A corporation is a business structure that provides personal liability protection by separating the owner’s personal assets from the business’s assets. Thus, a corporation is liable for the business’s actions and finances, while the owners (known as shareholders) are not.
Corporation Pros
- Corporations provide liability protection for the shareholders
- A corporation can raise non-debt financing by selling shares of the business
- Taxation may be lower than a sole proprietorship or partnership
Corporation Cons
- Corporations are more complex and expensive to set up than sole proprietorships, partnerships, and Limited Liability Companies (LLCs)
- At a minimum, corporations are required to hold an annual board of directors meeting and shareholders meeting, take minutes at the meetings, issue shares, etc., to maintain the entity’s liability protection.
Generally, Corporations are chosen over Limited Liability Companies when a significant amount of funding is being raised from investors. However, due to the cost and complexity of a Corporation, most small businesses are better off forming an LLC.
Related: How To Form An LLC In Kentucky
The following steps are to create a domestic Corporation, which is the most common type for businesses. The other types of Corporations in Kentucky include a foreign Corporation (an out-of-state Corporation wanting approval to physically operate in the state), a professional Corporation (designated for Corporations offering professional services), or a non-profit Corporation.
Steps to Forming a Corporation in Kentucky
Step 1: Choose a Name
The first step in forming a Corporation in Kentucky is selecting a name.
The name of the Corporation has to be different from other entity names in the state of Kentucky. Check available Corporation names in Kentucky.
The name of the Corporation must include one of the following designators at the end of the business name:
- Corporation
- Incorporated
- Company
- Limited
- Or an abbreviation for one of those words: Corp., Inc., Co., or Ltd.
A comma may be used after the business name and before the designator. For example, “Common Grounds Coffee Inc.” and “Common Grounds Coffee, Inc.” are both acceptable.
If you want a name but are not ready to register the Corporation, you can file a Reservation of Reserved Name with the Kentucky Secretary of State, Division of Business Filings. The reservation will hold a name for up to 120 days.
While a Corporation has to select a unique name that another Kentucky Corporation isn’t using, that doesn’t guarantee the name isn’t currently in use by someone else. So before registering a Corporation name, be sure to do a trademark search to verify it is available for you to use.
Step 2: Choose a Registered Agent
To have a Corporation in Kentucky, a Kentucky Registered Agent must be identified to act as a central point of contact to receive legal documents, tax notices, summons, subpoenas, etc., on behalf of the Corporation (also referred to as an agent for service of process). This can either be a resident of Kentucky or a commercial registered agent service.
You can act as the Corporation’s Registered Agent in Kentucky, and you are not required to pay for a registered agent. The requirements to be a Registered Agent are generally available during normal business hours, and the registered office must have a physical street address in the state. A PO Box is not allowed.
Related: Do I Need To Hire A Registered Agent In Kentucky?
Step 3: File the Kentucky Articles of Incorporation
Next, you can start filing the Articles of Incorporation with the Kentucky Secretary of State’s One Stop Business Portal.
The information requested includes:
- The name of the Corporation must contain the words “Corporation,” “Incorporated,” “Company,” “Limited,” or an abbreviation.
- The number of shares the Corporation is authorized to issue.
- Registered Agent’s name and physical address. PO Boxes aren’t allowed.
- The mailing address of the Corporation’s principal office.
- The name and address of the incorporators. These can be the corporation’s owners or someone helping with the formation of the entity.
The Kentucky Articles of Incorporation can be filed online or submitted by mail. The mailing address is:
Office of the Secretary of State
PO Box 718
Frankfort, KY 40602-0718
Step 4: Create Corporate Bylaws
Bylaws are the general guiding principles and procedures for the business’s operations. For example, the bylaws may include the name of the corporation’s officers, the responsibilities of the board members, terms of office, procedures for removing or adding a new director or shareholder, policies for authorizing new shares, when shareholder and director meetings will be held, and more.
Step 5: Hold the Initial Board of Directors Meeting
During the first board meeting, the board of directors will, at a minimum, elect the officers of the Corporation (the President, Vice President, Treasurer, and Secretary). They will also typically review and approve corporate bylaws, choose a bank, issue shares of stock, and decide whether the Corporation will be taxed as a C corporation or S corporation.
Taking meeting minutes at all meetings is necessary to protect the shareholders from lawsuits and court actions. The minutes provide a written record of all decisions and actions taken during the meeting. Minutes aren’t filed with the state but should be stored along with other corporate documents.
Step 6: Issue Shares of Stock
The corporation can exchange shares of stock in exchange for money or services. The number of shares of stock issued cannot be more than the number of authorized shares listed in the Articles of Incorporation.
Step 7: Obtain an EIN
The EIN or Employer Identification Number (also called a Federal Employer Identification Number, FEIN, or Tax ID Number) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Like an individual’s social security number, the EIN identifies the corporation for tax purposes. The EIN will be needed to hire employees, open a bank account, register for business licenses and permits, file tax returns, and more.
There is no cost for the EIN when registering through the IRS. The number is available immediately when applying through the IRS website; however, you can also register by phone, fax, or mailing IRS Form SS-4.
Step 8: Elect the Corporation’s Form of Federal Income Taxation
By default, a new corporation will be taxed by the Internal Revenue Service (IRS) like a C-Corporation. C-Corporations pay corporate taxes on their profits, and the owners pay personal income taxes on their dividends.
A Corporation can elect to be taxed as an S-Corporation. S-Corporations are taxed as “pass-through entities,” meaning the Corporation does not file corporate taxes. Instead, the profits (or losses) “pass through” to the shareholders, who then report this income on their individual taxes.
For most small businesses, the S-Corporation tax election is the most beneficial because it eliminates the double taxation of the C-Corporation. This tax election can be changed; however, it is highly recommended to talk with an accountant before making this decision.
Step 9: Open a Bank Account
Opening a bank account for your Corporation is important for liability protection as the bank account separates the business’s funds from the member’s personal funds.
Several documents will be needed to open a business bank account, such as:
- A banking resolution is a document that authorizes the members to open a business bank account on behalf of the LLC.
- Copies of the original Articles of Incorporation showing the creation of the Corporation in addition to the bylaws.
- Driver’s licenses of the members.
- Depending on the age of the Corporation, a Kentucky Certificate of Good Standing may be needed to prove the business entity is active and in good standing with the state.
Step 10: Apply for Business Licenses and Permits
Depending on what your business does and its location, various business licenses and permits will likely be needed before starting your business. Some common registrations include:
Business Licenses – The state of Kentucky doesn’t have a general business license; however, many cities require a business license to operate.
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, Kentucky Sales Tax Permit, and the corporation and limited liability entity tax.
Occupational License – Some occupations, such as detectives, cosmetologists, barbers, architects, and massage therapists, require licensing in Kentucky. While this isn’t a license on the business, licensing is required to operate. The Kentucky Cabinet for Economic Development has compiled over 400 different licenses, and state permits for various types of business activities.
Land surveyors and professional engineers will need licensing from the Kentucky Board of Licensure.
Related: How To Register A Business In Kentucky
Step 11: File Annual Reports
Corporations are required to file an annual report with the Kentucky Secretary of State.
The annual report is due between January 1st and June 30th.
Step 12: Pay the Limited Liability Entity Tax
In addition to the annual report, the Kentucky Department of Revenue charges a gross receipts tax called the Limited Liability Entity Tax (LLET). This tax is based on the annual gross profits of corporations and Limited Liability Companies.
