How To Start A Business In Kentucky
The Bluegrass State offers entrepreneurs an impressive combination of a business-friendly environment, a skilled and dedicated workforce, a strategic central location, a low cost of living, and an array of state-backed incentives. With all these ingredients in place, Kentucky is home to startups and established businesses alike.
Kentucky Small Business Stats
- There are 364,200 small businesses in Kentucky, which is 99.3% of all businesses in the state. (2022 SBA Small Business Profile)
- Exports by small Kentucky firms reached $3.2 billion. (2022 SBA Small Business Profile)
- Small businesses in Kentucky employ 722,253 employees, which is 43.3 percent of the total employees in the state. (Statistics of US Businesses)
- Kentucky was ranked as the #26th best state for business by CNBC, with the cost of doing business, cost of living and workforce, being the highest ranking factors.
- The Tax Foundation ranked Kentucky as number 18 in terms of business tax climate.
- Kentucky has the lowest formation LLC formation filing fee of $40.
- Forbes ranked Kentucky as the 18th best state for cost of doing business.
Steps To Start A Business In Kentucky
Starting a business can be overwhelming, but by following our comprehensive checklist, you’ll be able to systematically tackle each step, from registering your company and obtaining the necessary permits, to securing funding and so much more. With a clear roadmap in hand, you’ll be able to focus on building a strong foundation for your business and ultimately, turn your entrepreneurial dreams into a thriving reality
Step 1: Choose a Business Idea
Selecting the right business idea is crucial, as it will set the tone for everything that follows. So, here are a few key points to keep in mind when picking your idea.
Passion and skills: First and foremost, choose a business idea that you’re passionate about and aligns with your skills. Passion will keep you going during tough times, and having the right skill set will make it easier to overcome challenges. Reflect on your interests, talents, and past experiences to pinpoint an idea that genuinely excites you and leverages your strengths.
Market demand: No matter how much you love your idea, it’s crucial to ensure there’s a market for your product or service. Conduct market research to identify gaps, trends, and potential customers in Kentucky. Talk to people, survey your target audience, and analyze your competition. This will help you validate your business idea and determine if it has the potential to thrive in the local market.
Scalability and growth potential: When choosing a business idea, consider its potential for scalability and growth. Will your business be able to adapt and expand as the market evolves? Aiming for an idea that allows for growth will make your entrepreneurial journey more rewarding and potentially more profitable in the long run.
Budget and resources: Be realistic about your budget and resources when selecting a business idea. Make sure your chosen idea is financially viable and can be executed within your means. This doesn’t mean you have to play it small – just be mindful of your constraints and plan accordingly.
Research your industry: Utilizing resources such as our business library, industry reports, articles, forums, conferences, and talking with other business owners you can gather valuable insights and tips for success.
Don’t fear failure: Embrace the fact that not every business idea will be a home run. If you’re afraid to fail, you’ll never take the necessary risks to succeed. So, give yourself permission to make mistakes, learn from them, and pivot when needed. Remember, failure is just another stepping stone on your path to success.
As you explore business ideas for your new venture in Kentucky, keep these tips in mind and stay patient. Finding the right idea may take time, but it’s essential to lay a solid foundation for your entrepreneurial journey. Trust yourself, be persistent, and remember that every successful business starts with a dream and the courage to pursue it.
Step 2: Write a Business Plan
A business plan is essential for starting a business not only becuase it is used to attract investors and lenders, but also because it serves as a roadmap for outlining your goals, strategies, and the steps needed to achieve them. A few of the various reasons a business plan is crucial:
Clarity and focus: A well-crafted business plan helps you clarify your business idea, target market, and competitive advantage. It keeps you focused on your objectives, ensuring that you allocate resources efficiently and make informed decisions.
Financial planning: A business plan includes financial projections and a detailed budget, allowing you to assess the financial viability of your venture, make informed financial decisions, and secure funding.
Attract investors and lenders: A comprehensive business plan demonstrates to potential investors and lenders that you’ve thoroughly researched your industry, have a well-thought-out strategy for success, and on paper the business makes a profit.
Manage risks and challenges: A business plan helps you identify potential risks and challenges, allowing you to develop contingency plans and strategies to overcome them.
