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Should your Kentucky small business become an S corporation? The decision could save you money on taxes — or it could be a hassle with no real benefit. This article will help you assess whether it makes sense for your business entity to file for S corp status with the IRS, and show you how to form an S corporation in Kentucky.
Kentucky S corps are taxed as pass-through entities, which allows them to avoid corporate tax and instead pass their income tax obligations to their shareholders’ tax returns.
S corp status is a federal tax designation, not a business structure. This means LLCs or C corps can be S corps, provided they meet specific requirements.
Small businesses must file Form 2553 to the IRS to receive S corp status.
Unlock tax savings and ensure compliance with critical regulations with our assistance.
An S corporation is a business that has elected S corp status with the IRS by filing Form 2553, known as an S corporation election. Because S corp status is a Federal tax designation, a business that receives S corp status retains its business structure.
Only business entities eligible to be taxed as a corporation can file for S corp status. A sole proprietorship or partnership must form a limited liability company (LLC) or C corporation to become an S corp.
S corp status allows C corporations to benefit from a “pass-through” status like an LLC. On the other hand, S corp status will enable LLCs to reduce their shareholders’ self-employment tax burden in some instances.
To be approved for S corp status, your business must also meet specific requirements which we’ll detail later in this article.
Kentucky S corporations are taxed according to federal guidelines as pass-through entities. Still, they are also subject to another state tax called the limited liability entity tax (LLET).
In Kentucky, S corporations owe three types of income tax forms to the state:
A pass-through entity (PTE) return: Primarily informational, and accounts for your shareholder’s collective income tax obligations to the state
Corporation income tax: A Kentucky S corporation may owe state corporation income tax on passive income or built-in gains
Limited liability entity tax: Every S corp must pay a limited liability entity tax (LLET) based on its Kentucky profits, with a minimum cost of $175
While not specifically a franchise tax, Kentucky charges a Limited Liability Entity Tax to all companies that benefit from limited liability protections in the state. This is a relatively low tax on gross profits or receipts. The state has set a minimum of $175 for this business tax.
C corporation owners typically go through “double taxation.” The corporation pays its income tax, and then shareholders pay personal income tax on their earnings.
S corp status allows C corporations to access “pass-through” taxation. With pass-through tax treatment, they can circumvent state and federal corporate income tax and pay all of the company’s income taxes on its shareholders' personal income tax returns.
Pass-through taxation can amount to substantial tax savings, making S corp status attractive to many C corps.
LLC members pay self-employment tax on all their business income, which can be demanding for some. But S corp status allows them to receive distributions from the S corporation that aren’t subject to self-employment taxes. These dividends must come after they receive a “reasonable” salary for their work in the business.
Businesses must meet the following qualifications set by the IRS to receive S corp status:
The business entity must be a limited liability company (LLC) or C corporation
Some financial institutions and insurance companies are eligible for S corp status
S corporations must be domestic (located in the United States)
An S corporation cannot have more than 100 shareholders
An S corporation can only issue one class of stock
Certain entities and individuals cannot be S corporations shareholders, including:
Nonresident non-U.S. citizens
To form an S corporation in Kentucky, you’ll need to establish a business entity if you don’t already have one. Below, we guide you through the steps required to form such an entity, a C corporation in Kentucky.
You’ll need to select a business name that is available for use and meets state requirements.
Your Kentucky business name must have one of the following words (or its abbreviation listed in parentheses):
While brainstorming corporate names, check that a domain name and relevant social media handles are available before one serious consideration.
Conduct a business name search on the Secretary of State’s website to determine if your name is available. You can also call (502) 564-3490 or write to the Kentucky Secretary of State’s office for a free preliminary name availability check.
The state disregards punctuation, case, conjunctions, articles, and entity endings when it checks name availability. Refer to these rules for specifics and examples.
When you’ve found the perfect name, you can reserve it by filling out a name reservation form and sending it to the Kentucky secretary of state. The filing fee is $15; your name will be reserved for 120 days.
C corporations must maintain a board of directors that meets at least annually. Made up of at least one person — who may also be a shareholder — the board of directors assumes responsibility for the overall well-being of the corporation.
The S corporation shareholders work together to appoint the board of directors. To get started, you’ll need at least one director; ideally, you’ll soon have a trusted board. S corp directors make significant decisions for the business by a vote at board meetings.
A business’s registered agent receives legal documents on its behalf. Your Kentucky registered agent must be located in the Bluegrass State and have a street address where it maintains regular business hours.
Because your registered agent will handle critically important correspondence in a legal situation involving your company, it’s wise to hire a professional registered agent service that is experienced and reliable.
Swyft Filings’ registered agent service securely stores all your important documents online and is a strong choice for any S corporation in Kentucky.
Articles of Incorporation are a simple form that officially registers your business with the Kentucky Secretary of State. Here’s what you need to have ready before filing:
A $40 filing fee (plus an organization tax based on the number of shares being issued)
Your business name and “business ending” (corporation, co., limited, etc.)
The number of shares the company plans to issue
The name and address of your corporation’s registered agent
The address of your business’s principal office
The name, address, title, and signature of at least one incorporator
An entity email address
LLCs must file a similar document called Articles of Organization (in some states, it’s called a Certificate of Organization).
Now that your business is official, you must file an annual report to the Kentucky Secretary of State every year, keeping this information current. The filing fee is $15.
