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STARTING AND OPERATING A BUSINESS IN KENTUCKY Copyright © 2009, Michael D. Jenkins CHAPTER 18
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION Kentucky has a fairly typical tax and legal structure under which businesses must operate. Like most states, Kentucky imposes an income tax, franchise taxes on corporations, a sales and use tax, various excise taxes, but some property taxes are imposed at the state level, in addition to those imposed at the local level. Some localities also impose taxes on business income. The state has also adopted a limited liability company (LLC) law, and a limited liability partnership (LLP) law, so that businesses operating in Kentucky in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally, although Kentucky tax legislation passed in 2005 subjected limited liability entities, such as LLC's, LLP's, limited partnerships, and S corporations, to the corporate income tax. However, that legislation also:
In addition, further legislation in 2006 repealed the corporation income tax on limited liability pass-through entities (LLC's, LLP's, limited partnerships and S corporations), effective in 2007, although such entities are now subject (also starting in 2007) to a Limited Liability Entity tax of at least $175, or a greater tax, based on either gross receipts or gross profits, for such entities that have more than $3 million of annual gross receipts and gross profits. In addition, all pass-through entities are now required to withhold state income tax on behalf of the nonresident individual owners of such entities. At present, the state's economy is in a steep decline, in terms of the level of unemployment and other economic measures, and has been rapidly worsening since early 2008. For example, in March, 2008, the unemployment rate in Kentucky was 5.9%, somewhat higher than the national rate, but by March, 2009, had soared to 9.8%, significantly above the national rate of 8.5%. To view the latest federal Bureau of Labor Statistics unemployment rate data for Kentucky or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Kentucky can operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. Like the federal tax law, the state income tax law recognizes S corporations, for income tax purposes, and allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity, before 2005. However, under legislation that applied in 2005 and 2006, all limited liability entities were made subject to the corporate income tax, although the tax rate was reduced. Under subsequent (2006) tax legislation, however, the corporate income tax on all such limited liability entities other than C corporations was quickly repealed, effective in 2007, and instead all limited liability entities, including S corporations, LLC's, LLP's, and limited partnerships, are now subject to a "Limited Liability Entity" (LLE) tax on gross receipts or gross profits, whichever results in the smaller tax, or a minimum LLE tax of $175, if greater. The LLE tax also applies to C corporations, but is like an alternative minimum tax that, in effect, only applies if greater than the corporate income tax. Sole proprietorships and general partnerships remain exempt from either the corporate income tax or the LLE tax. Kentucky law also provides for limited liability partnerships, in which no partner is liable for debts of the partnership, in general, as in the case of a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each major form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In general, sole proprietorships in Kentucky can be established with no formalities. However, as discussed in Section IV(b), it will typically be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well, and if you will make sales subject to sales tax or will have to withhold state income tax from employees' wages, you will need to register your business with the Kentucky Department of Revenue. No separate tax form filing is required, generally, for a sole proprietorship, under the Kentucky income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. See Section IV(c) for more information on the Kentucky income tax and filing requirements for individuals. Operating as a sole proprietor in Kentucky is generally much simpler than as any other kind of business legal entity. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, or obtain workers' compensation coverage for yourself. However, if your sole proprietorship operates under an assumed or fictitious business name (trade name), you will be required to register the name with the county or counties where you do business, as discussed in Section IV(g). (c) Partnerships. Kentucky's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, usually. State law also allows for the creation of a limited liability partnership (LLP), in which no partner has personal liability. As is discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. In addition, any partnership or other business that has employees will generally have to register for, and pay, state unemployment tax on wages paid, as discussed in Section V(b). Kentucky is one of the few states that also requires partners in a partnership to be covered by workers' compensation insurance, unless they are "qualified partners" who share in the profits of the business and have decision-making powers. General partnerships, as entities, are not subject to state income tax in Kentucky. However, under legislation in 2005, limited partnerships and LLP's were both made subject to the corporate income tax, at the partnership level, as were LLC's, including LLC's that are taxed as partnerships or treated as "disregarded entities" (sole proprietorships) for federal income tax purposes. However, that tax only applied in 2005 and 2006 and has been repealed and replaced by a Limited Liability Entity tax, which is a tax that only applies to limited liability entities with over $3 million each of annual gross receipts and gross profits, except for a minimum tax of $175 which applies to all such entities. LLP's and limited partnerships (and LLC's) were required to file corporate returns and pay corporate income tax and make estimated income tax payments, for 2005 and 2006, but now must file partnership returns again, beginning with the 2007 tax year. For details on Kentucky partnership tax return filing requirements, see Section IV(c). