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Editorial 10 MIN READ

Kentucky in March 2019: cheap to form, expensive to forget

A $40 filing fee, a $15 annual report, and a gross-receipts tax that most founders do not see coming

The Editors
Staff, Incorporator.org
10 min read Updated
Contents 7 sections
  1. The mechanics
  2. The annual report, and the deadline that administratively
  3. The LLET, which is the real Kentucky tax
  4. What HB 366 changed, and what it did not
  5. The registered-agent requirement and the in-state address
  6. Who this state actually makes sense for
  7. Sources

Kentucky LLC costs $40 to form and $15 a year to keep. Those are the two numbers on the Secretary of State's fee schedule, and together they make Kentucky one of the three or four cheapest states in the country to incorporate and maintain. The third number, the one that is not on the fee schedule, is the $175 minimum Limited Liability Entity Tax, and it is the number a Kentucky LLC formation guide exists to warn you about.

This is a guide for someone forming in March 2019, written for a reader who already knows what an LLC is and wants the Commonwealth's specifics without the throat-clearing.

The mechanics

You file Articles of Organization with the Kentucky Secretary of State under KRS Chapter 275, the Kentucky Limited Liability Company Act. The filing fee is $40, paid to the Kentucky State Treasurer, and it has been $40 for long enough that Kentucky is a reliable outlier on the cheap end of the national range. You can file online through the Secretary of State's Business Filings portal or mail the one-page form (KLC). Online is the default and clears in a business day or two. Mail is slower and exists mostly for the people who insist on it.

The Articles ask for the items KRS 275.025 requires: a name that contains "limited liability company," "LLC," or one of the acceptable variants; the mailing address of the initial principal office; the street address of the initial registered office in Kentucky; the name of the initial registered agent at that office; a statement of whether the LLC is to be member-managed or manager-managed; and the signature of the organizer and of the registered agent accepting appointment. The registered-agent consent on the same page is a Kentucky quirk worth flagging; several other states collect it separately.

You will need an EIN from the IRS, which Form SS-4 produces online in the time it takes to answer twelve questions. You will need an operating agreement, which Kentucky does not require you to file and does not require to be written, but which the statute treats as the governing document for most of the questions that matter once two people are involved. For federal tax purposes, you pick from the usual menu: disregarded entity (single-member default), partnership (multi-member default), S-corp (Form 2553), or C-corp (Form 8832, then Form 2553 if you want to flip again). Kentucky piggybacks on the federal classification for income-tax purposes, so the federal election cascades down to the state return.

There is no expedite menu comparable to Delaware's tiered pricing. If you need the filing tomorrow, file online today and call the Business Filings division if it stalls. The Commonwealth is not in the speed business.

The annual report, and the deadline that administratively

dissolves you

Kentucky requires every domestic and foreign entity on the rolls to file an annual report with the Secretary of State between January 1 and June 30 of each year. The fee is $15. The form confirms the principal office address, the registered agent and office, and the names and addresses of the managers or members who serve in a management capacity. It takes five minutes if your information has not changed.

Miss the June 30 deadline and the Commonwealth administratively dissolves you. This is not a $200 late fee regime like some states run; the failure to file is itself the trigger for dissolution under the statute. Reinstatement is available and not expensive, but it requires filing the missed report, paying a reinstatement fee, and waiting for the Secretary of State to process a "Certificate of Reinstatement" that moves you back into active good standing. While you are administratively dissolved, you cannot maintain an action in Kentucky courts as the dissolved LLC, which is how most founders discover the problem: they try to sue a deadbeat customer and their own lawyer tells them they have no standing.

The reminder notice Kentucky sends looks enough like junk mail that it gets thrown away at roughly the same rate as Delaware's franchise-tax notice. Put June 30 on your calendar the same day you file the Articles. Set a second reminder for June 15. If you use a commercial registered agent, ask whether their service includes the annual report; most do, for a small add-on.

The LLET, which is the real Kentucky tax

The item that makes Kentucky less cheap than the headline fees suggest is the Limited Liability Entity Tax, imposed under KRS 141.0401 on every corporation and pass-through entity with limited liability doing business in the Commonwealth. Sole proprietorships and general partnerships, which have no liability shield, are outside the regime by design. LLCs are inside it. So are LLCs taxed as disregarded entities, as partnerships, as S-corps, and as C-corps.

The LLET is calculated as the lesser of two amounts: $0.095 per $100 of Kentucky gross receipts, or $0.75 per $100 of Kentucky gross profits (gross receipts less cost of goods sold as the statute defines it). There is a minimum tax of $175 regardless of the calculated amount. An entity with less than $3 million in Kentucky gross receipts and less than $3 million in Kentucky gross profits pays the $175 minimum flat. The full rates apply at $6 million and above. The range between $3 million and $6 million is a phase-in.

The $175 minimum is the number to internalize. A single-member LLC doing $50,000 of consulting revenue out of a home office in Lexington owes $175 in LLET for the privilege of having the liability shield, and it owes that regardless of whether the LLC turned a profit, had employees, or took a distribution. The LLET is paid with Form 725 for a single-member LLC or Form 765 for a multi-member LLC, both filed with the Department of Revenue, and it is separate from the owner's individual Kentucky return. An S-corp files Form 720S. A C-corp files Form 720. The same LLET applies to all of them.

What the LLET does on the gross-profits side is unkind to service-heavy businesses. KRS 141.0401(1)(d) restricts the "cost of goods sold" deduction to costs incurred directly in acquiring or producing tangible property: manufacturing, producing, reselling, retailing, and wholesaling. Labor, overhead, rent, and most of the expenses a law firm, accounting practice, or software company actually incurs are disallowed from the COGS computation. A Kentucky-resident consultancy pulling $8 million in gross receipts will therefore usually owe LLET on roughly the gross-receipts basis rather than the gross-profits basis, because its gross profits and gross receipts are nearly identical. The tax Frankfort designed for manufacturers hits services harder in practice.

