Known for its delicious bourbon, world-class horse racing, and housing the world’s longest cave system, Kentucky has a culture and atmosphere all its own. You can add “great place to start a business” to the state’s bio, too. Entrepreneurs in the state benefit from a tax-friendly business climate that features corporate tax, individual income tax, and sales tax rates that are among the top twenty lowest in the nation.

Additionally, Kentucky ranks in the top 15 in terms of the cost of living and housing affordability. Kentucky’s low tax rates and affordability are likely the reason why Kentucky has a high new entrepreneur opportunity share of 85.38%, which is the ratio of people creating a business out of desire rather than necessity.

To aid you in your pursuit of entrepreneurial success, we’ve produced this step-by-step guide to starting a business in Kentucky. We’ll inform you about the necessary documents you need to file in order to register your business in the state, discuss licensing and tax obligations, and point you in the direction of investors that can provide much-needed funding for your early-stage company.

Kentucky small business statistics at-a-glance

  • Kentucky’s sales tax is the 14th lowest in the U.S., while its corporate and income taxes among the top 20 lowest. 
  • U.S. News rates Kentucky the 13th best state for affordability based on its 14th ranked cost of living, and 13th ranked housing affordability.
  • Kentucky’s opportunity share of entrepreneurs is 85.38%, while the percentage of Kentucky startups that survive through the first year is 78.71%.
  • On average, Kentucky startups create 4.26 new jobs. 
  • 347,159 small businesses operate in Kentucky, accounting for 99.3% of total businesses in the state.
  • 696,183 Kentucky residents are employed by small businesses, which is 44.1% of the state’s workforce.
  • The health care and social assistance industry is the largest small business employer in the state, followed by accommodation and food services, and retail trade.

Sources: Tax Foundation, Kauffman, U.S. News, Small Business Administration

Starting a business in Kentucky in 12 steps

1. Develop an idea

Every successful business starts with a good idea. Ask yourself these questions: 

  • Which product or service can your business provide that doesn’t already exist on the market? 
  • How does your business idea refine an existing product or service?

Determine your personal strengths and interests: developing an idea that suits your personality and positive traits will provide motivation to put in the long hours necessary in addressing the myriad challenges you’ll face in getting your business off the ground.

Figure out how to market your expertise: if your business idea is not something you totally believe in and can sell effectively, it will be much harder to succeed.

2. Do the research

Once you have an idea, it’s time to put it through the wringer and decide if it’s viable in the market. Conduct market research to arrive at answers to these key questions:

  • Is there a demand for your product/service in Kentucky? 
  • Who is your target market?
  • Do existing businesses in Kentucky offer a similar product/service?
  • What makes your business unique compared to the competition?

Coming up with satisfactory answers may require refinement, or even a total overhaul, of your original idea. Be patient: you’ll only want to proceed with the next steps after determining that a niche exists in the Kentucky market for your business idea.

3. Draft a business plan

Now it’s time to write the blueprint of your business. A great business plan should chart the path of your company from infancy to success while being able to attract investors to provide financing.

Your business plan ought to include the following sections:

  • Executive summary – An overview of your business and why it will be successful
  • Description of business – Explain the advantages of your business and the problems it solves
  • Market research – Provide research on your industry, target market, and potential competitors 
  • Organization and staff – Detail the nuts and bolts of your business; how it’s structured and who will run it
  • Product or service description – State what you are selling or offering
  • Marketing plan – Explain your strategy for attracting customers
  • Fundraising – The money you’ll need in the next five years to grow your business and how you’ll spend it
  • Financial forecast – Data and balance sheets providing a financial forecast for your business
  • Appendix – An optional section with supporting and/or requested documents like resumes, letters of reference, permits, etc.

4. Secure funding

Every business needs money to get off the ground. In fact 82% of businesses that fail do so because of a lack of cash flow, U.S. Bank found in a recent study. Your business plan should include a detailed estimate of the funds you’ll need to cover expenses for at least a year, so now it’s time to acquire the money.

If you aren’t wealthy enough to self-fund your business, you can choose from a number of other funding options. These include a loan from the U.S. Small Business Administration, taking out a loan from a commercial bank, launching an equity crowdfunding campaign, or securing funding from an angel investor or venture capitalist group active in Kentucky.

An angel investor is a wealthy individual who invests their personal finances in a startup, typically in the beginning stages, whereas a VC is a group of investors that will fund a business throughout its existence.

Which route you choose depends on the specifics of your business: angel investors typically invest smaller sums to help get a startup off the ground, while VCs invest larger sums of money in exchange for a greater say in the operations of a business. Smaller startups usually opt to pursue funding from angel investors.

Investors in Kentucky are eligible for a tax credit of 40% (or 50% in counties with high unemployment) on a minimum cash investment of $10K in a local business. This incentive helps to increase investment activity in the state, although the receipt of applications is currently suspended until 2021 due to the overwhelming response of applicants.

Kentucky Angel Investors and VCs

  • Bluegrass Angels – A Lexington-based organization founded in 2004 that has invested millions of dollars in Kentucky-based tech startups. The group intends to fund 5-7 new companies through 2020.
  • Kentucky Angel Investors – A statewide network of 93 angel investors that hold monthly online meetings to examine funding opportunities.
  • Lincoln Trail Venture Group – A central Kentucky VC firm with a diverse membership ranging from wealthy business owners to farmers and housewives.
  • Tri-State Angel Investment Group – A network of accredited investors active in Kentucky, Ohio, and West Virginia.

Additional Investor Resources

  • AngelList: Kentucky Angel Investors – A directory of 4930 individual investors and 553 companies seeking investment opportunities in the Bluegrass State. To learn more about an investor, click their profile which includes their professional background, a tally of total investments made, and their areas of interest. 