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in Kentucky can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. General partnerships, as entities, are the only pass-through entities that were not subject to state (corporate) income tax in Kentucky in 2006. (All types of partnerships are exempt from the corporate income tax, beginning in 2007.) Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the appropriate tax returns of any corporate, LLC's or other types of partners that are not individuals). General partnerships are required to file an annual tax information return with the state, reporting each partner's share of taxable income and credits. For details on Kentucky partnership tax return filing requirements, see Section IV(c). PLANNING POINT: A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under Kentucky law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a certificate of limited partnership with the secretary of state, together with a filing fee of $40. Foreign limited partnerships (those formed in another state or country) must also register before being allowed to do business in Kentucky, and must pay a registration fee of $90. Both domestic and foreign limited partnerships are required to file annual reports with the secretary of state and pay a filing fee of $15. The annual reports are due between January 1 and June 30 each year. For more information on limited partnership filing requirements, see the contact information for the offices of the Kentucky Secretary of State, listed in Section VI(a). Limited partnerships are no longer required to file corporate returns or pay corporate income tax, starting with the 2007 taxable year. However, they are now subject to the new Limited Liability Entity (LLE) tax of at least $175, or possibly more if gross receipts exceed $3 million a year. See Section IV(c) for more details on the taxation of partnerships in Kentucky. LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLP's) are a relatively new form of partnership permitted under the laws of Kentucky. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Kentucky income tax purposes, although they are now subject to the Kentucky Limited Liability Entity tax of at least $175 each year. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. A general partnership can achieve limited liability by simply registering the partnership with the state as an LLP. However, an LLP does not offer quite the same degree of liability protection as a corporation or LLC, since, under Kentucky's Revised Uniform Partnership Law, a partner in an LLP is not relieved of liability from his own negligence, wrongful acts, or misconduct. To form an LLP in Kentucky, you must register your Kentucky or foreign partnership with the secretary of state and pay a filing fee of $40 for a domestic LLP or $90 for a foreign LLP. Both domestic and foreign LLP's are required to file annual reports with the secretary of state and pay a filing fee of $15. The annual reports are due between January 1 and June 30 of each year. For more information on LLP registration and reporting requirements, see the contact information for the offices of the secretary of state, listed in Section VI(a). Note that one potential drawback of LLP's, if you will do business in other states besides Kentucky, is that some states, like California and New York, only recognize certain types of professional partnerships as LLP's. If yours is not a professional partnership, such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. A further drawback, compared to a regular general partnership, is that LLP's and other limited liability entities were subject to Kentucky corporate income tax in 2005 and 2006. Though that tax on pass-through limited liability entities is repealed after 2006, an LLP is now subject to the Kentucky Limited Liability Entity tax of at least $175 a year, as are all other limited liability business entities. See Section IV(c) for more details of Kentucky taxation of LLP's and tax return filing requirements. (d) Corporations. To form a corporation in Kentucky, you must file articles of incorporation with the secretary of state and pay a fee of $40. At the same time, an organization tax (franchise tax), which is based on the number of authorized shares of stock of the corporation, must also be paid. The tax is computed as follows:
There is a minimum tax of $10. Any subsequent increase in authorized shares must be reported to the secretary of state and an additional tax paid. A $10 fee must also be paid to the county clerk for recording articles of incorporation or most other corporate documents. A foreign corporation (one formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct business in Kentucky, by filing an application for a certificate of authority and paying a filing fee of $90, plus the $10 recording fee. All corporations doing business in Kentucky are also subject to the corporate income tax and to the Limited Liability Entity (LLE) tax, although the LLE tax (except for the $175 minimum tax) is allowed as a tax credit against the corporate income tax, for a C corporation, or as a tax credit to shareholders of an S corporation. The annual franchise (or license) tax on capital stock that formerly applied has been repealed, for periods after December 31, 2005. Corporate taxes are described in more detail in Section IV(c). For