Related: How to write a business plan
Step 3: Select a Business Entity
The next step in starting a business in Kentucky is selecting a business entity. A business entity is a legal structure that defines how your business operates, pays taxes, and distributes liability. Choosing the right entity is crucial, as it impacts your personal liability, tax obligations, and overall business management. Let’s look into the four main types of business entities: sole proprietorship, general partnership, corporation, and Limited Liability Company (LLC), and discuss their differences, pros, and cons.
Sole Proprietorship: This is the simplest business structure, where you, as the owner, operate the business under your name or an assumed name. To register a business name, a Certificate of Assumed Name, also known as a DBA (Doing Business As), will need to be filed with the County Clerk in the county where the business is located.
– Easy to set up and low cost
– Complete control over the business
– Pass-through taxation (profits are taxed on your personal income tax return)
– Unlimited personal liability (you’re personally responsible for all the business’s debts and liabilities)
– Limited access to funding
– Difficulty in transferring ownership
General Partnership: A partnership involves two or more people sharing ownership and management of a business. Each partner contributes resources and shares profits, losses, and liabilities.
– Easy to establish and low cost
– Shared decision-making and responsibilities
– Pass-through taxation
– Unlimited personal liability for each partner
– Potential for conflicts between partners
– Difficulty in transferring ownership
Corporation: A corporation is a separate legal entity from its owners (shareholders) and offers limited liability protection. It’s more complex and costly to set up and maintain than other structures.
– Limited liability protection for shareholders
– More options for funding
– Transfer of ownership is more straightforward
– Double taxation (profits may be taxed at the corporate level, and dividends are taxed on shareholders’ personal income tax returns)
– Higher setup and maintenance costs
– More complex regulations and reporting requirements
Related: How to form a Kentucky Corporation
Limited Liability Company (LLC): An LLC combines the limited liability protection of a corporation with the pass-through taxation and simplicity of a sole proprietorship or partnership.
– Limited liability for the owners (members) personal assets
– Pass-through taxation
– Flexibility in management structure
– More complex and costly to establish than a sole proprietorship or partnership
– Limited access to funding compared to corporations
– State-specific regulations and requirements
Related: How to form a Kentucky LLC
Each of these business entities has its own set of advantages and disadvantages, depending on your needs, goals, and the nature of your business.
Forming a corporation or LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.
Some popular formation services include:
IncFile - Great service and free registered agent the first year.
Northwest - Privacy-Focused: Free registered agent and private business address for 1 year!
ZenBusiness - Easy to use and free registered agent for 1 year!
Step 4: Register the Business
While specific business registration requirements will vary depending on your industry and location, there are some common steps and licenses you’ll need to consider.
Business Licenses: The state of Kentucky doesn’t have a general business license; however, many cities require a business license to operate.
Federal Employer Identification Number (EIN): If you have employees or your business is structured as a partnership, multi-member LLC, or a corporation, you’ll need to obtain an EIN from the Internal Revenue Service (IRS). This unique nine-digit number is used for tax purposes and is sometimes referred to as a Federal Tax ID Number.
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, and the corporation and limited liability entity tax.
Professional Licenses – Depending on your industry, you may need specific licenses or permits to operate legally. Some common examples include professional licenses include 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.
Local Licenses and Zoning Compliance: Different businesses will need local licensing such as retail food permits, and liquor licenses, in addition to ensuring the business location complies with local zoning and building codes. Contact your city or county zoning department to verify that your chosen location is zoned for your type of business and complies with any building regulations.
Step 5: Open a Business Bank Account
Keeping your business and personal funds is an important step for several reasons:
Financial organization: Keeping your business transactions separate from personal transactions simplifies bookkeeping and helps you stay organized. It makes it easier to track your business income, expenses, and cash flow.
Professionalism: Instead of having customers write a check to your personally, or when paying vendors, having a dedicated business account projects a more professional business.
Legal protection: For LLCs and corporations, maintaining separate accounts is vital to preserving the limited liability protection. Commingling funds can lead to “piercing the corporate veil,” making you personally liable for your business debts.
Tax purposes: Separating your funds simplifies tax filing and helps you accurately report your business income and deductible expenses. It can also provide clear records if you ever face an audit.
Step 6: Find Financing
Securing the right funding is essential to the success of your venture, and there are several avenues to explore:
Conventional Bank Loans: Traditional banks offer a range of financing options for small businesses, including term loans, lines of credit, and commercial mortgages. To secure a small business loan, banks generally require personal investment (typically between 15%-25% of the total startup costs), strong credit score, a detailed business plan, financial projections, and collateral.
