How to start a business in Kentucky in 8 steps
"Float like a butterfly, sting like a bee." Kentucky's own Muhammad Ali uttered those immortal words, and they apply to entrepreneurs looking to weave through an ever-evolving market and build a business that knocks out the competition.
In 2019, the Kentucky economy was swinging in full force with a heavyweight $189.4 billion and a reasonable growth rate of 1.0%. But then the COVID crisis sucker-punched the state, and suddenly thousands of businesses were down for the count.
But you can't keep Kentuckians down, especially those scrappy would-be business owners. And the state itself recently took 5th place for the best business climate in the country. So read on to discover how to bob around novice founder mistakes and learn how to launch your business in the Bluegrass State successfully.
1) Think about the type of business you want to start
Entrepreneurs setting out to create a brand must first decide whether they want to run a small or large company. Some components may be clear, such as whether an online store or physical storefront is best, while others may offer more significant challenges. Consequently, astute entrepreneurs analyze the competition to learn from their successes while avoiding their missteps.
Aside from the realities of your daily operations, you must also determine whether being a business owner is appropriate for you at this time in your life. Certain businesses take years to become profitable, and you'll face several failures along the road. Are you prepared to deal with the stress, hassles, and obligations that clichéd "be your own boss" advertisements never mention? (By the way, since they have all the money, the customer is and will always be the boss.)
If that business idea of yours still gets you excited about the possibility of the startup grind, now's the perfect time to start. While you may break each step down into smaller, actionable tasks, you must finish the process as soon as possible to begin serving your customer base.
2) Set up your legal structure
A legal structure is also known as a business structure, legal entity, or business entity. Nonetheless, all these words are related to your enterprise's legal organization. Aside from sole proprietorships and partnerships, every Kentucky business must appoint an owner or staff member to function as a registered agent since this person receives all state mail. Here are the structures to choose from:
- Sole proprietorship: Working as a sole proprietor is one of the simplest methods to structure your new company. Profits from your work are paid to you as the company's owner, but any business debt is your personal responsibility. Sole proprietorships require the least amount of paperwork since they are not incorporated. Furthermore, business owners may use their Social Security Number to record all income on their personal tax returns since there are no workers.
- Partnership: A general partnership could be the best option for starting a company with another person. Partnership owners, like sole proprietors, are personally responsible for business debt and have no liability protection for their personal assets.
- C Corporation: The C corporation is owned by its stockholders. This structure is usually a more appealing choice for businesses looking for investment. C corporations are legal entities separate from the people who work for and own them, and they are often large businesses. This structure requires the filing of annual reports and Articles of Incorporation with the Kentucky Secretary of State.
- S Corporation: Companies with 100 or fewer shareholders can elect to organize their operations as an S corporation, also called a small business corporation, to benefit from particular Internal Revenue Service (IRS) rules and avoid federal business taxes. And, the government may ask you to fill out more documentation, such as IRS Form 2553.
- Limited Liability Company (LLC): This form combines the ease of use of sole proprietorships and partnerships with the financial protections provided for corporations. You must submit Articles of Organization to the Kentucky Secretary of State as a Kentucky LLC.
- Nonprofit: Setting up a nonprofit may be a superb choice if your group plans to concentrate on social problems and raise funds via contributions. Nonprofit organizations are often exempt from paying income taxes.
In addition, corporations and nonprofits must create bylaws to outline how they will operate on a day-to-day basis. Similarly, although not required by law, LLCs should draft an operating agreement, a handy tool for partners. These agreements spell out your profit splits, ownership percentages, duties, as well as what happens if one of your LLC's owners quits.
For further help, head over to the Commonwealth's Choose a Structure Wizard. After you've decided on the proper structure for your company, the next step in the business formation process is developing your business plan. Your business plan should encompass your market research, business model, and financial projections.
3) Name and register your business
Selecting a business structure is a pain for most people, so you deserve to fire up the fun factor. Choosing a name for your company is among the most gratifying and creative activities of setting up a business, but there are a few crucial factors to ponder.
First, ensure your name is one-of-a-kind. To do that, check the Business Name Availability Search. Moreover, most companies in the Commonwealth must register with the Kentucky Secretary of State and the Kentucky Department of Revenue to do business lawfully. As a start on that, head over to the Kentucky One Stop Business Portal, which exists to provide an easy-to-use environment for companies to discover the requirements and resources they need to own and run a business in the state.
Sole proprietorships or partnerships that will be doing business as any name other than their legal name must register a "dba," also called a Certificate of Assumed Name, with the county clerk.
If applicable, after locking in a business name, register with the IRS and get your federal Employer Identification Number. When it comes time to file federal taxes, you'll need to use this ID number. In addition, Kentucky has a 5% state tax on personal income and corporate income. Finally, depending on where your company's located, you may need to file with your city or municipality.