5. Decide on a legal business entity

The form of business entity you choose will affect many factors going forward. There are 3 main options to decide from:

  • Sole proprietorship – The name for running a business by yourself. Legally, you and your business are one and the same, with no separate legal entity for your business. A partnership is legally identical to a sole proprietorship, except that it comprises two or more people.
  • Corporation – A complex legal structure that is a separate entity (providing legal protection to owners) from the owner and comprises directors, officers, and shareholders.
  • LLC – AKA “Limited Liability Company”, this is a hybrid entity between a sole proprietorship and a corporation that possesses advantages of both. An LLCs provides the liability protection of a corporation, yet isn’t subject to double taxation as the profits go through your personal tax return.

Nowadays, LLCs are the option of choice for small business owners as they are easy to manage and provide the benefits of a corporation while lacking their complex structure. Taxwise, they operate more like a sole proprietorship.

You may want to consult with an attorney to help decide which entity works best for your business. 

6. Register your business

Once you’ve settled on an entity for your business, it’s time to register with the Commonwealth of Kentucky. This process varies whether you are forming a sole proprietorship, LLC, or corporation.

For sole proprietorships

Operating a sole proprietorship in Kentucky requires no special filings, however, if your chosen business name does not include your given name, you must file a Certificate of Assumed Name with your local county clerk’s office.

First, use the Name Availability Search to confirm that your chosen name is available in the state, then find your county clerk in the state directory, and give them a call to learn their operating hours and information on the fee for filing a Certificate of Assumed Name.

For LLCs and corporations

Forming an LLC or corporation in the Commonwealth of Kentucky follows a similar process, albeit with different paperwork. First, you must appoint a registered agent to receive process notices and other government correspondence on your business’s behalf. Those with a physical address in Kentucky are eligible to be their own registered agent, however, hiring a professional is cheap—$50-$200 a year, and reduces the amount of time you’ll spend filling out paperwork.

After appointing a registered agent, check to see that your chosen business name is available with the Name Availability Search. If it is, you’re ready to register your LLC or corporation.

Those forming an LLC must file Articles of Organization with the state while forming a corporation requires Articles of Incorporation. Either document can be filed online at the Kentucky Online Gateway after creating an account, or printed and mailed in. The filing fee for either Articles of Organization or Articles of Incorporation is $40.

7. Acquire federal and state tax IDs

Now you should obtain a Federal Employer Identification Number (EIN), which is like a social security number for a business and allows you to open bank accounts, handle payroll, and file taxes.

For sole proprietorships, an EIN is optional, although it is required for corporations and LLC’s. You can apply online for your EIN through the IRS website, or fill out and mail this form.

Each state has its own laws and taxes regarding businesses. Visit the Kentucky Government’s State Tax Registration Requirements for information on state taxes that may apply to your business and instructions on how to register with the Department of Revenue.

8. Open business banking and credit accounts

Opening a bank account for your business is crucial because it allows you to separate company assets from your personal assets, and makes filing taxes a lot easier. This is a recommended step, even if you are operating a sole proprietorship.

It’s also a wise idea to obtain a credit card for your business because it will help you isolate business expenses and build up credit for your company, which may help in securing investment in later stages.

Local banks operating in Kentucky good for small businesses

9. Get the necessary licenses and permits

Depending on the type of business you are opening, you may need to apply for a number of permits and licenses to operate legally. For example, a restaurant will need a liquor license, and a pawn shop will need a reseller’s license. The paperwork may prove a hassle, but it’s a necessary ordeal that will protect you from fines, lawsuits, and other legal hazards.

Kentucky does not issue a statewide business license, but depending on the nature of your business, you may need one or more special licenses or permits to legally operate in the state. Visit the Department of Professional Licensing website for a directory of professional boards that regulate and issue licenses for a wide number of professions. If you are still unsure of the permits or licenses you need, contact your local county clerk’s office.

10. Choose a location

Whether you are running an online business or opening a restaurant, location is everything. Be aware of the demographics of the neighborhood or town that you are considering: Are the local residents likely to visit your business? Will nearby competitors take a share of your potential profits?

Louisville, Kentucky’s largest city, is home to the state’s most vibrant startup scene. The city rests on the Ohio River on the border with Indiana and is home to the University of Louisville, as well as six Fortune 500 companies.

Kentucky’s second-largest city, Lexington, is another good choice for entrepreneurs, with affordable housing and a well-educated populace from which to draw employees to your team.

11. Get insured

No matter what type of business you form, buying insurance coverage to protect yourself in the case of property damage or legal action is a good idea. In fact, businesses with employees are required by the federal government to have two types of insurance, while others are strongly encouraged or required at the state level, depending on your business type. Consult with a licensed insurance agent to find out which types of insurance you should get.

Required forms of insurance:

  • Workers’ compensation: Covers medical costs and disability benefits if an employee is injured or becomes ill on the job.
  • Unemployment insurance: Provides benefits to workers after a loss of job through no personal fault.

Recommended forms of insurance:

  • Professional liability insurance: Covers losses as a result of property damage, medical expenses, libel, slander, and negligence claims.
  • Commercial property insurance: Covers property damage to business owned properties and possessions as a result of fire, theft, or storm.
  • Disability insurance: Provides short-term benefits for employees suffering an illness or injury. Required in certain states such as California, New York, and Hawaii.

12. Develop an internet presence

Establishing an identity on the web is an important investment in a business’s future development. Here are some key steps in the process:

  • Register a domain name for a company website (You can use domain.com, Bluehost, GoDaddy.com, Namecheap.com). Design the website and fill it with content.
  • Create profiles on the popular social media services (Twitter, Facebook, Instagram)
  • Register a Google profile for your business
  • Create accounts on review sites such as Yelp, Google Reviews, and TripAdvisor

 

Kentucky small business resources