more information on filing articles of incorporation or applying for a certificate of authority to do business in Kentucky, see the contact information for the offices of the secretary of state, listed in Section VI(a). Once your corporation is formed, or once your foreign corporation is admitted to doing business in Kentucky, it will be required to file annual reports with the secretary of state and pay a filing fee of $15 with the report, which is due between January 1 and June 30 of each year. Failure to file this report on a timely basis could result in suspension or revocation of your corporation's charter. (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. While most states recognize S corporations for income tax purposes, and treat them in a manner similar to the federal tax treatment, Kentucky did not do so, under tax legislation passed in 2005 that applied to the years 2005 and 2006, but which has now been repealed, beginning in 2007. However, Kentucky now taxes S corporations and other limited liability entities under a new Limited Liability Entity (LLE) tax, which is $175 a year for S corporations with $3 million or less in gross receipts, and can be greater for those with more than $3 million in gross receipts. The income or losses and tax credits of an S corporation still pass through to individual shareholders, who are now allowed to take a tax credit for their share of the LLE tax paid by the S corporation, to the extent such tax exceeds the $175 minimum tax and to the extent they have an income tax liability attributable to their share of income from the S corporation. See Section IV(c) for more details on S corporation taxation by Kentucky. (f) Limited Liability Companies. Kentucky, like all the other states, has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Kentucky may also choose to operate in the form of an LLC. In most states, including Kentucky, LLC's are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal and Kentucky income tax purposes. However, Kentucky is one of the few states that requires the members of an LLC to be covered by workers' compensation insurance, unless they are "qualified members" who share in the profits of the business and have decision-making powers. LLC's were temporarily subject to Kentucky's corporate income tax in 2005 and 2006, but are no longer subject to the corporate income tax in 2007. LLC's are now instead subject to a Limited Liability Entity (LLE) tax, which is $175 a year or, if the LLC has more than $3 million in annual gross receipts, may be much larger, based on its gross receipts or gross profits. Otherwise, LLC's are generally treated like partnerships for state income tax purposes, starting in 2007. See Section IV(c) for a discussion of the income tax treatment of LLC's under Kentucky tax laws in 2007 and subsequent taxable years. To form an LLC under the laws of Kentucky, one or more persons must file articles of organization with the secretary of state, which must be accompanied by a filing fee of $40. Kentucky state law now permits formation of a one-owner LLC. Foreign LLC's, those formed under the laws of another state, must obtain permission to do business in Kentucky, by registering with the secretary of state and paying a filing fee of $90. In addition to initial filing fees, LLC's doing business in Kentucky must subsequently file annual reports with the secretary of state each year between January 1 and June 30 and pay a filing fee of $15 with each such annual report. For more information on filing articles of organization for an LLC, see the contact information for the offices of the secretary of state, listed in Section VI(a). (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as is discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Kentucky is one of the business-friendly states that has repealed its bulk sale laws, so you no longer have to be concerned with this requirement when buying a business in Kentucky. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you can be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business occurs. In Kentucky, you should generally require the seller to obtain tax releases for sales and use tax and for Kentucky unemployment tax. You will be liable for sales or use tax of the seller if you do not withhold an adequate amount from the purchase price. The seller should produce a certificate from the Department of Revenue specifying the amount of sales tax to be withheld or that there is no tax due. Or, you can cover yourself from sales tax liability by making a request to the Kentucky Department of Revenue for a certificate of good standing with respect to the seller. For unemployment taxes, contact the Office of Employment and Training of the Kentucky Department for Workforce Investment regarding any unpaid unemployment taxes of the selling business. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. To obtain the seller's favorable experience rating as a successor employer, you will need to apply on a timely basis to the Office of Employment and Training, requesting that you be treated as a successor employer. Both parties to the sale of a business must jointly complete and file Form UI-21, Report of Change in Ownership or Discontinuance of Business in Whole or Part. For successorship to apply, at least two of the following five conditions must exist:
NOTE: If only the conditions in C and D are met, successorship will not apply. PLANNING POINT: EXAMPLE: IV. KENTUCKY TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
Kentucky taxes on businesses are neither particularly high nor
particularly low. Taxes are relatively high on incorporated
businesses, with an initial organization tax on shares of
domestic corporations and a corporate income tax at relatively
high rates, until recently. Before 2006, corporations were also
subject to an annual license tax on capital.
