LLC vs S-Corp | What Entrepreneurs Need to Know in Kentucky

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LLC vs S-Corp in Kentucky

When starting a small business in the Kentucky, one of the most important decisions you’ll make is choosing the right legal structure. Two popular options for small businesses are electing for S Corporation (S-Corp) or forming an LLC in Kentucky. Both offer certain advantages and drawbacks, making it crucial to understand their differences and determine the best fit for your business. 

If you want to know more about LLC vs. S-Corporation, which is better and suitable for the business you will form, you should consider a few things. Before we get through this article, you should understand LLC vs. S-Corporation in Kentucky. 

Webinarcare Editorial Team will help you define and understand the difference, and you must be guided by all the factors gathered in this article.

LLC Vs. S-Corporation in Kentucky

LLC vs. S-Corporation: Definition

A limited liability company is a type of business structure that guards against the impact of business liabilities on your personal assets. However, while not a typical business structure, the S Corp is a tax status you can register with the IRS. Unlike an LLC, an S-Corp does not offer personal asset protection. The two are explained in detail here:

What is an LLC in Kentucky?

A legal corporate organization that protects personal assets is a limited liability company (LLC). With this setup, the LLC member or owner can protect their personal assets if their company faces financial difficulties or becomes the subject of legal action. In some unique circumstances, the opposing party may pursue your personal assets if your firm is sued in court. When you are held personally accountable for the company’s debt, this is called “piercing the corporate veil.”

By creating an LLC in your state, you can take advantage of the pass-through tax benefit, which means that your personal income will be used to determine your income tax obligations rather than the revenue generated by your firm. 

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What is an S-Corp in Kentucky?

Unlike a limited liability company (LLC) or other business structures, Kentucky S-Corporation is not a type of corporate entity. It’s a tax classification that, though in various ways for corporations and LLCs, might lead to considerable financial savings. S-Corporations are similar to LLCs, except that the Internal Revenue Service recognizes them as corporations for taxation purposes. 

A well-known alternative to the LLC is the S-corp. In contrast to a traditional C-corp, an S-corp is better suited for small and medium-sized firms, such as those with 100 total stockholders. 

LLC Vs. S-Corporation in Kentucky

Creating a business in Kentucky requires careful consideration, especially when deciding whether a state LLC or an S-Corporation is more advantageous. An LLC is a legal corporate structure, but an S-Corporation is a tax categorization which some small firms are eligible for. Forming Kentucky Corporations and LLCs can elect S-Corporation taxation by filing paperwork with the Internal Revenue Service (IRS). Making an S-Corporation may be less formal than establishing an LLC, and it typically offers less security. Additionally, S-Corporation in Kentucky does not offer the same safeguards that business owners seek in an LLC. When starting a business, thinking about your alternatives from a legal and tax perspective is important.

It is suggested that you speak with a legal professional before you begin setting up an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in Kentucky.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in Kentucky

There is a distinction between an LLC and an S-Corporation regarding taxation. Based on the differences in Federal and State taxes, you can determine whether S-Corporation or LLC in Kentucky is best for your business.

Federal Taxes 

There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in Kentucky. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in Kentucky are the same regarding pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners must pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in Kentucky are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
  • Self-Employment Taxes: Most LLC owners choose S-corporation taxation in Kentucky to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes. 

Consider the following scenario: you are the sole owner of an LLC in Kentucky with a $200,000 annual profit. And $150,000 is a fair wage in your area for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $200,000 profit. However, if your business is taxed as a state S-corp, you must only pay payroll taxes on the standard wage of $150,000. The remaining $50,000 will still be subject to income tax.

Kentucky State Taxes

At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in Kentucky, it costs $15, which can be paid to the LA Secretary of State. Of course, before forming the whole LLC, you must pay the initial fee of $40 to the Kentucky Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in Kentucky have different ownership requirements that can impact your choice of business structure. Here’s a comparison of the key ownership requirements for each structure:

1. Number of Owners

Kentucky LLC: An LLC can have any number of owners, called members, from starting Kentucky Single Member LLC to multiple members LLC. There is no upper limit on the number of members an LLC can have.

