File a Kentucky S Corp

Initiating an S corporation in Kentucky could be a pivotal decision for entrepreneurs seeking to harness tax efficiencies for their businesses. An S corp, defined by its tax classification under Subchapter S of the Internal Revenue Code, primarily benefits businesses through its ability to pass income directly to shareholders, avoiding the double taxation frequently encountered by C corporations. This tax status is particularly beneficial for limited liability company (LLC) owners, as it offers a method to potentially reduce self-employment taxes. By choosing S corp status, LLCs can allocate a portion of the business’s income as salary to the owners, with the remaining profits distributed as dividends, which are not subject to self-employment taxes.

This article aims to outline the steps and considerations for establishing an S corp in Kentucky, helping ensure business owners are well-equipped to take full advantage of the tax savings opportunities this designation can provide

Kentucky S Corp Filing Requirements

For the IRS to accept your application for S corp classification, you must meet the filing requirements of the Internal Revenue Code. To qualify for S corporation status, your company must:

• Be a domestic LLC or corporation
• Only have one class of stock
• Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations
• Have no more than 100 shareholders or members (“shareholders” is the term for owners of a corporation, while “members” is the term for owners of an LLC)
• Have only allowable shareholders or members, which includes individuals, certain trusts, and estates. The shareholders/members may not be partnerships, corporations, or non-resident aliens. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.

If your business entity falls within these parameters, congratulations — you can apply for an S corp election. 

Considerations for Kentucky S Corp Taxes

In an S corp, the business itself doesn’t usually pay federal income tax, just the individual owners. But what about Kentucky income taxes?

Kentucky does recognize federal S corp election, meaning that it will treat an S corp for state income tax purposes the same way the federal government treats it for federal income tax purposes. That being said, S corps and every other business that is protected from liability by the laws of the state must pay the Kentucky Limited Liability Entity Tax (LLET).

How to Start an S Corp in Kentucky

Before you can have your Kentucky S corporation, you’ll need to create either an LLC or a C corporation (the default form of corporation) if you haven’t already done so. Then, you’ll file an election form with the IRS.

Forming a Kentucky LLC

1. Name your Kentucky LLC
2. Appoint a registered agent
3. File Kentucky Articles of Organization
4. Create an operating agreement
5. Apply for an EIN
6. Apply for S Corp status with IRS Form 2553

For details on these steps and more, visit our “Start a Kentucky LLC” page.

Forming a Corporation in Kentucky

1. Name your Kentucky corporation
2. Appoint Directors
3. Choose a Kentucky Registered Agent
4. File the Kentucky Articles of Incorporation
5. Create Corporate Bylaws
6. Draft a Shareholder Agreement
7. Issue shares of stock
8. Apply for Necessary Business Permits or Licenses
9. File for an EIN and review tax requirements
10. Submit Your Corporation’s First Annual Report
11. Apply for S Corp status with IRS Form 2553

If you’d rather start your own corporation in Kentucky, there are more steps and paperwork involved. Follow the instructions on our Kentucky corporation page.

File the form 2553 to apply for S corp status

When your LLC or C corporation formation is approved by the state, you’ll need to file Form 2553, Election by a Small Business Corporation, with the IRS to get S corp election. 

The IRS requires you to complete and file your Form 2553: 

• Within 75 days of the formation of your LLC or C corporation, or no more than 75 days after the beginning of the tax year in which the election is to take effect

OR

• At any time during the tax year before the tax year the election is to take effect.

For LLCs wishing to file as an S corp: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail. 

Note that all of the shareholders or members must sign the consent statement portion of the form. For more information on filing Form 2553, visit the IRS website.

Keeping Your Kentucky S Corp Compliant

Whether your S corp is an LLC or a corporation, you’ll need to perform certain ongoing tasks to keep them in compliance. One of these is to regularly file a Kentucky annual report. This report is intended to keep the state informed about any changes to your business. For both LLCs and corporations, there’s a $15 filing fee for the report, and it’s due by June 30 each year. You’re also required to notify the state of any major changes to your business, such as changing your registered agent or your principal business address.

If your S corp was formed as a Kentucky corporation, you’ll need to keep records of the minutes of meetings, all actions taken by the shareholders and board of directors, and all actions taken by committees on behalf of the corporation. Corporations in Kentucky are also required to hold annual shareholder meetings at a time and place established in the bylaws.

These may not be the only ongoing requirements for your Kentucky S corp. For example, you may have business licenses that need to be renewed regularly.

Pros and Cons of S Corp for Kentucky LLCs and Corporations

S corp status comes with a number of tax benefits for some businesses, but making this election might not be right for everyone. Weigh the pros and cons before deciding whether you want an S corp. Consult a tax professional about whether the S corp election would be best for your business.

