Starting a Business in Kentucky

Last Updated: January 11, 2018

Business Start-up Checklist in KentuckyPerhaps the most important, but often undervalued step to starting a business in Kentucky is writing a business plan.  While the business plan is most often thought of as something that is required to get a business loan, it can also serve as a roadmap for your business.  Starting and running a business is complex and there are so many parts in motion, it’s next to impossible to keep track of everything – and that’s where the business plan comes in. When most people think of business plans, most think about a formal document that’s as thick as a text book.  Those don’t happen much anymore because they just aren’t useful.  If you are writing a business plan for the bank, some formality is in order but you should also have a business plan that you can use to execute your vision, even if it’s just scribbled on notebook paper. For some resources on business plans including business plan templates, free sample business plans and more, click here.

Select a Business Entity in kentucky

The second step in starting a business in Kentucky is selecting a business entity, sometimes known as a business structure..  The business entity is how a business is legally organized to do business.  The four primary types include the sole proprietorship, partnership, corporation and LLC.  Each has pros and cons and a short description of each is below.

Sole Proprietorship: A sole proprietorship is an individual that decides to go into business.  This is easiest and least expensive of the four to set up but has a serious potential downside which is unlimited liability.  This unlimited liability opens the business owner up personally should the business be sued.   Forming a sole proprietorship in Kentucky.

General Partnership: A general partnership is similar to the sole proprietor, except it involves two or more people conducting a business together. Like the sole proprietorship, the partnership has unlimited liability.

General Partnerships need to file a Statement of Partnership Authority with the Secretary of State which will cost $40.

Corporation: The corporation is more complex to form than the sole proprietorship or partnership but that complexity provides the owner with the ability to protect their personal assets through liability protection. If the corporation gets sued, the owner’s personal assets should be safe.

The initial cost to form the Articles of Incorporation with the Kentucky Secretary of State is $40, plus a Corporation Organization Tax.  This tax varies on the number of shares that are authorized.  The cost is $.01 per share up to 20,000 shares, $.005 per share for the next 180,000 shares and $.002 per share on the remaining shares.  There is a minimum tax fee of $10 for 1,000 shares or fewer.

Click for more details about forming a corporation in Kentucky.

Limited Liability Company (LLC): The LLC is similar to the corporation because of the liability protection but provides the ease of operation of a sole proprietorship by eliminating the administrative requirements of the corporation. 

The initial cost to file the Articles of Organization with the Kentucky Secretary of State is $40.

Click for more details about forming a Limited Liability Company in Kentucky.

Register a Business Name in KentuckyAfter deciding on a business entity, the next step in starting a business in Kentucky is to register a business name. 

HOW TO FILE A DBA IN KENTUCKY FOR SOLE PROPRIETORSHIPS & GENERAL PARTNERSHIPS

If you are a sole proprietorship or general partnership in Kentucky and doing business under your full first and last name, John Smith for example, there is no filing, but if the business will operate under an assumed name/ DBA like John Smith’s Handyman Service, Mr. Handyman, etc, you will need to file a Certificate of Assumed Name, also known as a DBA (Doing Business As).  The clerk will process the form same day and you will have successfully filed.

The filing fee is typically under $20.

HOW TO RESERVE A BUSINESS NAME IN KENTUCKY FOR A CORPORATION OR LLC

Corporations and LLCs have to pick a name at the time of filing for the entity and each corporation/LLC has to be uniquely named. 

To check the availability of names, visit the Kentucky Secretary of State.

Registering does not necessarily keep others from using the business name.  For more details on registering a business name and protecting it with a trademark, click here.

how to file for an ein in kentucky

The Employer Identification Number or EIN (sometimes referred to as the Federal Employer Identification Number or FEIN) is a unique nine digit number from the IRS to identify a business operating in the U.S.  Much like what a social security number is to a person, the EIN is essentially a social security number for a business.  While most businesses will need to get an EIN, some do not need to. 

Businesses that are required to get an EIN include partnerships, corporations or LLCs OR sole proprietorships with employees.

A sole proprietorship with no employees isn’t required to get an EIN and would simply use the owner’s social security number instead. 

For more information about how to apply and to see our video with step by step directions check out how to file for an EIN

how to get a business license in kentuckyStarting a business in Kentucky may require special permits and/or licensing, potentially from a variety of agencies before legally operating.  Some of the most common licenses a business may need in Kentucky could include;

Local Business Licensing – Most cities, towns and/or counties in Kentucky require a business to register, even occasionally those that are home-based businesses.   Each local entity has its own rules for business activity, so requirements vary depending on location as some require a business license while others have requirements for zoning, building/ building improvements, signage requirements, liquor licenses, etc.  