SBA Loan Guarantees: The U.S. Small Business Administration (SBA) partners with lenders to provide loan guarantees, reducing the risk for banks and making it easier for small businesses to obtain financing. The SBA 7(a) and 504 loan programs are popular options for small businesses looking to secure funding for various purposes, such as working capital, equipment purchases, or real estate.
Microloan Programs: Microloan programs, offered by non-profit organizations and alternative lenders, provide smaller loan amounts, typically under $50,000, to startups and small businesses. These loans often have more flexible terms and requirements compared to conventional bank loans. One such program in Kentucky is the Community Ventures Corporation (CVC), which offers loans to small businesses that may not qualify for traditional bank loans.
Investors: Another funding option is to seek investment from angel investors or venture capitalists. These investors provide capital in exchange for equity in your business. To attract investors, you’ll need a compelling business idea, a solid business plan, and a clear path to profitability. Local networking events and organizations like the Kentucky Angel Investors can help you connect with potential investors in the state.
Step 7: Hire Employees
Bringing on your first team member is a big step, and it’s crucial to follow the necessary guidelines and legal requirements. There are multiple agencies to register with, such as the IRS, Kentucky Department of Revenue, and Office of Employment & Training, along with state and federal labor laws to understand.
Employers are also responsible for reporting new hires, verifying employees are eligible to work in the U.S., income tax withholding, unemployment insurance, unemployment taxes, and payroll withholding taxes, including Social Security and Medicare.
Step 8: Obtain Business Insurance
Insurance is an important aspect of risk management, and having the right coverage can protect your business from unforeseen events, financial losses, and potential liabilities.
Most types of business insurance are optional, except for workers’ compensation insurance, which is required in Kentucky for all employers, and there are no exceptions for family-member employees or temporary labor.
Even if insurance isn’t required, and there is a fire, theft, or personal injury lawsuit, the small business owner may have to pay out-of-pocket damages and legal fees. Home-based businesses and side-businesses may want to consider business insurance, too, as personal home and vehicle policies may not cover a business loss.
Step 9: Set up an Accounting System
Having a good accounting system in place is crucial for your business as it not only keeps the business compliant with state and IRS tax requirements, but you can better track and monitor trends to maximize profits.
Related: Setting up accounting for a business
This material is property of StartingYourBusiness.com
Common questions when starting a business in Kentucky
Is Kentucky a good state to start a business?
There are several factors that make it an attractive location for entrepreneurs. Here are a few of the key points:
Business-friendly environment: While Kentucky tends to rank in the middle of best states for business, Kentucky has some advantages over other states such as its cost of doing business.
Skilled workforce: With a population of over 4.5 million people, Kentucky boasts a skilled and educated workforce. The state strongly focuses on education and workforce development, as evidenced by initiatives like the Kentucky Skills Network, which provides training and support to both businesses and workers.
Strategic location: Kentucky is situated within a day’s drive of two-thirds of the U.S. population, making it an ideal hub for distribution and logistics businesses. The state’s central location in the eastern part of the country provides easy access to major markets and transportation networks.
Low cost of living: The cost of living in Kentucky is significantly lower than the national average, making it an attractive place for both businesses and employees. According to the U.S. Bureau of Economic Analysis, Kentucky’s cost of living index is 86.9, with the national average being 100.
Incentives and support: The state offers a range of incentives and support to businesses, including tax credits, low-interest loans, and workforce development programs. The Kentucky Cabinet for Economic Development’s website provides comprehensive information on these programs, which can help new businesses get off the ground and grow.
What are the steps to starting an LLC in Kentucky?
There are three main steps to starting an LLC in Kentucky. These include:
1. Making sure the LLC name is available
2. Appointing a Registered Agent
3. Filing the Articles of Organization
There are a few more details to learn about, so be sure to check out how to start an LLC in Kentucky.
How much does it cost to start an LLC in Kentucky?
The cost to start an LLC in Kentucky is $40 to file the Articles of Organization with the Kentucky Secretary of State.
What licenses do I need to start a business in Kentucky?
There isn’t a general business license required by the state, however, there are potentially several different licenses and permits a business will need to obtain before starting.