Kentucky S-Corporation: An S-Corporation is limited to a maximum of 100 shareholders (owners). This restriction can be a limiting factor for businesses that plan to have many owners or seek outside investment.

2. Type of Owners

Kentucky LLC: An LLC can have various owner types, including individuals, corporations, other LLCs, trusts, and estates. Non-resident aliens can also be members of an LLC, like forming a Foreign LLC in Kentucky.

Kentucky S-Corporation: S-Corporations have more restrictive ownership requirements. Only U.S. citizens and resident aliens can be shareholders of an S-Corporation. Additionally, other corporations, LLCs, and certain types of trusts and estates are not eligible to be S-Corporation shareholders.

3. Classes of Ownership

Kentucky LLC: An LLC offers flexibility regarding ownership classes. Members can have varying levels of management rights, profit distribution rights, and voting rights, creating different classes of membership interests.

Kentucky S-Corporation: S-Corporations are limited to only one class of stock. While shareholders’ voting rights may differ, all shareholders must have equal rights to profit distribution and liquidation proceeds.

4. Profit Distribution

Kentucky LLC: Profit distribution in an LLC is flexible, allowing members to allocate profits and losses in any proportion they choose. This can be outlined in the Kentucky Operating Agreement.

Kentucky S-Corporation: Profits and losses in an S-Corporation must be distributed to shareholders based on the percentage of shares each owns. This can be less flexible than the profit distribution options available to an LLC.

Kentucky LLC offers more flexibility in ownership requirements, allowing for a greater variety of owner types, multiple classes of membership interests, and flexible profit distribution. In contrast, an S-Corporation has more restrictive ownership requirements, limiting the number and type of shareholders, allowing only one class of stock, and requiring proportional profit distribution based on share ownership. Consider these differences when deciding which business structure best fits your needs and goals.

Which is easier to incorporate in Kentucky: LLC or S-Corp?

Filing an LLC or S-Corporation in Kentucky requires planning and time. Even though it is not as simple as it appears, something manageable keeps it from being too difficult. LLC and S-Corporations can be formed using Registered Agent. To establish an LLC in Kentucky, you must submit the Articles of Organization to the Kentucky Secretary of State. Your Articles of Organization must include information about your Kentucky LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the Kentucky S-Corporation election. Fill out Form 8832 to notify the Internal Revenue Service that you prefer to tax your LLC as a corporation rather than a partnership. Then you’ll submit Form 2553 to select S-Corporation status.

Remember that you must file annual tax returns and reports after forming your LLC to remain legally compliant.

Who Pays More Taxes in Kentucky: LLC or S-Corp?

Taxes for LLCs and S-Corporations in Kentucky depend on the tax purposes and the profit generated. LLCs are typically taxed at personal rates, and LLC owners can be treated as separate companies with their own federal tax identification numbers. You can check the Kentucky LLC Cost for detailed information.

Kentucky S-Corporation owners, on the other hand, must be paid a salary that includes Social Security and Medicare taxes. On the other hand, the owner can receive dividend income or some of the leftover profits without being classified as an employee and thus will not be subject to Social Security and Medicare taxes on that money.

Should I Incorporate Kentucky LLC as an S-Corporation?

Forming an LLC may be advantageous because your business assets are separate from your personal assets if you are a sole proprietor. You are not restricted from converting your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and follow more regulations, it is ideal for larger companies with more shareholders.

How do you convert LLC to S-Corporation in Kentucky?

You must submit Form 2553, Election by a Small Business Corporation, to the IRS to elect S-corp taxes if you want to form an LLC as an S-Corporation in Kentucky. A Form 2553 must be submitted by 75 days following the creation of your S-Corp or by 75 days following the start of the tax year in which the election is to be effective. 

You must also submit Form 8832, Entity Classification Election if your LLS-Corp has passed the deadline of 75 days and you wish to elect to be taxed as a corporation. You would collectively transmit Forms 2553 and 8832 via certified mail from the USPS. You can send your Form 2553 to the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734​ in Kentucky.