The city hall, mayor, economic development office or even the Chamber of Commerce are all good places to contact and find if you need a business license in your community. 

Kentucky Sales Tax Permit -Businesses in Kentucky will need to obtain a sales tax permit if they sell tangible personal property, digital property, and sales of certain services.  More information on the sales tax permit is available from the Kentucky Department of Revenue.

Occupational Licenses – A variety of professionals in the state are regulated such as doctors, physical therapists, veterinarians, detectives, cosmetologists, barbers, architects, massage therapists

Click for more details on Kentucky business license requirements

finding financing for a small business in kentucky

Getting business start-up funding can be a time consuming process.  Similar to getting a home loan, the bank is going to want lots of documentation on your personal finances in addition to a solid idea and business plan.

As a rule of thumb, banks will want to see the owner invest 15%-25% of their money (equity) into a start-up business.  That can include cash but also any buildings, tools, vehicles, inventory and equipment that will be used in the business. 

There are a number of small business loan options, but the primary ones that are used by small businesses include: 

Conventional Bank Loans – These are available at most local banks and are where most entrepreneurs start when looking for a loan. 

Loan Guarantee – When a loan is riskier than the bank wants to take on, many have the option to use the Small Business Administration (SBA).  This is a federal program that provides a guarantee to the bank that will pay a percentage of the loan should the business owner default.  

Alternative Lenders – A newer type of lender has emerged to make business loans online. 

Revolving Loan Funds – Several communities, economic development agencies, etc. offer revolving loan funds to businesses as a way to encourage investment and job creation.  They are often low interest and approval is typically not as strict as a bank since job creation in the community is a priority.  

Expect the loan approval process to take anywhere from 2 weeks to 6 months (and possibly more) depending on the amount being borrowed, complexity of the project and owner’s personal financial condition.

Credit Score
Before stepping into a bank for financing, it is a good idea to know your credit score.  A major factor in getting start-up business loan approval is the owner’s credit score.  Typically scores above 650 are considered viable so if you aren’t sure, get a copy of your credit report. 

More details about different loans for businesses is available on our financing a business page.

accounting taxes start business kentuckyDepending on the type of business, there are a variety of taxes a business in Kentucky needs to be aware of with the most common being sales tax and self-employment taxes.

Kentucky Sales Tax – Generally speaking, physical products, sold at retail, are taxable within Kentucky.  So, if you sell a pair of shoes from your store, you would charge the customer sales tax (which varies depending on where your store is located. Services are generally not taxable.  Learn more about Sales & Use Tax from the Kentucky Department of Revenue.

Self-Employment Taxes – Sole proprietors, partnerships and LLCs that elect to be taxed as such will be required to pay state and federal income taxes, Social Security, and Medicare based on the profits generated by the business.

More details are available on our Accounting & Taxes in Kentucky page.

How Do I Hire Employees in Kentucky?Before hiring employees, there are several items that a small business owner needs to be familiar with before making their first hire.    

Register as an Employer – Employers will need to register with the IRS (EIN number) Kentucky Department of Revenue (Business Registration) and the Kentucky Office of Employment & Training (Business Registration)

Fill Out Paperwork For New Employees – When hiring a new employee there are four forms that will need to be filled out; New-Hire Reporting Form (Kentucky New Hire Reporting Center), I9 (Form I-9, Employment Eligibility Verification), W-4 (IRS’s Publication 15 Employer Tax Guide), and the K4 (Kentucky Employee’s Withholding Exemption Certificate).

Federal & State Income Tax Withholding – Employers withhold money from each employee’s paycheck to pay that employee’s federal and state income taxes. The employer pays no part of the withholding tax, but is responsible for collecting and remitting the taxes that are withheld.

Social Security & Medicare – To comply with the Federal Insurance Contributions Act (FICA), an employer must withhold the employee’s portion of Social Security and Medicare taxes and the employer matches.

Federal & State Unemployment Insurance – Employers are responsible for paying taxes to compensate workers who have recently lost their jobs, which is through federal & state unemployment insurance.

Worker’s Compensation Insurance – Workers’ compensation provides compensation benefits and covers medical costs to employees injured on the job.    Worker’s Compensation Insurance is administered through the Kentucky Labor Cabinet

Labor Laws – Employers should also understand the various regulations and laws pertaining to employees. If you plan to hire employees, learn the rules that apply to your business. Federal laws, depending on your sales volume and number of employees, may supersede state laws.

Consult with the Kentucky Labor Cabinet and U.S. Department of Labor to learn more. If you are unsure of your obligations, an attorney’s guidance can be also useful in assisting you to meet legal requirements.

This is a very brief overview and more information is available on our Hiring Employees in Kentucky page.