Unincorporated businesses, except for limited liability
entities, on the other hand, are subject to none of the above
taxes, with the owners instead paying personal income tax on
their profits at fairly low personal income tax rates. Unlike
many states, Kentucky property tax laws do not provide any
exemption for business inventories, but the state and local
property taxes on intangible assets have been repealed,
beginning in 2006.
Kentucky's business tax laws have undergone major and often
highly complex and confusing changes in recent years, although
the overall trend has been to reduce tax burdens on Kentucky
businesses. Under 2005 tax legislation, limited liability
entities, including S corporations, limited partnerships, LLC's,
and LLP's, were made subject to the corporate income tax that
applies to C corporations. However, the annual corporation
license tax on capital was repealed after December 31, 2005,
and the top corporation income tax rate was reduced from
8.25% to 7% in 2005, and to 6% in 2007 and thereafter.
Further legislation in 2006 repealed the corporate
income tax on such limited liability pass-through
entities, effective in 2007, so that the corporate
income tax only applied to such entities for two
years, 2005 and 2006. However, beginning in 2007,
all limited liability entities, including corporations
(C and S corporations), LLC's, LLP's, and limited
partnerships, are subject to a new Limited Liability
Entity (LLE) tax.
The LLE tax is a minimum of $175 a year or, if
gross receipts and gross profits both exceed $3
million, a gross receipts tax or gross profits tax,
whichever is less, may apply if each produces a tax
of more than $175. The LLE tax does not apply to
individuals who do business as sole proprietorships
or to general partnerships (that have not become LLP's).
For C corporations, the LLE tax (other than a $175
minimum LLE tax) is allowed as a credit against the
corporate income tax, so that it is, in effect, an
alternative minimum tax, imposed at more than $175
only if it is greater than the corporate income tax.
For more on the LLE tax, see Section IV(c).
Entities subject to the LLE tax must make estimated
tax payments on Form 720-ES. The first
quarterly estimate for calendar year 2007 taxpayers was
due on June 15, 2007 and the estimates may NOT be paid
electronically.
In addition to state income and franchise taxes, counties
in Kentucky with more than 300,000 population (such as Jefferson
County) are permitted to impose local license taxes or taxes
on wages or net business profits, and the fiscal courts and boards
of education in such counties may also impose similar taxes. In
2003, legislation was enacted, effective January 1, 2006, that
harmonizes any such local occupational license and net income
taxes in Kentucky. Under such legislation, taxing districts are
required to use a two-factor apportionment method (payroll and
sales) to apportion a taxpayer's profits or gross receipts between
districts, and districts are allowed to require quarterly estimated
tax payments of any business entity other than a sole proprietorship,
if the tax liability exceeds $5,000. The legislation also requires
taxing districts to use federal income tax law definitions of profits
and gross receipts, where applicable, and to use uniform definitions
of terms such as "business entity," "employee," "net profit,"
"compensation," and the like.
For state tax forms and tax information, see the contact
information for the Kentucky Department of Revenue
in Section VI(a).
(b) State and Local Licensing.
Nearly any business, operated anywhere in the United States,
will have to have at least one government license of some
kind. In most cases, this will be a local license, issued
by your city or county. Before you open your business,
contact your local city or county hall and find out if
your particular business needs one or more local licenses.