4) Apply for licenses and permits
Kentucky has no statewide business license for all businesses, but some types of businesses must obtain specific licenses or permits to operate lawfully. In certain instances, you may need several licenses.
Along with the above-mentioned Business Portal, visit the U.S. Small Business Administration (SBA) website or the field office in Louisville for more information on licenses, permits, and filing fees specific to your business. For example, starting a restaurant has different criteria than opening a gym, and Lexington has regulations that Bowling Green does not have, and vice versa. As a result, any prior research will lead you closer to winning your first customer.
Depending on your business, you may also be required to hold occupational licenses. For instance, architects, barbers, cosmetologists, massage therapists, and private investigators all need licenses in Kentucky. Check the Occupational Licensing site to see what professional licenses apply to your industry.
If you plan to sell goods, you'll need to fill out the Kentucky Tax Registration Application, which lets business owners register for a Sales Tax Permit along with Kentucky's most common taxes, such as the Employer's Withholding Tax and the corporate and limited liability entity taxes (LLET).
5) Choose a location
Many new business owners mistakenly begin at this step because they discovered a fantastic bargain on a nearby retail spot. While evaluating potential business locations is essential, proceed with care before signing a lease.
You've probably thought about what sort of company you'll be running at this stage, and your business plan outlines your vision for your actual site. You've also presumably decided whether you'll launch with a handful of workers, how fast you'd want to expand, and what your competitors are up to.
All these factors will affect where you place your business, so it's best to make your decision at this stage of the process. Furthermore, zoning limitations may apply to specific structures, so getting your store or office up and operating may take some time.
6) Open a bank account and prepare for future taxes
Personal banking is allowed for commercial transactions for sole proprietorships and partnerships. On the other hand, other types of structures need a business bank account. For example, because corporations and limited liability companies (LLCs) separate their income and debt from the owner's responsibility, they must conduct all commercial activities from an independent account. With a bank account, you may fund your business through business loans, credit cards, or even with the help of investors.
You've most likely already obtained an IRS tax ID and paid the filing costs for your licenses and various permits. While you're still pondering when to open your doors to customers, prepare to pay both federal and state taxes. If balance sheet and cash flow statements cause you a migraine, rely on accounting software or a bookkeeper.
7) Purchase business insurance
In far too many instances, prospective business owners in Kentucky fail to complete one of the most important administrative duties of establishing a firm. Small business insurance is as essential as any other coverage you may currently have. Of course, you would never drive without insurance. Similarly, you should not attempt to drive sales without adequate protection.
Furthermore, state law may require business insurance for your startup, particularly when hiring employees. Because each industry has unique requirements, below is a summary of coverages your venture may require:
- Workers' compensation insurance is required for businesses with one or more employees. This insurance helps cover an employee's missed earnings and medical care due to job-related sickness or injury.
- General liability insurance may protect you if someone sues your company for bodily injury or property damage. If your workers visit a customer's property, such as a landscaping company, this coverage may be helpful.
- Business interruption insurance is another option to explore, which may help you pay your expenses if your company is forced to close temporarily for a covered reason.
- Both business property insurance and business personal property insurance are also smart protections to consider. For instance, the former may cover your building if it's damaged or destroyed, while the latter may cover damages to the items inside your building.
Except for workers' compensation, you could combine all the above insurance selections into a single policy known as a Business Owner's Policy, which offers a great deal of peace of mind with a mishap and significant savings versus the à-la-carte cost. Additionally, if you plan on hiring employees, you must provide unemployment insurance by registering and paying the Kentucky Office of Unemployment Insurance.
8) Create a marketing plan, hire employees, and more
Before your business enters the ring, make sure you've got a solid marketing plan in your corner. A company that doesn't have a marketing strategy is boxing blindfolded. Sure, they'll occasionally connect with a customer, but there are a whole lot of misses and wasted energy. Word of mouth is fantastic, but relying on it alone will likely have you seeing red on your balance sheet.
You don't need Michael Buffer to "get ready to rumble," simple actions like building a website, printing business cards, and creating social media accounts should all help your efforts to announce your business to your target market. Give your business plan a once-over to decide which tasks are the wisest investments of your time and limited resources.
Unless you're in a sole proprietorship or partnership, you will eventually need to hire your first employee, which prompts the purchase of workers' compensation insurance. Moreover, top-tier business resources such as the Small Business Administration, Kentucky Cabinet for Economic Development, and Kentucky Small Business Development Centers can help you through the process and offer advice as your company and business needs advance.
Starting your own company can leave you more tired than a prized fight, but after the bumps and bruises, you earn the title of "business owner." There are many tools ready to aid entrepreneurs to become champions for their customers and communities in the Bluegrass State, and here's one for your small business insurance:
Huckleberry can help you get a policy in about the time it takes to give a piece of KFC some TLC—most small business owners can easily get a policy in minutes.