How to Start a Sole Proprietorship in Kentucky
If you’re thinking of starting your own business in the Bluegrass state, you can consider starting a sole proprietorship. The start-up process is easy, and there is very little paperwork to get started. Keep reading to discover all the ins and outs of how to start a sole proprietorship in the state of Kentucky.
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What is a sole proprietorship?
A sole proprietorship is a business with only a single owner who is indistinguishable from the business itself. The business and the owner often share a name (but aren’t required to), and any taxes owed are paid through the owner’s personal income tax return.
Examples of a sole proprietorship
- A freelancer or freelance graphic designer using a platform like Upwork or their own website.
- A knitter selling homemade pot holders and other crafts on a platform like Amazon or Etsy.
- Someone selling homegrown fruits and vegetables at a farmers market.
- An individual opening a boutique clothing shop managed from their home and shipped to customers’ doors.
What qualifies your business as a sole proprietorship?
A business is qualified as a sole proprietorship as long as there is only one owner and he or she performs business activities. Keep in mind, however, that not needing to file paperwork doesn’t mean this business schema is free from liability.
Sole prop vs LLC
A sole proprietorship is a business that only has one owner. This owner and the business often have the same name, and all taxes are paid through the owner’s personal tax return. The owner is responsible for the business debts of the company.
An LLC, or limited liability company, is a business structure that divides a company from its owner. Individuals wanting to open an LLC must file paperwork in advance, but in exchange, they are exposed to less liability during business dealings.
Who is it best for?
Sole proprietorships, despite their ease of opening, aren’t for everyone. The sole proprietor business schema is specifically recommended for those who are looking to start a side hustle or small business with a low amount of risk.
Sole proprietorships are great for small business owners because they offer almost unlimited growth, and you are in complete control of your business. This ability to grow, however, introduces lots of risks because if your business fails, so do you. Either way, a sole proprietorship is a good place for a new business owner to start, as it can be converted to an LLC later.
How to set up a sole proprietorship in Kentucky
If you’re ready to set up a sole proprietorship in Kentucky, there are a few steps you should take. You’ll name your business, research business licenses, and consider getting an EIN and opening bank accounts. Here’s more on each step:
Is there any formal paperwork filed to establish this type of business?
Unlike most comparable business types, like a general partnership or S-corp, there isn’t paperwork that you need to file before starting your business activities in Kentucky.
Once you start business activities, you are considered a sole proprietor. Even if you have not yet made a sale, cold-calling potential customers constitutes a business activity.
Naming your business
In Kentucky, you have a couple of options for naming your business. You can use your name, or you can choose a business name. There are benefits and pitfalls to both options.
Using your own name
If you choose to use your own name for your business, according to Kentucky law, it must be the name you were given at birth unless you have filed a legal name change with the state.
The benefit of this option is that you don’t need to file any paperwork, and you can quickly and easily start up your business. Unfortunately, if you want to use a nickname or other form of your name, you will need to file a certificate of assumed name.
Setting up a DBA
In most states, if you don’t want to use your own name for your sole proprietorship, you can get a DBA or Doing Business As. In Kentucky, this is called a Certificate of Assumed Name (or CNA), and it needs to be filed with the county clerk in the county of the business owner’s main residence.
Even if your name is John Smith, and you want to open a sandwich place called Johnny’s Sandwiches, you will need a CNA before you begin doing business.
How to Check if a Business Name is Taken
Obtaining state licenses
In the state of Kentucky, a business license is not required for work under your sole proprietorship to begin. However, certain types of businesses will require permits to be acquired from the state.
Whether or not your business will need a license will depend on your business activities. You can find the full list of businesses needing a permit on the Commonwealth of Kentucky Website. If your business does require a license, it will need to be renewed with frequency.
Requesting an EIN
Even if you are a sole proprietor, you are allowed to hire employees. If you think you will one day want to hire employees, it is recommended to request an EIN or employer identification number from the IRS.
This number will need to go on all W9s you send to your employees. If you don’t have an EIN, your personal social security number will be used instead, which can expose you to identity theft.
Opening a business bank account
With a sole proprietorship, a business bank account isn’t required because the funds of you and your business will be the same. But if you want to more easily track the funds of your business, opening a business bank account is recommended.
Pros
- No business taxes, taxes are easy to file.
- Taxes on business profits will be paid at your personal tax rate.
- Easy to set up a startup.
- Little, or no, paperwork is needed.
- Available to anyone, no business plan or incorporation documents are needed.
- You have control over all activities of your business.
- You can hire help when needed with your SSN or an EIN.
Cons
- The company owner is liable for all business assets and company debt, to the point where they may become bankrupt due to a poor-performing business.
- You can’t have a business partner or investors.
- You are not eligible for government grants or social programs like Medicare.
- While taxes are easier, you still pay a self-employment tax.
- It is difficult to separate business expenses from personal expenses.
- You have to use your legal name as the business name unless you file otherwise.
- The business owner has very few legal protections because the business and the person are the same legal entity.
FAQs
How much is a business license in Kentucky?
In Kentucky, only certain businesses need a business license. If your business deals with items under federal regulation, sell alcohol, or affects the environment, then you will need a business license. They cost $50 and can be ordered on the State website.
Do I need a business license to sell on Etsy in Kentucky?
As long as you are selling only material goods through the Etsy platform, a business license isn’t required to sell crafts in Kentucky.
What is the business tax in Kentucky?
Kentucky has no local sales taxes, but any business operating in the state will need to pay a 6.00 percent tax on the sale of goods. These tax payments are settled through the Kentucky State website.
Do you need a trade name to open a business in Kentucky?
You do not need a trade name or certificate of assumed name in Kentucky as long as you use your own legal name for your business. If you want to use a nickname or a separate name entirely, you will need to file a certificate of assumed name with the county clerk.
Is a business bank account required for a sole proprietorship in Kentucky?
Because your business and you are not separate legal entities, no business bank account is required for a sole proprietorship. Getting one won’t offer liability protection or lower your personal liability, but it may help you keep your expenses separate for accounting purposes.
What is the self-employment tax in Kentucky?
If you work on a sole proprietorship in Kentucky, you will pay an individual tax called the self-employment tax. In Kentucky, the self-employment tax is 15.3%.
How does a sole proprietorship pay taxes?
When tax season comes around, you will simply file your personal tax return with both the state and federal government as directed.
The only difference is that, with a sole proprietorship, you will file an additional form called the Schedule C form. The IRS or internal revenue service will use this form to tax you at your personal tax rate over your business income, but you will not pay business taxes.
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