FAQs

What is an LLC and an S-Corp, and what are the differences between the two in Kentucky?
An LLC is a limited liability company, while an S-Corp is a type of corporation. The main differences between the two lie in their taxation, ownership limits, and management structures.
Can S-Corps be based in Kentucky?
Yes, they can.
Can LLCs have a single member in Kentucky?
Yes, Kentucky allows single-member LLCs.
Is there a limit to the number of members an LLC can have in Kentucky?
No, there is no limit to the number of members an LLC can have in Kentucky.
Can S-Corps in Kentucky have foreign shareholders?
Yes, they can. However, the foreign shareholder will have to fill out the necessary tax forms.
How are LLCs taxed in Kentucky?
LLCs in Kentucky can be taxed as either a disregarded entity, a partnership, an S-Corp or a C-Corp.
Which type of taxation is most favored by Kentucky LLCs?
The disregarded entity taxation option is often the favored choice for Kentucky LLCs.
How are S-Corps taxed in Kentucky?
S-Corps in Kentucky are generally taxed like a partnership or sole proprietorship.
Are there any federal tax benefits associated with forming an LLC in Kentucky?
No, LLCs are taxed at the state level not the federal level.
What about federal tax benefits for S-Corps in Kentucky?
S-Corps can reduce overall corporate earnings through differential coverage — as business income for S-Corps “flows through” shareholders’ personal tax liability.
Does Kentucky have formation requirements for LLCs?
Yes, potential LLC owners must first file articles of organization with the state, pay an application fee, establish a registered agent in Kentucky, and file an annual report.
How much do LLC formation fees cost in Kentucky?
The current filing fee for an LLC in Kentucky is $40, but that could subject to change.
What about annual report fees?
Kentucky’s annual LLC report filing fee is $15. Available online only on “Kentucky One Stop”.
Are there legal limitations on who can own an LLC or S-Corp in Kentucky?
No, there are no legal limitations for either LLCs or S-Corps in Kentucky.
Can an LLC convert into an S-Corp in Kentucky, or vice versa?
It is possible in some scenarios, but requires approval by both the state of Kentucky and the IRS.
Can the ownership interest in an LLC or S-Corp in Kentucky be sold or assigned to another party?
Yes, membership interests in an LLC and shares in an S-Corp can both be sold or assigned.
What’s the primary benefit of forming an LLC in Kentucky?
The main benefit is typically the liability protection afforded to owners (called members).
Can an out of state business form an LLC in Kentucky?
Yes, out of state businesses can file the necessary paperwork with the state if they want to organize an LLC in Kentucky.
What about foreign LLC formation in Kentucky?
Foreign LLCs wishing to operate in Kentucky can do so by obtaining a certificate of authority from the state.
Is it necessary for a lawyer to be used during the formation process?
While state law does not mandate this, hiring an attorney can be beneficial in the event of legal trouble down the line.
What are the annual fees for an S-Corp in Kentucky?
Annual reports must generally be filed each year for S-Corps along with a $100 filing fee.
Does Kentucky have franchise taxes?
No, Kentucky does not impose franchise taxes.
Do S-corps and LLCs Still file taxes in Kentucky?
A company taxed as an LLC can choose to file as a disregarded entity, a partnership, an S-Corp or C-Corp. A company entity can choose to be treated as a corporation, complete with complex federal, state and KENTUCKY tax considerations.
Are there local taxes for businesses in Kentucky?
Some localities may impose a payroll tax depending on the company’s size and location, called “local occupational taxes” which will deducted from salaries taxes (also known as withholding tax).
Who is required to pay Kentucky sales tax?
Anyone conducting regular business which include selling taxable goods will pay sales tax.
Should I form a professional LLC (PLLC) or professional corp (PC) in Kentucky?
Depending on the inherent stresses and rewards of each. PCs retain ownership via common shares, while PLLCs typically file under identical considerations with LLCs, so choice is a decision between you and your Kentucky business attorney +/- based upcoming state-appointed payouts.
Can my LLC or S-Corp operate multiple businesses with multiple EINs?
Yes, an LLC or S-Corp can have numerous businesses running under a separate EIN within it.
Does Kentucky IRS require registered agent domiciled to Kentucky?
LLCs and corporations aren’t required to appoint agents, as long as they have a physical office inside Kentucky to deliver state government or court documents by hand.
