A History Of Growing Trust In Kentucky

What are the pros and cons of starting an LLC in Kentucky?

On Behalf of | May 22, 2023 | business formation & planning

The Bluegrass State has seen a surge in new businesses recently. According to the Kentucky Secretary of State, nearly 53,000 companies were formed in 2021, an increase of 21% despite the ongoing challenges of the pandemic. The state says limited liability companies (LLCs) were the most common entity chosen.

LLCs are flexible, hybrid entities with many benefits, such as personal liability protections offered by corporations and the tax benefits of partnerships. While there are many advantages, LLCs may not be the best choice for everyone. Let’s examine some of the pros and cons.

Advantages of forming an LLC

First, co-owners in an LLC are called members, which can be people or other businesses. There are typically no limits on the number of members allowed. Choosing this structure for your company comes with these benefits:

  • Members’ personal assets – including homes, cars, bank accounts and investments – are protected from creditors for debts the LLC owes.
  • Profits go directly to members without the company being taxed. LLCs are “pass-through” entities, allowing members to avoid double taxation.
  • Members can choose who they want to manage the business’s day-to-day operations, including other members or professional managers who are not members.

Paperwork and fees are generally light for LLCs. In Kentucky, the filing fee is $40 whether you file as a for-profit, nonprofit or professional LLC.

Disadvantages of an LLC

It’s also crucial to consider potential complications that can arise before registering as an LLC. Possible drawbacks include:

  • Committing fraud or failing to separate personal transactions from business transactions can put your personal assets at risk.
  • If taxed as a partnership, the IRS considers members self-employed, making them responsible for paying their own Medicare and Social Security taxes.
  • If taxed as an S corporation, members pay Social Security and Medicare taxes based on their own compensation instead of the business’s pretax profits.

Whether starting a business with family members, close friends or other like-minded partners, choosing the appropriate business entity is crucial to your short-term and long-term success. Working with experienced business formation attorneys can help ensure you select the best path for your future.