The Corporation is a business structure that provides personal liability protection by separating the owner’s personal assets from the assets of the business. Thus, a corporation is liable for the actions and finances of the business, while the owners (known as shareholders) are not.
- Corporations provide liability protection for the shareholders
- A corporation can raise non-debt financing by selling shares of the business
- Taxation may be lower than a sole proprietorship or partnership
- Corporations are more complex and expensive to set up than sole proprietorships, partnerships, and Limited Liability Companies (LLC)
- At a minimum, corporations are required to hold an annual board of directors meeting, shareholders meeting, take minutes at the meetings, issue shares, etc., to maintain the entity’s liability protection.
Generally, Corporations are chosen over a Limited Liability Company when a significant amount of funding is being raised from investors. However, due to the cost and complexity of the Corporation, most small businesses are better off forming an LLC.
Related: How to form an LLC in Kentucky
The following steps are to create a domestic Corporation, which is the most common type for businesses. The other types of Corporations in Kentucky include a foreign Corporation (an out-of-state Corporation wanting approval to physically operate in the state), a professional Corporation (designated for Corporations offering professional services), or a non-profit Corporation.
Steps to Forming a Corporation in Kentucky
Step 1: Choose a Name
The first step in forming a Corporation in Kentucky is selecting a name.
The name of the Corporation has to be different from other entity names in the state of Kentucky. Check available Corporation names in Kentucky.
The name of the Corporation must include one of the following designators at the end of the business name:
- Or an abbreviation of one of those words – Corp., Inc., Co., or Ltd.
A comma may be used after the business name and before the designator. For example, “Common Grounds Coffee Inc.” and “Common Grounds Coffee, Inc.” are both acceptable.
If there is a name you want but are not ready to register the Corporation, you can file the Reservation of Reserved Name with the Kentucky Secretary of State, Division of Business Filings. The name reservation will hold a name for up to 120 days at the cost of $15.
Before selecting a name, you may also want to see if the domain name is also available.
While a Corporation has to select a unique name that another Kentucky Corporation isn’t using, that doesn’t guarantee the name isn’t currently in use by someone else. So before registering a Corporation name, be sure to do a trademark search to verify it is available for you to use.
Step 2: Choose a Registered Agent
To have a Corporation in Kentucky, a Kentucky Registered Agent must be identified to act as a central point of contact to receive legal documents, tax notices, summons, subpoenas, etc., on behalf of the Corporation (also referred to as an agent for service of process). This can either be a resident of Kentucky or a commercial registered agent service.
You can act as the Corporation’s Registered Agent in Kentucky, and you are not required to pay for a registered agent. The requirements to be a Registered Agent are generally available during normal business hours, and the registered office must have a physical street address in the state. A PO Box is not allowed.
Any individual meeting the requirements can be the agent; however, the agent’s name and address will become public record, and with that comes a loss of privacy. This is more important for some entrepreneurs, especially when doing business from home or are still employed. Hiring a company like Northwest Registered Agent to be the Registered Agent will help protect their privacy.
Step 3: File the Kentucky Articles of Incorporation
Next, you can start filing the Articles of Incorporation with the Kentucky Secretary of State’s One Stop Business Portal.
The information requested includes:
- The name of the Corporation, which must contain the word “Corporation,” “Incorporated,” “Company,” “Limited,” or an abbreviation.
- The number of shares the Corporation is authorized to issue.
- Registered Agent’s name and physical address. PO Boxes aren’t allowed.
- Mailing address of the Corporation’s principal office.
- Name and address of the incorporators. These can be the owners of the Corporation or someone helping with the formation of the entity.
The Kentucky Articles of Incorporation can be filed online or submitted by mail. The mailing address is:
Office of the Secretary of State
PO Box 718
Frankfort, KY 40602-0718
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Step 4: Create Corporate Bylaws
Bylaws are the general guiding principles and procedures of the operations of the business. For example, the bylaws may include the name of the officers of the Corporation, responsibilities of the board members, terms of office, procedures for removing or adding a new director or shareholder, policies for authorizing new shares, when shareholder, and director meetings will be held, and more.
While bylaws are required in Kentucky, they are a critical document for reducing owner and shareholder disputes. An attorney can help draft bylaws, or you can use a template to generate your own with LawDepot or RocketLawyer.
