Start a Kentucky S Corp

Kentucky S Corporation Requirements and Limitations

The IRS requires your business to fulfill certain requirements before you can apply to be taxed as an S Corporation in Kentucky. Your business must:

• Be a domestic corporation or other eligible business
• Have only certain kinds of corporate shareholders, including individuals, estates, exempt organizations, and certain trusts, but not partnerships, corporations, or non-resident immigrants
• Have no more than 100 shareholders
• Have no more than one class of stock
• Not be an ineligible corporation such as an insurance company, international sales corporation, or a certain kind of financial institution

If you’re looking to build lots of capital through a large shareholder base, an S Corp might not be the entity for you. But it’s a good idea to speak to legal and financial professionals about your best business options. 

Pros and Cons of Creating an S Corp

Is the S Corp tax designation right for your business or not? This decision is highly dependent on your unique circumstances, but we can give you some factors to consider. 

Pros

Running your business as an S Corporation can provide tax benefits, such as:

• Saving on self-employment taxes (if you own an LLC)
• Eliminating corporate double taxation (if you own a C Corp)

How an LLC can save money on self-employment taxes requires some explanation. The members of a standard LLC are 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 (about 15.3%) on all profits they receive from the LLC. This is more than the taxes they’d pay when working for someone else because their employer would pay part of them.

When the members elect S corp status, though, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay self-employment taxes on their salary and not the profits they receive. This can add up to thousands of dollars.

One catch to this is that 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 $2 and avoid contributing anything to Social Security and Medicare. The IRS considers “reasonable” to be something similar to what others in your field are earning.

If one of your biggest concerns about choosing the right business structure is your amount of tax liabilities, an S Corp might be the right selection for you.

Cons

There can also be drawbacks to an S Corp. How much these disadvantages will affect your business depends on your particular circumstances and priorities:

• Restrictions on issuing shares
• More extensive IRS oversight
• More stringent eligibility requirements
• More accounting work

Once again, we encourage you to speak to a tax and/or legal professional to determine if these factors are significant in the face of your specific needs.

Can LLCs choose an S Corporation election?

Yes, LLCs can make an S Corp election. They may choose to do so for tax benefits because S Corporations can limit the self-employment taxes that LLC owners pay. To learn more about the tax impacts of choosing a particular business structure, read our article, Tax Information for Limited Liability Companies.

We can help

When you hire us to form your LLC, we ask a series of questions to help you determine if the S corporation status is the best option. However, you may want to consult your tax advisor about the tax benefits of an S Corp.

If you decide to take advantage of the tax benefits of an S Corp by forming an LLC with S Corp status, we can assist you. We help you get your business running quickly, taking the legal hassle off your plate so that you can pursue your passion. Contact us to form your Kentucky S Corporation today.