Ready to turn your business idea into a reality in Kentucky? It might seem tough at first, but with our easy-to-follow checklist, you’ll know what steps to take. From getting your business officially registered to securing the funding you need, we guide you through each stage..
Steps To Start A Business In Kentucky
Step 1: Choose a Business Idea
The first thing you need to do when starting a business in Kentucky is figure out what your business will be about. Maybe you’ve already got an idea, or maybe you’re still thinking about it. Either way, we’ve got a bunch of business idea profiles for you to look at. You can find out what you need to know about different kinds of businesses, how much it might cost to get started, some helpful advice, and a lot more.
Step 2: Write a Business Plan
Creating a business plan is an important step in starting a business. It’s not just a document to show to investors and lenders; it’s also your guide for mapping out your goals, how you plan to reach them, and the steps it’ll take to get there. Here’s why having a solid business plan matters:
- It gives you clear direction: A good business plan refines your business idea, who you want to sell to, and what makes you different from the competition. It helps you stay on track with your goals, making sure you use your time and money wisely and make smart choices.
- Helps with money matters: Your business plan will show how much it will cost to start and help you see if your idea can make money.
- Draws in funding: A business plan shows the people who might want to invest in your business or lend you money that you’ve done your homework.
- Prepares you for challenges: Every business faces hurdles, but a business plan helps you see some of these future challenges. This lets you think ahead about handling them, which means you’re better prepared.
Related: How to write a business plan
Step 3: Find the Money
Once we have a grasp on the direction and financial needs of the business, the next step is to figure out where the money is going to come from. If personal funding isn’t enough, outside sources will be needed. Some common ones are below:
- Bank loans: Traditional lenders offer a range of financing options for small businesses, including term loans, lines of credit, and commercial mortgages. To secure a small business loan, banks generally require personal investment (typically between 15%-25% of the total startup costs), collateral, a strong credit score, and a detailed business plan.
- SBA loan guarantees: The U.S. Small Business Administration (SBA) partners with lenders to provide loan guarantees, reducing the risk for banks to help small businesses obtain financing.
- Friends and family: This route offers a more personal and flexible approach to raising money, but it’s important to set clear expectations about the risks and potential returns to ensure everyone is on the same page.
- Microloan programs: Microloan programs, offered by non-profit organizations and alternative lenders, provide smaller loan amounts, typically under $50,000, to startups and small businesses that may not qualify for traditional bank loans. A few microloan programs in Kentucky include the Community Ventures Corporation (CVC), Kentucky Highlands Investment Corporation, and LiftFund.
- Investors: Another funding option is to seek investment from angel investors or venture capitalists. These investors provide capital in exchange for equity in your business. To attract investors, you’ll need a compelling business idea, a solid business plan, and a clear path to profitability. Local networking events and organizations like the Kentucky Angel Investors can help you connect with potential investors in the state.
Step 4: Select a Business Structure
The next step in starting a business in Kentucky is selecting a business structure (also called a business entity). A business structure is the way a business is legally organized to conduct business. This decision defines how your business operates, pays taxes, and the personal liability of the owners, so choosing the right one is important.
Let’s look further into the four main types of business entities, which include the sole proprietorship, general partnership, corporation, and Limited Liability Company (LLC), and discuss their differences, pros, and cons.
Sole proprietorship: This is the simplest business structure, where you, as the owner, own and operate the business. With this structure, the owner and business are legally considered the same.
- Easy to set up and lowest cost. With a sole proprietor, there is no entity to register; however, if you want to operate under a specific business name, a Certificate of Assumed Name, also known as a DBA (Doing Business As), will need to be filed with the County Clerk in the county where the business is located.
- Complete control over the business
- Pass-through taxation (profits are taxed on your personal income tax return)
- Unlimited personal liability (you’re personally responsible for all the business’s debts and liabilities)
- Limited access to funding
- Difficulty in transferring ownership
General partnership: A partnership involves two or more people sharing ownership and management of a business. Each partner contributes resources and shares profits, losses, and liabilities.
- Easy to establish and low cost
- Shared decision-making and responsibilities
- Pass-through taxation
- Unlimited personal liability for each partner
- Potential for conflicts between partners
- Difficulty in transferring ownership
Corporation: A corporation is a separate legal entity from its owners (shareholders) and offers limited liability protection. It’s more complex and costly to set up and maintain than other structures.
- Limited liability protection for shareholders
- More options for funding
- Transfer of ownership is more straightforward
- Double taxation (profits may be taxed at the corporate level, and dividends are taxed on shareholders’ personal income tax returns)
- Higher setup and maintenance costs
- More complex regulations and reporting requirements
Related: How to form a Kentucky Corporation
Limited Liability Company (LLC): An LLC combines the limited liability protection of a corporation with the pass-through taxation and simplicity of a sole proprietorship or partnership.