Most kinds of local business licenses are granted upon
payment of a fee, with no further requirements, except
possibly for annual or other periodic renewal fees.
However, if you are engaging in any kind of food business,
you will usually need to also obtain a health department
permit and show that you are in compliance with health
department food-handling requirements. In addition, be
sure to check with an attorney or local government zoning
or planning department officials to determine if your
business will be in compliance with all local zoning
and planning restrictions. If you own or rent any type
of facility, you will generally need fire department
permits, showing that you meet fire safety codes and any
construction or improvements to an existing structure
will usually require a building permit. If you intend to
simply operate your business from your home, you may be
in violation of local zoning requirements, but this is
less likely to be a concern if you don't have clients,
customers, suppliers, or employees coming to your house
on business, on a regular basis.
The state government of Kentucky requires special licenses
for many kinds of professionals, such as physicians, dentists,
lawyers, and accountants. To further protect consumers,
Kentucky has expanded the list of occupations that must be
licensed by the state to include many other occupations.
Most state licenses not only require payment of fees, but
are only issued for a given profession or occupation upon
showing that you have completed certain educational or
experience requirements, or passed certain tests, or some
combination of the foregoing.
Kentucky has no single "state business license" that
covers every business activity. Instead, it has over 600
business license requirements for different kinds of
businesses, and some kinds of businesses require no state
license of any kind. For information on state licensing
and business registration requirements in Kentucky, contact
the Business Information Clearinghouse of the Kentucky
Cabinet for Economic Development, at the phone number
or address listed in Section VI(a).
They are a "one-stop" agency that can help you to find
out what state license or licenses may be required for
your particular business.
Many businesses will need to register with the Kentucky
Department of Revenue on Form 10A 100, Kentucky Tax
Registration Application, including:
If you have employees and need to register for state
unemployment tax, you must do so separately by registering
for an unemployment insurance reserve account with the
Kentucky Office of Employment and Training, part of the
Department of Workforce Investment, as discussed in
Section V(b).
(c) Income and Franchise Taxes.
Kentucky has both an individual income tax and a corporate
income tax, as well as a Limited Liability Entity (LLE) tax
on corporations and other limited liability entities. Recent
legislation, effective in 2005, extended corporate income
tax treatment to all limited liability pass-through entities,
however, including limited partnerships, LLP's, LLC's, and
S corporations, but also abolished the annual corporate
license (franchise) tax after December 31, 2005.
However, a special session of the Kentucky legislature passed
new legislation, signed into law by Governor Fletcher on June
28, 2006, that eliminated the corporate income tax, generally,
on pass-through entities. Beginning with the 2007 tax year,
Kentucky once again treats such entities in the same manner
as they are treated for federal income tax purposes, eliminating
the corporate income tax that was imposed on all limited
liability pass-through entities in 2005 and 2006.
While the corporate income tax on S corporations, LLC's,
LLP's, and limited partnerships was repealed for 2007, a new
Limited Liability Entity (LLE) tax on those entities has
replaced it, also beginning in 2007. For a small business
subject to the tax, the LLE is simply a flat tax of $175 a
year if either its worldwide gross receipts or its worldwide
gross profits are less than $3 million. Sole proprietorships
and general partnerships are not "limited liability entities"
and thus are completely exempt from the LLE tax.
Larger limited liability entities, including C
corporations as well as S corporations and unincorporated
limited liability entities, may have to pay more than
the $175 annual minimum LLE tax if their gross receipts
and gross profits both exceed $3 million, under a complex
tax calculation formula, based on gross receipts or gross
profits, whichever produces the smaller tentative tax. An
entity subject to the LLE tax and which has more than $3
million in worldwide gross receipts or worldwide gross
profits computes the tax in 2007 or later as follows, in
a 4-step calculation:
"Gross receipts from all sources" and "gross profits from
all sources," for purposes of the LLE tax calculations, refer
to worldwide gross receipts or gross profits. "Kentucky gross
receipts" and "Kentucky gross profits" refer to only those
gross receipts or gross profits earned in or allocable to
Kentucky sources.
