilizing your EIN will allow you to file for tax returns, particularly federal income taxes if you are required to do so.

Kentucky Unemployment Tax Account

If you hire employees working within Kentucky on a regular basis then you’ll need to make sure that they are all registered on the proper unemployment insurance account.

Each employee needs to file a separate form with the state government for this, so be sure to keep track of everyone’s social security number.

Kentucky Sales and Use Tax Permit

If your business is required to charge sales taxes then you will need a permit that will allow you to file and pay those taxes throughout the year.

It’s important that you register and complete all necessary forms before beginning to operate like those who fail to do so may face penalties from both federal and state governments.

Kentucky Business License

This type of license needs to be obtained if you own a business such as a restaurant or any other type of office within Kentucky.

They are issued by either the county clerk or city clerk depending on which county or city your business is located in.

Kentucky Transient Vendor Permit

If you go to various locations within Kentucky and sell any product, then you will need a permit to do so. This is known as a transient vendor permit and it must be obtained from the Kentucky Department of Revenue if your annual sales reach $2500 or more in the calendar year.

Visit this page for more information: http://revenue.ky.gov/bus_permits/index.htm

Kentucky LLC Tax Filing Requirements

Unlike many other types of businesses, limited liability companies are not taxed directly by the federal government.

This means that you’ll need to pay taxes separately on your own each year at the state, county, and city levels.

You will also need to file separate tax returns for yourself as well.

  1. Federal Tax Returns – The LLC itself is not required to pay any type of taxes with the IRS unless you have selected for it to be treated as a corporation instead which would require an S-Corp election before taxes can be filed. However, if your business has employees or conducts business in various states around the county then you may have to file various types of federal tax returns throughout the course of the year depending upon what type of income is earned and where it was earned. You would be responsible for all taxes that are owed throughout the course of the year after paying your LLC taxes and then withholding taxes from employees each month. If you’re unsure about how to file any federal tax returns, then you can always consult a CPA since they will know exactly what needs to be filed and when it needs to be filed.
  2. State Tax Returns – If your business is required to pay tax in the state of Kentucky before operating, then you’ll need to make sure and register with the Department of Revenue (DOR). Visit their website: http://revenue.ky.gov/bus_permits/index.htm for more information on licensing as well as filing any necessary quarterly or monthly returns throughout the course of the year.
  3. County Tax Returns – Limited liability companies are required to file county taxes through each respective county that your business operates in. This means that you will need to contact the local county clerk’s office and apply for a permit before beginning any operations within the state of Kentucky.
  4. City Tax Returns – Limited liability companies are also required to file city taxes through the proper city clerk’s office depending on which city your business is actually located in. You should be aware that there can be differences between counties, cities, and even towns so it’s important to confirm if you’re operating within any particular area so that an annual license can be applied for prior to doing so.

Kentucky Sales Tax

According to the Kentucky Sales and Use Tax Act, those who sell items at retail within the state of Kentucky will need to pay this tax as it is mandated by law.

It’s also important to note that if you do not charge your customers with any type of sales tax or make them aware of this obligation on your part, then you could find yourself facing stiff penalties from both state and federal authorities for doing so.

Here’s a basic breakdown of what you need to know:

  • Kentucky requires all sellers (including limited liability companies) to register with the Department of Revenue before beginning operations. If they fail to do so, then they can be charged fines and penalties by both state and federal governments. Visit http://revenue.ky.gov/bus_permits/index.htm for more information on tax requirements in Kentucky.
  • Currently, the Kentucky Sales Tax Rate is 6%. This rate can be anywhere from 0% to 8% depending upon what county you do business within and whether or not the state has authorized a local taxing jurisdiction in that area.
  • Sellers are required by law to clearly display their prices when selling items at retail price so customers are aware of any taxes which will need to be added in addition to these marked prices -there can be no hidden charges.
  • While there is a requirement in Kentucky that requires sellers to provide purchasers with documentation of the transaction amount, unfortunately, this rule does not apply to limited liability companies since they are required to send all collected taxes directly to the state’s treasury department without collecting them from other sources ahead of time. If you are selling items at retail price, then you should make sure that your customers know about this obligation before giving them their receipt or invoice so that there aren’t any misunderstandings later down the road concerning this particular matter.

Kentucky Employer Taxes

As with most other states, Kentucky requires employers to remit certain taxes on a semi-monthly or monthly basis.

These are the following requirements that apply to limited liability companies:

  1. Employers are required by law to register for an account with Employment Security before beginning any operations within the state -this might require you to provide copies of your Articles of Organization or an affidavit before registration can take place. You can find more information on this requirement here http://labor.ky.gov/divisions/ui/ui_frm1employerinfo.htm.
  2. Employers are required by law to make their workers pay federal unemployment insurance (FUTA) as well as file quarterly returns whenever they meet specific criteria which are defined by law. Visit http://labor.ky.gov/divisions/ui/wv_methfaqs.htm for more information on what you need to know about your tax obligations if you’re an employer in the state of Kentucky.
  3. Employers are required by law to make payments related to their particular account with Employment Security semi-weekly. You can find out how much is due by visiting this page: http://labor.ky.gov/forms/ein5wagewithholdingcalculatorbasic.pdf

Industry-Specific Taxes

While the state of Kentucky does not require limited liability companies to produce and remit any special types of taxes, you should always check with your particular industry’s governing agency (i.e: Cosmetology Board, Construction Licensing Board) for information on whether or not there are any city or local requirements that need to be upheld as well.

File Your LLC Annual Report

In order to maintain good standing with the state of Kentucky, annual reports need to be filed by those companies that meet certain criteria.

Generally speaking, a limited liability company will need to file an Annual Report if they have conducted business within the state for more than three months and they meet specific financial requirements as defined by law.

Visit http://revenue.ky.gov/bus_permits/annual_report/index.htm for more information on what you’ll need to do in order to keep your business running smoothly throughout the course if you fall into this category of entities.

If your limited liability company is registered with the Kentucky Secretary of State’s Office, then you should receive an Annual Report from them every November which contains details about your company’s incorporation and any changes that may have occurred to your Articles of Organization.

This document is the equivalent of an individual’s Form 1040 tax return, so you should fill it out as completely as possible to ensure that there are no mistakes made.

How to Obtain a Certificate of Good Standing in Kentucky?

If you would like to file an Annual Report with the Secretary of State, then you’ll need to apply for a Certificate of Good Standing upon submitting your Annual Report.

You can do this by visiting http://sos.ky.gov/bus_permits/annual_report/apply_good_standing.htm and following the instructions listed on that web page.

It is important to note that while applying for a Certificate of Good Standing in Kentucky will cost $50 if there is no change in information (address, registered agent, etc.) from the previous year’s report then continuing with their business registration doesn’t require filling out another Annual Report or paying any fees either so it is up to your discretion whether or not you want to do this.

You can find forms for all of the things you would need to do as a business owner in Kentucky at http://sos.ky.gov/bus_permits/forms/.

Conclusion

Kentucky is a great place to start your limited liability company. Enforcing the LLCs in this state has been made easy for you so you can save time and money as a business owner by hiring an online registered agent service.

Now you know all the steps necessary for creating your Kentucky LLC today!

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