Should You Form a Kentucky Limited Liability Company (LLC)?
Kentucky entrepreneurs eager to start their business must first make several important decisions, including how to organize their company. There are several types of entities to choose from including Partnerships, LLCs, Corporations, and Non-Profits. Depending on your priorities, an LLC might be the optimal choice for your business’s needs. Forming a Kentucky LLC can sound like a daunting task if you are not familiar with the process or the benefits of doing so. Below is a simple walkthrough of what an LLC is, the benefits, how to form a Kentucky LLC, and the steps to maintain your business.
What is an LLC?
The term LLC stands for Limited Liability Company, which is a hint as to why many individuals choose this type of business structure. An LLC is owned by individuals called members. There must be at least one member, but there is no limit on the number of members. The LLC can be either (1) member managed, meaning the members make the day-to-day decisions regarding the operation of the LLC or (2) manager managed, meaning the members appoint one or more managers who make the day-to-day decisions for the LLC. The managers can be members but are not required to be.
Benefits of an LLC
One of the top benefits of a Kentucky LLC is personal liability protection. When an LLC is formed, it is legally separate from its members. This means a member’s personal assets, such as his or her home, cannot be used to collect on any of the LLC’s business debts. This can alleviate much of the stress off of an LLC owner’s shoulders, especially for someone starting a new business.
Another main benefit of forming an LLC in Kentucky are the tax advantages. An LLC’s income and expenses passes through the LLC to the member’s personal tax returns, so the LLC itself is not taxed separately. Only the member pays personal income tax on any of the LLC’s profits. In contrast, a corporation is typically taxed twice, once on the corporate level and once at the individual level. It’s important to note that these situations can vary which is why you should always consult with your CPA or tax attorney.
An LLC is also a good choice for a business that prefers flexibility. For example, a corporation is typically required to hold annual shareholder meetings, keep substantial records, and follow strict rules. On the other hand, an LLC has (1) ownership flexibility, as there are no restrictions on the amount or type of members; (2) management flexibility, as the LLC does not have a board of directors that it must elect and then follow; and (3) profit distribution flexibility, as the LLC can agree which member should receive any profits and the amount of profits the members receive.
How to Form an LLC
In Kentucky, to form an LLC there are several steps to be completed. The first step is to form the LLC with the Kentucky Secretary of State. This can be done by visiting the Kentucky Secretary of State’s website, filling out the information for your LLC, and then submitting for approval to the Secretary of State. You will then receive a document referred to as the Articles of Organization.
The next step is to draft an Operating Agreement for your LLC. The LLC is governed and controlled by the Operating Agreement which will specify the type of LLC (member managed versus manager managed) as well as how the business of the LLC is to be handled. This document is often drafted by an attorney and will need to be signed by all members of the LLC.
Next, you should request your LLC’s Employer Identification Number (EIN) from the IRS. This can be completed online at the IRS’s website.
The final step in Kentucky is to create an account at Kentucky Business One Stop to register your LLC.
Maintaining your LLC
Once your LLC is formed, your next concern is to maintain it. If you don’t, you could lose the benefits of an LLC as it may be dissolved or found to not be a legitimate LLC by a court or the IRS. The following is a checklist to keep your LLC in good standing:
- Set up a separate bank account
- Keep the Operating Agreement up to date
- Keep any permits or licenses up to date
- File the annual report with the Secretary of State
- Save the Operating Agreement, Articles of Organization, EIN confirmation letter, and other important documents in a safe place
If you are interested in forming an LLC in Kentucky or Tennessee, or have further questions about the benefits of doing so, you can contact attorney Carson A. Mourad at 270-450-8253.