For a C corporation, the LLE tax replaces the former
"alternative minimum tax" on corporations. Thus, the LLE
tax (except for $175) is allowed as a credit against the
regular corporation income tax so that, in effect, a
corporation either pays the regular corporation tax plus
the $175 LLE minimum tax, or, if the LLE tax (minus $175)
is higher than the income tax, it pays only the LLE tax.
For a pass-through entity that pays more than the $175
LLE minimum tax, the additional tax is "passed through"
as a tax credit to its owners (S corporation shareholders,
LLC members, or partners in an LLP or limited partnership).
However, the owner who is allocated such a tax credit can
only use the credit to offset Kentucky income tax that is
attributable to income from the pass-through entity -- he
or she can't use the credit to offset tax state income
tax incurred on other sources of income.
Pass-through entities that can reasonably expect to owe
more than $5,000 of LLE tax in 2007 or later years are
generally required to make estimated tax payments in advance,
payable on the same basis and at the same time as corporate
estimated income taxes (see the discussion of
Kentucky corporate income taxation below.)
TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS
The Kentucky individual income tax is imposed at a tax
rate of 5.8% on taxable income over $8,000, and 6% on
taxable income over $75,000, since 2005. Thus, the state
individual income tax is very nearly a flat tax, although
lower rates, starting at 2%, apply to the first $8,000 of
taxable income. Individual taxpayers pay state income tax
on their business earnings from a sole proprietorship, or
on their share of the earnings of a partnership or other
pass-through entity, such as an LLC or S corporation.
Partnerships are not subject to state income taxation in
Kentucky after 2006, but must file an information return with
the Department of Revenue each year, showing each partner's share
of taxable income, losses, and credits. However, under major tax
legislation enacted in 2005, all limited liability entities,
including S corporations, LLC's, LLP's, and limited partnerships
(but not general partnerships), were temporarily subject to the
Kentucky corporation income tax in 2005 and 2006, before the
corporate income tax was repealed for all entities other than
C corporations.
The tax treatment of limited liability pass-through entities
has become extremely complex and confusing in recent years as a
result of major Kentucky tax law changes that went into effect
in 2005 and which were largely repealed and revised by the
legislature in a special session in June, 2006.
Limited partnerships, LLP's, LLC's and S corporations were
(temporarily) taxed in 2005 and 2006 much like corporations,
generally, so that owners (other than individuals) of interests
in such entities no longer had to report a share of the taxable
income (or loss, or tax credits) of such entities, generally.
In addition, all items of income, loss, or tax credits
that formerly passed through still did so under the law
that applied in 2005 and 2006, with respect to owners who
were individuals, but the individual owner could claim a
tax credit for his or her share of the corporate tax that
was paid by the pass-through entity. This tax credit would,
in most cases, offset any tax paid by the individual on
his or her income passed through from the business entity,
but was nonrefundable and could exceed the amount of the
additional tax the individual owed that was attributable
to the passed-through business income.
(For 2005 and 2006. Beginning in 2007, pass-through entities
are required to withhold state income tax with respect
to nonresident owners, on their share of the entity's
Kentucky-source income, but the pass-through entities
themselves are no longer subject to the corporate income tax.)
Under the Kentucky tax rules that applied to pass-through
entities in 2005-2006, distributions from a pass-through
entity were treated like dividends from corporations, subject
to the same tax rules that apply generally to corporate
dividend distributions. (For 2005 and 2006 only. This provision
apparently does not apply after 2006, now that the corporate
income tax on limited liability pass-through entities has been
repealed and the former pre-2005 pass-through tax treatment is
restored.)
Therefore, while the complex 2005-2006 Kentucky tax law
changes supposedly treated such pass-through entities like
C corporations, some of the old pass-through rules still
applied to pass-through entities for those two years -- and
after 2006 which the corporate income tax no longer applies
to any pass-through entities, and all income or losses of
such entities will once again pass through to the owners.