S Corp Status Advantages for LLCs

The benefits of filing as an S corp for an LLC aren’t exactly the same as they are for C corporations. An LLC already has pass-through taxation by default, so the advantages of S corp tax designation for an LLC come from federal self-employment tax. We’ll explain.

Social Security and Medicare Taxes

The members of an LLC are usually considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (Social Security and Medicare, which add up to about 15.3%) on all profits they receive from the LLC. This is double the taxes they’d pay when working for someone else because their employer would pay half of them.

Salary and Profits

But when the members elect S corp status, they get to be compensated in two ways, by receiving their share of the profits and by being an employee of the LLC. Once they do that, they only pay taxes for Social Security and Medicare on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Note that the members will still pay income tax and all other applicable taxes on their share of the profits and any other taxable income.) Money paid out as salary is a tax-deductible expense for the business. 

Reasonable Compensation

Here’s the catch: the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $0.14 and avoid contributing anything to Social Security and Medicare. 

So, what is a “reasonable” salary in the eyes of the IRS? While the terms aren’t 100% defined, the IRS seems to consider “reasonable” to be something similar to what others in your field are earning for similar work.

S Corp Status Advantages for C Corporations

If you have a C corporation, filing as an S corp has these tax advantages:

Pass-Through Taxation

Traditional corporations are encumbered by “double taxation.” When the corporation makes money, the IRS taxes those profits on the business level. And when those profits are ‌distributed to the shareholders, they’re taxed a second time on the shareholders’ personal tax returns.

When a C corporation becomes an S corp, though, those profits are only taxed at the individual level. The business itself isn’t taxed on them. This is called “pass-through taxation.”

Writing Off Losses

Business profits pass through to the owners of an S corp, and so do the company’s losses. Unlike C corporation shareholders, S corp owners can write off the business’s losses on their personal income statements. 

Deduction for Qualified Business Income 

Thanks to the Tax Cuts and Jobs Act, some S corp owners may be able to deduct up to 20% of their qualified business income. This deduction isn’t available to C corporation shareholders.

Qualified business income (QBI) is basically your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for details).  

S Corp Status Disadvantages for LLCs

LLCs with S corp status can have its minuses, though:

More Accounting and Bookkeeping

Having an LLC that files as an S corporation means more paperwork and red tape. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to start. Your taxes will be more complex, as well.

Stricter Requirements 

You must meet more requirements with an S corp than with a standard LLC. An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have these limitations.

Extra IRS Scrutiny

Because of the “reasonable salary” restrictions, the IRS monitors closely LLCs filing as S corps. That could mean a greater chance of being audited.

S Corp Status Disadvantages for C Corporations

S corp status also has its weaknesses for C corps:

Limited Number of Shareholders

As we said, an S corp can’t have more than 100 shareholders, while a C corporation has no restriction on the number of shareholders.

One Class of Stock

Corporations can sometimes use preferred stock to entice investors, but the IRS doesn’t allow this for S corps.

Limited Types of Shareholders

S corp shareholders must all be U.S. citizens, or certain trusts or estates. You also can’t have corporations or partnerships as shareholders. 

Greater IRS Scrutiny

Because of the extra limitations S corps have, the IRS looks at them more closely to see if they’re in compliance. Your corporation is more likely to get audited.

S Corp Tax Calculator

The S Corporation tax calculator below lets you choose how much to withdraw from your business each year, and how much of it you will take as salary (with the rest being taken as a distribution.) It will then show you how much money you can save in taxes.

Disclaimer: The savings estimate provided by this tool is for informational purposes only and should not be considered financial, tax, or legal advice. Actual savings may vary depending on individual circumstances and other factors. We recommend consulting with a qualified tax or legal professional before making any decisions regarding your business entity. ZenBusiness, Inc. is not responsible for any actions taken based on the information provided by this tool. Use of this tool does not establish any client relationship with ZenBusiness, Inc.

State and Federal Resources

For more information about how S corps are treated in Kentucky and other important tax info, see the Kentucky Department of Revenue website. The IRS website can provide additional information on the federal guidelines for S corporations. Whenever you have questions, we recommend having a trusted tax professional by your side. They can guide you through legal and financial challenges so that you can stay in compliance while maximizing your tax savings.

Get help establishing a Kentucky LLC with S corp tax election

Are you ready to form an S corp as an LLC in Kentucky? Our S corp service can help you do that. We also offer other services to help you run and grow your business. If you’re ready to make your dream business a reality, contact us today.

Branching out of state? See; File a Kansas S Corp