What is the difference between an LLC and an S-Corp in Kentucky?
An LLC is a type of legal structure, while an S-Corp is a tax designation.
Which one offers better protection for personal assets, an LLC or an S-Corp in Kentucky?
Both an LLC and an S-Corp offer limited liability protection in Kentucky.
Do the same tax rules apply to LLCs and S-Corps in Kentucky?
No, different tax rules apply to each.
Can an LLC in Kentucky elect to be taxed as an S-Corp?
Yes, an LLC in Kentucky may elect to be taxed as an S-Corp.
Which type of business entity has lower taxes in Kentucky, LLC or S-Corp?
The tax implications can vary depending on the specific situation.
Do Kentucky LLCs and S-Corps receive equal treatment under state law?
Yes, both LLCs and S-Corps are recognized and regulated by the state of Kentucky.
Which type of entity is easier to form in Kentucky, LLC or S-Corp?
Both LLCs and S-Corps require paperwork to form in Kentucky.
Can any business be an LLC or S-Corp in Kentucky?
All businesses that meet the requirements can be either an LLC or S-Corp in Kentucky.
Can an LLC in Kentucky have employees like an S-Corp?
Yes, an LLC in Kentucky can have employees.
Can Kentucky LLCs and S-Corps be owned by non-US citizens?
Yes, both can be owned by non-US citizens in Kentucky.
Can a sole proprietor in Kentucky convert to an LLC or S-Corp structure?
Yes, a sole proprietor in Kentucky can convert to either an LLC or S-Corp structure.
What are the disadvantages of forming an LLC in Kentucky?
Some disadvantages of forming an LLC in Kentucky include potential tax implications and more paperwork.
Does forming an S-Corp in Kentucky require more ongoing maintenance than an LLC?
Yes, forming an S-Corp in Kentucky requires more ongoing maintenance than an LLC.
How does liability protection differ between LLC and S-Corp in Kentucky?
Both provide limited liability protection in Kentucky, but an S-Corp may offer more.
Which type of business entity has more flexibility in Kentucky, LLC or S-Corp?
Usually, an LLC in Kentucky has more flexibility than an S-Corp.
Can an LLC in Kentucky be taxed as a partnership?
Yes, an LLC in Kentucky may choose to be taxed as a partnership.
How easy is it to change the tax status of an S-Corp in Kentucky?
It may be a process, but an S-Corp in Kentucky can elect to be taxed differently.
Is it possible for a Kentucky S-Corp to elect for c-corp tax status later on?
Yes, a Kentucky S-Corp can elect for c-corp tax status at a future point.
How many employees can a Kentucky LLC or S-Corp have before it affects tax status?
The number of employees does not necessarily affect tax status for either entity in Kentucky.
Does forming a Kentucky S-Corp require a board of directors?
Yes, forming a Kentucky S-Corp requires a board of directors.
Can an LLC in Kentucky have multiple owners, or is it just for one-person businesses?
An LLC in Kentucky can have multiple owners.
What is the minimum and maximum number of owners for an S-Corp in Kentucky?
An S-Corp can have a minimum of one owner and a maximum of 100 shareholders in Kentucky.
What is the process for dissolving an LLC or S-Corp in Kentucky?
The process for dissolving an LLC or S-Corp in Kentucky involves filing appropriate paperwork.
Which form of business entity may be more appropriate for certain types of businesses in Kentucky?
The appropriate type of business entity can depend on several factors, including size and industry.
Can Kentucky S-Corps have foreign shareholders?
Yes, Kentucky S-Corps can have foreign shareholders.
How can I determine whether an LLC or S-Corp is the best option for my business in Kentucky?
It is best to consult a trusted legal and financial advisor for guidance specific to your business needs in Kentucky.
Are there any unique laws or requirements for forming an LLC or S-Corp in Kentucky?
Some minor differences in requirements may exist between LLCs and S-Corps in Kentucky, but their frameworks follow a general pattern.
Do LLCs in Kentucky have any ownership restrictions?
LLC ownership in Kentucky is generally unrestricted unless otherwise specified in a state statute.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in Kentucky will depend on your business goals, management preferences, and tax considerations. It’s essential to consult with a legal or financial advisor to determine which structure is best for your business in Kentucky and help you navigate the formation process. Making an informed decision will set your business up for success and ensure you’re well-positioned for growth and profitability.

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