Step 5: Hold the Initial Board of Directors Meeting
During the first board meeting, the board of directors will, at a minimum, elect the officers of the Corporation (the President, Vice President, Treasurer, and Secretary). They will also typically review and approve corporate bylaws, choose a bank, issue shares of stock, and decide whether the Corporation will be taxed as a C corporation or S corporation.
It’s critical to remember that taking meeting minutes at all meetings is necessary to protect the shareholders from lawsuits and court actions. The minutes provide a record of all decisions and actions taken during the meeting. Minutes aren’t filed with the state, however, they need to be stored with other Corporate documents.
Step 6: Issue Shares of Stock
In exchange for money or services, the Corporation can exchange shares of stock. The number of shares of stock issued cannot be more than the number of authorized shares listed in the Articles of Incorporation.
If you are using an attorney to create the bylaws, they can also create the shares of stock. Alternatively, an inexpensive Corporate Kit can be purchased from Amazon, which has a corporate records book, blank stock certificates, initial meeting minutes template, corporate seal, and more.
Step 7: Obtain an EIN
The EIN or Employer Identification Number (also called a Federal Employer Identification Number, FEIN, or Tax ID Number) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Similar to a social security number for an individual, the EIN identifies the Corporation for tax purposes. The EIN will be needed to hire employees, open a bank account, register for business licenses and permits, file tax returns, and more.
There is no cost for the EIN when registering through the IRS. The number is available immediately when applying through the IRS website; however, you can also register by phone, fax, or mailing IRS Form SS-4.
Related: How to Apply for an EIN
Step 8: Elect the Corporation’s Form of Federal Income Taxation
By default, a new corporation will be taxed by the Internal Revenue Service (IRS) like a C-Corporation. C-Corporations pay corporate taxes on their profits, and the owners pay personal income taxes on their dividends.
A Corporation can elect to be taxed as an S-Corporation. S-Corporations are taxed as “pass-through entities,” which means the Corporation itself does not file corporate taxes. Instead, the profits (or losses) “pass through” to the shareholders, who then report this income on their individual taxes.
For most small businesses, the S-Corporation tax election is the most beneficial because it eliminates the double taxation of the C-Corporation. This tax election can be changed; however, it is highly recommended to talk with an accountant before making this decision.
Step 9: Open a Bank Account
Opening a bank account for your Corporation is important for liability protection as the bank account separates the business’s funds from the member’s personal funds.
Several documents will be needed to open a business bank account, such as:
- A banking resolution is a document that authorizes the members to open a business bank account on behalf of the LLC.
- Copies of the original Articles of Incorporation showing the creation of the Corporation in addition to the bylaws.
- Driver’s licenses of the members.
- Depending on the age of the Corporation, a Kentucky Certificate of Good Standing may be needed to prove the business entity is active and in good standing with the state.
Related: How to Open a Business Bank Account
Step 10: Apply for Business Licenses and Permits
Depending on what your business does and where it is located, various business licenses and permits will likely be needed before starting your business. Some common registrations include:
Business Licenses – The state of Kentucky doesn’t have a general business license; however, many cities require a business license to operate.
Kentucky Tax Registration Application – Allows business owners to register for the most common taxes in Kentucky, some of which include the Employer’s Withholding Tax, Sales Tax Permit, and the corporation and limited liability entity tax.
Occupational License – Some occupations such as detectives, cosmetologists, barbers, architects, and massage therapists require licensing in Kentucky. While this isn’t a license on the business, licensing is required in order to operate. The Kentucky Cabinet for Economic Development has compiled over 400 different licenses and state permits for the various types of business activities.
Land surveyors and professional engineers will need licensing from the Kentucky Board of Licensure.
Step 11: File Annual Reports
Corporations are required to file an annual report with the Kentucky Secretary of State.
The annual report is due between January 1st and June 30th and comes with a filing fee of $15 per year.
Step 12: Pay the Limited Liability Entity Tax
In addition to the annual report, the Kentucky Department of Revenue also charges a gross receipts tax called the Limited Liability Entity Tax (LLET). This tax is based on the annual gross profits of corporations and Limited Liability Companies and, at a minimum, will cost $175 annually.