Your business will also owe the Limited Liability Entity Tax (LLET) to the Kentucky Department of Revenue. Like a franchise tax, it takes a small percentage of the business’s profits, a minimum of $175.
Bylaws are the user’s manual and rulebook for a corporation. Business owners make all of their decisions within the procedures stipulated by the bylaws. LLCs operate by a similar document called an operating agreement.
Swyft Filings can help you draw up bylaws for your new corporation. When you form your S corporation in Kentucky, you’ll want to implement a robust set of corporate bylaws as soon as possible.
Like a social security number, a company’s Employer Identification Number (EIN) is its unique IRS taxpayer code. But when you establish your Kentucky S corporation, you’ll need an EIN long before you start paying income tax or even withholding employment taxes.
An EIN is essential for the financial and legal existence of your business. You’ll need one to apply for a business bank account, loans, and credit cards, register for necessary licenses and permits, and numerous essential business functions. You can get an EIN for free right here on our website.
This final step is the most important. Remember that S corp status is a federal tax classification — so your business entity is not an S corp until the IRS says it is. That’s why to become an S corp, you must file Form 2553, an S corporation election, to the IRS.
You’ll need to pay attention to these deadlines:
To receive S corp status for the current tax year, file Form 2553 before the 15th day of the third month of the tax year
For the coming year, file Form 2553 anytime in the current year
LLCs filing an S corporation election past the deadline must file Form 8832, a separate IRS tax form, at the same time that they file Form 2553
After filing, you should hear from the IRS within 60 days.
Would your business model benefit from S corp status? Here we compare the tax treatments of a limited liability company (LLC) and a Kentucky S corp.
Kentucky LLCs are easy to start and run and provide a robust business structure. LLCs are a hybrid business structure that marries pass-through taxation with limited liability, which is often all a business owner needs to get started.
LLCs can’t issue stock, so fundraising could be an issue if you require lots of investment. In addition, transferring ownership of an LLC frequently can be difficult because members instead of shareholders form them.
And if you’re drawing high profits from your LLC, you will owe self employment tax on all your earnings. For businesses making lots of money, this can be onerous.
Owners of a Kentucky LLC could gain serious tax savings from an S corporation election. If you’re drawing significant profits from the business — more than you would “reasonably” earn as an employee for your work — you’re free to take distributions, free of self-employment tax. LLCs can’t access this tax treatment.
In addition, if you want to overcome barriers to investment and stock ownership that LLCs face, you can circumvent this by forming a C corporation and still benefit from pass-through taxation with S corp status. Remember, however, that there are limitations to the shareholders you could have, and you could issue just one class of stock.
If S corp status can’t provide you substantial benefits for tax purposes, the hassle isn’t worth it. A Kentucky LLC is a better option for early-stage businesses that aren’t yet making large amounts of money because it requires the least amount of paperwork and management.
Now that you know what it takes to form an S corporation in Kentucky, it’s even more important to remember that you don’t have to do the paperwork yourself. Our S corp formation service has helped thousands of business owners incorporate their company and file for S corp status.
Swyft Filings will complete your paperwork correctly by ensuring you meet all the S corp limitations, select the perfect business name, and fill out all the forms correctly with appropriate filing fees. It saves your small business time and risk at a small expense.
Maximize Tax Benefits: Experience pass-through taxation with Kentucky S corp status and avoid double taxation.
Access a One-Stop Solution: Establish an LLC or C corporation easily and then transition to S corp status, all within our platform.
Stay Compliant: Our compliance alerts help keep you up-to-date on all the complex compliance requirements of an S corp so you can stay on the government’s good side.
A Kentucky business (LLC or C corporation) that files Form 2553 with the IRS, electing S corp status.
Kentucky recognizes S corporations. They are only charged corporation income tax for passive income, file a pass-through return, and pay limited liability entity tax (LLET).
The IRS estimates a 60-day turnaround time for S corporation elections.
An S corp is a business with a Federal tax status under subchapter S of the Internal Revenue Code. A limited liability company (LLC) is a business entity that has chosen the LLC business structure.
Kentucky S corporations are allowed only 100 or fewer shareholders; corporations and certain persons cannot be shareholders; the S corp can only issue one class of stock; among other limitations.
Taxes for LLCs and S corps vary slightly. While both are pass-through entities, S corps can allocate “distributions” to shareholders free of self-employment tax. This has to happen after the shareholders are paid “reasonable” compensation for their work in the company. LLC members, by comparison, owe self-employment tax on their earnings no matter what.
S corps are taxed by their profits in Kentucky via the LLET; their income taxes vary based on their shareholders' personal income tax returns; and outside of passive income, they don’t pay corporate income tax.
File articles of dissolution with the Kentucky secretary of state, including a $40 filing fee.
Kentucky Department of Revenue. “Corporation, LLC, and Pass-Through Entity Tax Frequently Asked Questions.” Accessed April 4, 2023.
Kentucky Department of Revenue. “Corporation Income and Limited Liability Entity Tax.” Accessed April 4, 2023.
Internal Revenue Service. “S Corporations.” Accessed April 4, 2023.
Kentucky Secretary of State. “Guidelines to Name Availability.” Accessed April 4, 2023.
Kentucky Secretary of State. “Fees.” Accessed April 5, 2023.
No matter the business type, Swyft Filings can help you form your new company.