A Kentucky personal income tax return, Form 740,
must be filed with the Department of Revenue each year by April
15th, for calendar year individual taxpayers.
As noted above, for 2005 and 2006 tax years, LLP's and
limited partnerships, as limited liability pass-through
entities, did not pass through any items of income,
tax losses, or tax credits to partners that were not
individuals, but such items still were passed through
to individual partners, and the individual partners could
claim a tax credit for their share of the corporate tax
paid by the LLP or limited partnership.
For a summary of the corporate income tax rates and analysis of
the corporate tax calculations under the modernized Kentucky
tax system, see our discussion of Kentucky
corporate taxation.
General partnerships with nonresident partners are required
to withhold Kentucky income tax at the highest marginal tax rate
on such nonresidents' distributive share of the partnership's
Kentucky-source income and file a composite tax return on their
behalf. Under administrative regulations issued by the Kentucky
Department of Revenue, no such withholding is required if any
of the following is true:
In 2007 and later, all pass-through entities, not
just general partnerships, are generally required to withhold
Kentucky state income tax at the highest income tax rate on
each nonresident owner's share of the entity's Kentucky-source
income. ("Pass-through entities" include partnerships, LLC's,
and S corporations.) Where the nonresident owner is a
corporation, no withholding is required unless the corporation
is one that does business in the state only through its
ownership of an interest in the pass-through entity. No
withholding is required for a partner, member, or shareholder
(of an S corporation) of the pass-through entity if that
owner filed a Kentucky income tax return the prior year and
paid any tax owed in a timely manner.
Individual taxpayers doing business as sole proprietors
or who own an interest in a pass-through entity, who have
taxable income from the business, may be required to make
advance payments of estimated Kentucky individual income
taxes, on Form 740-ES, if their net tax
liability (not covered by withholding) exceeds $500.
Estimated tax payments are due in four installments, on the
15th day of the 4th, 6th, and 9th months of the taxable year,
and the 15th day of the first month of the following year.
Kentucky corporate income tax rates, on corporations other
than S corporations, are 4% on the first $50,000 of income,
5% on taxable income between $50,000 and $100,000, and 6%
on taxable income over $100,000. The top tax rate was reduced
from 7% to 6% for tax years beginning on or after January 1,
2007.
There is also a $175 LLE minimum tax, which must be
paid even if the regular corporate tax is zero and the new
Limited Liability Entity (LLE) tax is only the minimum of
$175. C corporations in 2006 and later years pay the higher
of the corporate income tax or the LLE tax, which is described
above in this Section IV(c). The LLE tax,
except for the $175 minimum LLE tax, is allowed as a tax credit,
offsetting any corporate income tax liability.
The state corporation income tax return is Form 720,
which must be filed with the Kentucky Department of Revenue
by the 15th day of the fourth month following the end of the
taxable year, or by April 15 in the case of a corporation
whose taxable year is the calendar year. S corporations
were required to file corporation income tax returns and pay
corporate income tax for tax years 2005 and 2006. However,
beginning in 2007, S corporations now generally pay only the
LLE tax, which is $175 unless the S corporation's worldwide
gross receipts and worldwide gross profits for the year are
each more than $3 million.
Before 2006, both C and S corporations also had to pay an
annual license or franchise tax on capital employed in Kentucky,
at the rate of $2.10 per $1,000 of capital, with a minimum tax
of $30.
While the annual tax on corporations' capital has been repealed,
a one-time tax based on capital stock applies at the time of
incorporation, and an additional tax applies if a corporation
later amends its charter to increase its capital stock. For more
on this fee or tax, see Section II(d).
Corporations are required to make estimated tax payments
of their state corporate income tax in advance, if their tax
liability for the year equals or exceeds $5,000. Estimated
tax payments are due in advance, in three installments, with
50% of the estimated tax due on the 15th day of the 6th month
of the taxable year, and 25% due on the 9th and 12th months of
the taxable year. The total estimated tax that must be paid
in is usually equal to 70% of the actual tax liability for the
year, less $5,000. Use Form 720-ES to make
estimated tax payments. For tax years before 2006, the prior
year's tax liability was not a factor in determining if
estimated tax payments were required.