There is a credit against Kentucky individual income tax for the LLET a pass-through owner pays, so the money is not quite double- taxed at the owner level, but the credit does not refund the minimum $175 for an entity with no net income. The floor is a floor.

What HB 366 changed, and what it did not

In April 2018 the General Assembly passed House Bill 366 over Governor Bevin's veto, the most significant overhaul of Kentucky's tax code in a generation. For a Kentucky LLC owner, two changes matter.

The first is the individual income tax. HB 366 repealed the graduated bracket schedule (2% to 6%, with the top rate reached at modest income) and replaced it with a flat 5% rate for tax years beginning on or after January 1, 2018. A single-member LLC owner in Kentucky now sees the pass-through income hit the individual return at 5%, no brackets, no phase-outs, no rate-stacking as income rises. The previous schedule was mildly progressive on paper and regressive in effect because the top bracket started so low; the new 5% is a mild cut for high earners and a mild increase for low earners, and for most LLC owners it is a simplification more than anything else.

The second is the corporate rate. HB 366 also repealed the old graduated corporate rates (4%, 5%, 6%) in favor of a flat 5% corporate income tax. An LLC taxed as a C-corp for federal purposes pays Kentucky corporate income tax at 5% on net income apportioned to Kentucky, plus the LLET described above, with the LLET credited against the corporate income tax. In effect, the C-corp LLC owes the greater of its computed corporate income tax or its LLET, not both stacked.

HB 366 also decoupled Kentucky from the federal Section 199A pass- through deduction. Kentucky does not allow the 20% deduction on the state return. A pass-through LLC owner whose federal taxable income benefits from 199A does not get a parallel benefit on the Kentucky return; the 5% state rate applies to the undeducted pass-through income. The arithmetic is unfavorable enough that a sole-proprietor flirting with an S-corp election for the federal wage/distribution split should model the Kentucky return carefully. What looks like a pure federal win can be partially clawed back by the state's refusal to conform.

The sales-tax base was also expanded, and the cigarette tax was raised. Those are background facts for an LLC owner in retail, food service, or a handful of newly taxed services (small-animal veterinary, landscaping, dry cleaning, and several others), and registration for the Kentucky sales and use tax permit at registration.ky.gov is the operational consequence.

The registered-agent requirement and the in-state address

Every Kentucky LLC needs a registered agent with a physical street address in Kentucky per KRS 275.115. A P.O. box alone does not satisfy the requirement. The agent can be an individual resident or a business entity authorized to do business in the Commonwealth. You can serve as your own agent if you have a Kentucky street address and are available during business hours to accept service of process.

The commercial market in Kentucky is priced in line with neighboring states: $50 to $125 a year at the commodity end, $125 to $300 at the full-service end. The value differential is the same as everywhere else: at the commodity end you are paying for a mailbox; at the higher end you are paying for a firm that will catch service of process and forward it the same day, remind you about the June 30 annual report, and push through a reinstatement quickly if you have fallen out of good standing. In Kentucky, where administrative dissolution is the default consequence of a missed annual report, the higher-end service usually pays for itself the first time you would have missed the deadline.

Who this state actually makes sense for

Kentucky is a sensible state to form in for three kinds of entity.

The first is the operating business with physical presence in the Commonwealth. Bourbon distilleries are the obvious marquee case; Kentucky produces roughly 95% of the world's bourbon, and the distilleries operating under Kentucky LLCs, their real-estate holding LLCs, and their related marketing and tourism LLCs all sit inside an intertwined regulatory regime (TTB permits, Kentucky ABC licensing, federal label approval, state ad-valorem tax on aging barrels) that makes foreign-qualifying from Delaware pure overhead. The same logic applies to horse-farm operations in the Bluegrass, Toyota and Ford supplier networks in Georgetown and Louisville, and the healthcare and logistics operations that cluster around UPS Worldport. If the employees, inventory, or customers are in Kentucky, the LLC belongs in Kentucky.

The second is the low-maintenance holding vehicle whose owner is a Kentucky resident. The $40 formation and $15 annual report are genuinely cheap, and the $175 LLET is the cost of admission rather than a variable burden. A single-purpose real-estate LLC holding a Louisville duplex pays $175 a year to exist in the Commonwealth's tax regime, and in exchange gets the liability shield KRS Chapter 275 provides. That is a fair trade for a Kentucky resident who would otherwise pay the $300 Delaware alternative-entity tax, foreign- qualify into Kentucky, and end up owing the LLET anyway.

The third is the working owner who wants the simplest possible state return. The flat 5% individual rate removes bracket management from the planning exercise. For a Kentucky LLC owner whose income is overwhelmingly pass-through, the state return is close to trivial once the LLET is paid. That is not a reason to form here if you live elsewhere. It is a reason not to overthink it if you do.

Kentucky is a weak fit for the venture-backed startup. If your cap table will ever include a fund, form in Delaware and save the conversion. It is also a weak fit for the owner who lives in Ohio, Indiana, or Tennessee and is shopping for a favorable state of incorporation; the LLET applies to any LLC "doing business" in Kentucky regardless of where it was formed, so you cannot escape the $175 floor by domiciling next door, and you cannot acquire Kentucky's cheap filing fees without exposing yourself to the LLET through any genuine nexus.

If you are forming this quarter and the business is in Kentucky, file the Articles online this week, put June 30 on the calendar in two places, and budget the $175 LLET as a line item from day one. The state is cheap to form in. The discipline required to keep the entity alive, in good standing, and current on the LLET is the part that is not on the fee schedule.

Sources

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