How to Start an S Corp in Kentucky
Kentucky has grown well beyond its agricultural roots with expansion into a number of industries — from technology to manufacturing. As the state experiences incredible growth, now is the perfect time to start a business in Kentucky and take advantage of its ideal location, low tax rates, and affordable cost of living.
Starting a business takes a lot of dedication and hard work, and choosing how to structure your business is one of the most important decisions you’ll make in the initial stages. By forming an S corporation (S corp), you can save money on your taxes while enjoying the benefits of a simple business structure.
This guide will walk you through the process of setting up your business as an S corp and provide all the information you need to keep it in good standing.
Want to form an S corp elsewhere? Check out our other How to Start an S Corp guides to learn more.
Recommended: If you have at least $60,000 in net earnings, an S corp may offer tax advantages. Let Northwest start your S corp today.
Factors to Consider Before Starting an S Corp in Kentucky
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation restrictions
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Restrictions
S corps have several restrictions, such as being limited to one class of stock and 100 shareholders. Read our What Is an S Corporation guide for full details.
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by a limited liability company (LLC) or corporation. With an S corp, business owners are considered employees of the company and must receive a reasonable salary. Since all S corps technically have employees, the s corp must run payroll.
In order to benefit from a Kentucky S corp tax designation, your business needs to make enough money to offset payroll expenses. Furthermore, S corps are beneficial for business owners who take large distributions in addition to their salary.
To learn more about the tax advantages of an S corp, read our LLC vs. S corp guide and take a look at our S corp tax calculator.
For a Free Consultation With a Tax Professional
How to Form a Kentucky S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the Internal Revenue Service (IRS) when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend forming an LLC because it’s simpler and more cost-effective.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in Kentucky
Starting a Kentucky LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Northwest to guide you through this process.
There are five basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Articles of Organization
Step 4: Create an Operating Agreement
Step 5: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in Kentucky.
Be sure to choose a name that complies with Kentucky naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for a Kentucky LLC:
-
Your name must include the phrase “limited liability company” or "limited company" or one of its abbreviations (LLC or LC). The word “Limited” may be abbreviated as "Ltd." and the word "company" may be abbreviated as "Co."
-
Your name cannot include the word “cooperative” without approval.
-
Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
-
Restricted words (e.g. Bank, Attorney, University) may require additional paperwork and a licensed individual to be part of your LLC.
-
Your name must be distinguishable from any existing business name on record in the state.
You can also read the Kentucky state statute about LLC naming guidelines for more information.
2. Is the name available in Kentucky? You can use the FastTrack name availability search on the Kentucky Secretary of State website to see if your desired LLC name is available.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don't plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Step 2: Choose Your Kentucky Registered Agent
You must elect a registered agent for your Kentucky LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Kentucky Registered Agent Consent to Appointment
Kentucky registered agents must consent to their appointment by signing the Articles of Organization physically or electronically.
If the registered agent is unable to sign the physical formation document, they must submit a Statement of Consent of Registered Agent form. This form includes the following information:
- Type of business entity
- Name of business entity
- State or county of incorporation, organization, or formation
- Name of initial registered agent
- Registered office address
- Effective date
- Registered agent signature
Step 3: File the Kentucky LLC Articles of Organization
The Kentucky Articles of Organization is used to officially register an LLC.
File Your Kentucky Articles of Organization
OPTION 1: File Online With the Kentucky Business One Stop Portal
File Online- OR -
OPTION 2: File by Mail or in Person
Download FormState Filing Cost: $40, payable to the Kentucky State Treasurer (Nonrefundable)
Mailing Address:
Michael G. Adams
Office of the Secretary of State
P.O. Box 718
Frankfort, KY 40602
Office Address:
Room 154, Capitol Building
700 Capital Ave.
Frankfort, KY 40601
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our Kentucky LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Ready to start saving on your taxes?
We recommend using a formation service to start your Kentucky S corp for you, so you can focus on the things that matter most - growing you business.
Keep Your Kentucky S Corp Compliant
After electing the S corp tax designation for your business, you’ll want to make sure you familiarize yourself with state laws to keep your business operating in good standing. Every year, you’ll need to file an annual report and pay Kentucky taxes.
Kentucky S Corp Annual Report
Your Kentucky business must file an annual report with the Kentucky Secretary of State each year. You can file this report online, and the deadline is June 30. This annual report allows you to update the state with your business’s current address and contact information.
Even if your business isn’t profitable or doesn’t undergo any changes in a given year, you must still file an annual report. Failure to file on time can result in the state dissolving your business.
Visit our step-by-step Kentucky Annual Report guide for more information.
Kentucky S Corp Taxes
S corporations benefit from pass-through taxation, meaning the business’s profits pass-through to S corp owners’ individual tax returns. S corp owners make money from their reasonable salary and distributions, and Kentucky S corp owners will need to pay various taxes.
Federal Self-Employment Taxes
Self-employment taxes cover social security and medicare. The self-employment tax rate is 15.3%, and money you take as salary will be subjected to the self-employment tax. However, distributions are not subjected to this tax.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets as well as the percent owed will change each year. Both your salary and distributions are subjected to federal income tax.
Kentucky Income Taxes
Kentucky has a flat income tax rate of 5%. Many local jurisdictions also levy a local income tax in addition to the state rate. This means you’ll pay a 5% state income tax regardless of your individual income bracket plus your local jurisdiction’s income tax, if any.
Compared to other states, Kentucky’s flat rate of 5% is fairly low. Some states have an income tax rate greater than 10%, while others have no income tax. Most states impose a graduated income tax rate somewhere in between.
Kentucky Corporation Income and Limited Liability Entity Tax
Despite electing to have the IRS tax your LLC as an S corp, your business technically remains a limited liability entity. As such, you’ll need to pay Kentucky’s Limited Liability Entity Tax (LLET). If your business’s total gross receipts or total gross profits are less than $3 million, then your company will only owe the minimum $175 LLET tax.
Visit the Kentucky Department of Revenue website to learn more.
Kentucky State Tax Registration
Before you begin doing business in the state, you’ll need to register your business for state and local taxes. Go to the Kentucky Department of Revenue website for registration information.
Kentucky Sales and Use Tax
Kentucky has a 6% statewide sales tax rate. Because Kentucky has no local sales taxes in addition to this, the sales tax rate will remain 6% regardless of your local jurisdiction within the state.
Additional State Taxes
The Kentucky Department of Revenue outlines many different state-specific taxes your business may need to pay depending on its number of employees, location, and industry. Some examples of these additional state taxes include:
- Bank Franchise Tax
- Insurance Premiums Tax
- Motor Fuels Tax
- Property Tax
- Telecommunications Tax
- Tobacco Tax
Visit the Kentucky Business One Stop portal for additional information.
Kentucky Local Taxes
Many local jurisdictions have their own rules and laws that may impact your business. Whether you live in Lexington, Louisville, or a smaller city within Kentucky, we recommend you familiarize yourself with any local laws that could apply to your business.
Start a Kentucky S Corp FAQ
An S corporation (S corp) is a tax designation that an LLC or a corporation can elect.
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.
If you decide later on that you’d prefer to have the IRS tax your business as an S corp, you can change your LLC’s tax status by filing Form 2553 with the IRS. The process of setting up an LLC is very similar to an S corp, making the change simple — as long as your business meets the requirements for an S corp.
Forming an S corp in Kentucky is relatively affordable in terms of filing fees. Aside from the cost of running your business, filing your Articles of Organization with the Kentucky Secretary of State costs $40 plus an additional $100 for your organization’s tax fee.