- Limited liability for the owners (members) personal assets
- Pass-through taxation
- Flexibility in management structure
- More complex and costly to establish than a sole proprietorship or partnership
- Limited access to funding compared to corporations
- State-specific regulations and requirements
Related: How to form a Kentucky LLC
Forming a corporation or LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right. Some popular formation services include: IncFile - Great service and free registered agent the first year.
Northwest - Privacy-Focused: Free registered agent and private business address for 1 year! ZenBusiness -
Easy to use and free registered agent for 1 year!
Forming a corporation or LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.
Some popular formation services include:
IncFile - Great service and free registered agent the first year.
Northwest - Privacy-Focused: Free registered agent and private business address for 1 year!
ZenBusiness - Easy to use and free registered agent for 1 year!
Step 5: Register the Business
After setting up the business structure, the next step is to register the business. While specific business registration requirements will vary depending on what your business does and its location, there are some common steps and licenses you’ll need to consider.
- Business licenses: The state of Kentucky doesn’t have a general business license; however, many cities require a business license to operate.
- Federal Employer Identification Number (EIN): If you have employees or your business is structured as a partnership, multi-member LLC, or a corporation, you’ll need to obtain an EIN from the Internal Revenue Service (IRS). This unique nine-digit number is used for tax purposes and is sometimes referred to as a Federal Tax ID Number.
- Kentucky tax registration application: Allows business owners to register for the most common taxes in Kentucky, some of which include the Employer’s withholding tax, sales tax, and the corporation and limited liability entity tax.
- Professional licenses: Depending on your industry, you may need specific licenses from the state. Some common examples include detectives, cosmetologists, barbers, architects, and massage therapists. The Kentucky Cabinet for Economic Development has compiled a list of over 400 different licenses and state permits.
- Local licenses: In addition to a local business license, some businesses may also need local licensing, such as a retail food permit or liquor license. Plus, there may be zoning, signage, and building codes to adhere to.
Step 6: Open a Business Bank Account
Once the business is set up and registered, you will be able to open a business bank account. While it’s possible to operate out of a personal checking account, keeping your business transactions separate from personal transactions simplifies bookkeeping and makes it easier to track your business income, expenses, and cash flow.
Also, instead of having customers write a check to you personally or when paying vendors, having a dedicated business account projects a more professional business.
Especially important for LLCs and corporations, maintaining separate accounts is vital to preserving limited liability protection. Commingling funds can lead to “piercing the corporate veil,” potentially making you personally liable for your business debts.
Step 7: Hire Employees
Bringing on your first team member is a big step, and if you are planning to hire, there are several responsibilities as a new employer.
First, there are multiple agencies to register with, such as the Internal Revenue Service, the Kentucky Department of Revenue, and the Kentucky Office of Employment & Training.
Employers are also responsible for reporting new hires, verifying employees are eligible to work in the U.S., income tax withholding, unemployment insurance, unemployment taxes, and payroll withholding taxes, including Social Security and Medicare.
Step 8: Obtain Business Insurance
Insurance is another potential step for a new business.
Most types of business insurance are optional, except for workers’ compensation insurance, which is required in Kentucky for all employers, and there are no exceptions for family-member employees or temporary labor. And, even if insurance isn’t required, and there is a fire, theft, or personal injury lawsuit, the small business owner may have to pay out-of-pocket damages and legal fees. Home based businesses and side businesses may want to consider business insurance, too, as personal home and vehicle policies may not cover a business loss.
Step 9: Set Up a Bookkeeping System
The next step to look at when setting up a business is having a system in place to track the income and expenses of the business. This system not only keeps the business compliant with state and IRS tax requirements, but you can better track the financial health of the business.
Related: Setting up accounting for a business
This material is property of StartingYourBusiness.com
Common questions when starting a business in Kentucky
What are the steps to starting an LLC in Kentucky?
How much does it cost to start an LLC in Kentucky?
The cost to file the Articles of Organization with the Kentucky Secretary of State, which creates an LLC in Kentucky, is $40.
Does a sole proprietor need a business license in Kentucky?
More than likely, in Kentucky, like in many other states, a sole proprietor (or any other business structure) may need a business license to operate.
The requirements can vary by city and county, as well as by the specific activities of the business. For example, certain professions may require specific permits, and local governments might have additional licensing requirements.
Kentucky Small Business Resources
There are 363,068 small businesses in Kentucky, which is 99.3% of all businesses in the state,1 and over 700,000 Kentucky residents work for a small business.2 Because of the economic impact of small businesses, there are a number of small business resources to help Kentucky businesses start and grow. Some of these include:
- Kentucky Cabinet for Economic Development’s Office of Entrepreneurship: This state office supports the startup and expansion of small businesses.
- Kentucky Innovation Network: This network provides assistance to Kentucky technology-based companies.
- Kentucky Business One Stop: Statewide clearinghouse of information for businesses in Kentucky.
- Kentucky Small Business Development Center: The SBDC offers services to equip business owners with the knowledge and tools necessary to succeed.
- SCORE Kentucky: A volunteer-driven organization that supports entrepreneurs.