“Americans filed paperwork to start 4.3 million businesses last year, according to data from the Census Bureau, a 24 percent increase from the year before and by far the most in the decade and a half that the government has kept track. Applications are on a pace to be even higher this year.”– NY Times
Since the pandemic started, many have begun to ponder their career and life situation, revaluating their current position against such factors as work-life balance, remote access, flexibility, pay equality, job fulfillment and ability to be one’s true self at work. This has led to the Great Resignation but also the boom of new startups, where many formerly dissatisfied employees have become very successful entrepreneurs. During the past few years, and historically during previous recessions, many new companies are created despite the volatile market. Despite the entrepreneurial risks, the are greater potential rewards and having the right resources and information will help mitigate those risks.
In the pre-startup phase, business owners must weigh the risk and benefits, research market trends, analyze competition, define market niche, learn how to overcome obstacles, and make a lot of decisions, but yet many have no idea where to start. We have developed a checklist of how to start a new company in Kentucky.
1. Important Decisions to Make
Before you can begin setting up your company, there are some crucial decisions you need to make concerning your company and its structure.
- Decide what state you want to form your company in. Each state has their own pros and cons concerning things such as taxes, filing fees, and laws.
- Choose your desired name for your company. The name must be unique, so decide on a few names that you like in case your first pick isn’t available. It’s generally a good idea to avoid names that limit you in the future to a certain area or industry or are hard to pronounce – this could include your name if difficult to pronounce, your geographic location, or specific services provided in case you decide to expand in the future
- Decide on the entity type. State designations include LLC, LLP, and LP. IRS designations include Sole Proprietorship (Schedule C), Partnership, S-Corporation, C-Corporation, and Non-Profit
- Choose the legal address, email address, and phone number for the company.
- Figure out what you want your business to be. Decide on your principal business activity, if you will be selling products (and if so, what products), what city/cities you will be doing business in, if you will have employees, and if the business will be home based or have an office.
- Pick the manager and owners of the company.
- Choose the business accounting period. The accounting period can be the calendar year (January 1-December 31) or another date of your choosing. Most small business start out with a calendar year accounting period.
- Decide on whether you want the business accounting to be cash or accrual basis. Most small businesses start out as cash basis. A company is only required to be accrual basis if it is either publicly traded or produces over $25 million in sales revenue over a period of three years.
It is essential to decide on this information before you begin the process of legally setting up your company. You will need to refer to the decisions you make in this first step multiple times throughout this process.
2. Application for LLC
The next step in setting up your company is to apply for Articles of Organization with the Secretary of State. This document is used to establish the power, rights, liabilities, obligations, and duties of the LLC members.
The process for this will be slightly different for each state. In Kentucky, you will need to either log into, or create, your KY Department of Revenue account. Once logged in, choose “Register a new business” to get started with the application.
The application will ask for information such as:
- Registration contact information – the person registering the business
- Business name
- Registered Agent – the person who will receive information regarding the business in the future
- Principal office address
- Members (Owners)
- Business representative
- Effective date
Once you have submitted the application, paid the $40 fee, and the application has been accepted by Kentucky, you can obtain your Articles of Organization. To do this, go to this website and search for your company name.
3. Apply for Federal ID (EIN) with IRS
You will also need to apply for a federal employer identification number (EIN), which is a unique nine-digit number given by the IRS. The EIN is mostly used for filing taxes, but is also essential when opening a bank account or applying for credit for your business.
Applying for a federal EIN is free and is accepted immediately if done online. Go here to apply. Some of the information the application asks for includes:
- The entity classification – make sure you choose the correct entity classification, if you are unsure, stop and consult an accountant as the wrong choice can create a mess in the future!
- Responsible Party
- Address & phone number
- The type of business & the activity of the business
- The date the business was started or acquired
4. State Tasks
The next step in the legal setup of a company is to register for your state tax account. As with the Articles of Organization application, each state will have a slightly different process for this. If your business is in Kentucky, you will have to log into your KY Department of Revenue account to begin the registration process for your state tax account.
The application will ask about the following information:
- Registration contact
- Business operations
- Federal EIN
- Business address & phone number
- Accounting period
- Accounting basis
- Services and/or products your business will provide/sell
- North American Industry Classification System (NAICS) code (search for a code that fits your business using this website)
- Responsible party
- Questionnaires regarding which taxes you may need to remit and how often such as…
- Employer’s withholding tax
- Sales tax – only applicable if:
- You are selling products (but not for resale/wholesale)
- You are providing a service that is taxable within the state (refer to this website for a list of taxable services in Kentucky)
- UCRL, telecommunications, and coal taxes
- Consumers use tax
- LLET Tax
- Non resident withholding tax
- Tobacco tax
5. County Tasks
Just like the previous step, each county has different requirements when it comes to the legal setup of a company. Many cities and counties require a local business license and/or impose an occupational tax on companies operating in their area. They may also require a Certificate of Occupancy for your business location, even if it is in a home office. If you will be doing business in multiple counties/cities, you will have to research the local business license or occupational tax for each county/city. You can check this website to see which counties impose an occupational tax.
In addition to applying for a business license or preparing an occupational license fee account, for some counties, you will have to mail a copy of your Articles of Organization to the county accompanied by a fee.
6. IRS Form 2553 – S-Corp
If you have decided to be classified as an S-Corp, you will have to file Form 2553 with the IRS.
The legal setup of a company in Kentucky requires you to apply for Articles of Organization and a Federal EIN. You will also have to set up tax accounts for each state you will be doing business with, as well as apply for a local business license and/or open an occupational tax account in each county you will operate in. This process can be complicated, especially if you will be doing business in multiple counties or states.
If you need help with the setup of your company, you can contact us for an initial consultation.