Under recent (2006) legislation, effective for tax years beginning
on January 1, 2006 or later, the amount of corporate estimated
tax due is equal to 100% of the tax for the prior year (minus
$5,000), if the tax liability for the prior year was $25,000 or
less.
Penalties will be imposed for failure to make the required
estimated tax payments on a timely basis.
Limited liability pass-through entities, including S
corporations, were taxable as corporations, in 2005 and 2006.
Under that now-repealed law, the income of an S corporation was
still taxable to individual shareholders, but the shareholders
could claim a tax credit for their share of the corporate tax
paid by the S corporation. No income, losses, or tax credits
earned by the S corporation were passed through to shareholders
other than individuals. (However, as a practical matter,
shareholders of S corporations are almost always individuals,
except for certain trusts or estates of deceased shareholders,
since the federal tax law does not permit S corporations to
have shareholders that are business entities, such as LLC's or
other corporations.)
Note, however, that beginning in 2007, Kentucky has
restored the former pass-through treatment of S corporations
and other pass-through entities, which are no longer subject
to the corporate income tax that applied to such entities
in the 2005 and 2006 tax years. However, the alternative
minimum tax, or Limited Liability Entity (LLE) tax, as it
is now called, based on either gross receipts or gross
profits, will apply, but is only $175 each year for limited
liability entities with $3 million or less of total gross
receipts or gross profits (within and outside of the state).
The LLE tax, as it applies to pass-through entities, is
now a separate tax, rather than an alternative minimum
tax, as revised by the 2006 legislation, but corporations
that pay both income tax and the LLE tax may claim the LLE
tax (less $175) as a tax credit against their income tax
liability. For more on the LLE tax, see the discussion above,
at the beginning of this Section IV(c).
As in the case of other pass-through entities, S corporations
that have nonresident shareholders are required to withhold
Kentucky state income tax on their behalf, generally, but the S
corporation may be relieved of such withholding for a shareholder
if that shareholder filed a Kentucky income tax return the prior
year and paid any tax owed in a timely manner.
TAXATION OF LIMITED LIABILITY COMPANIES
In Kentucky, a limited liability company (LLC) was
taxed as a corporation for state income tax purposes,
in 2005 and 2006, regardless of whether it had elected
to be taxed as a corporation, as a partnership, or as a
disregarded entity (sole proprietorship) for federal tax
purposes. LLC's also had to make estimated tax payments
of the corporate income tax. Kentucky recognized the
validity of single-member LLC's as a legal matter, but
taxed them as corporations, rather than treating them
like sole proprietorships, for state income tax purposes.
Such LLC's were required to file Form 725, Kentucky Single
Member LLC Individually Owned Corporation Income Tax Return.
LLC's, as limited liability pass-through entities, no
longer passed through any of their income, losses, or tax
credits to members that were not individuals, in tax years
2005 and 2006. Such items still were passed through to
individual members, however, and the individual members
could claim a tax credit for their share of the corporate
tax paid by the LLC.
However, 2006 tax legislation restored the former
pass-through treatment of LLC's and other pass-through
entities, beginning in 2007, so that the corporate income
tax no longer applies to such entities in 2007 and later
years. Such entities are now subject to the Limited
Liability Entity (LLE) tax, based on either gross receipts
or gross profits, whichever tax is smaller, except for
limited liability entities with no more than $3 million
of total gross receipts and gross profits (within and outside
of the state), which pay only the $175 minimum LLE tax each
year.
LLC's that expect to owe more than $5,000 of LLE tax
in 2007 or later years are required to make estimated tax
payments in advance, on the same basis as corporations
that pay estimated income or LLE tax (see discussion of
Kentucky corporate taxation above
in this Section. See also the discussion of the LLE tax
above, at the beginning of this Section IV(c).
As in the case of partnerships and S corporations,
LLC's that have nonresident members will generally be
required to withhold Kentucky income tax at the highest
individual or corporate tax rate (which is 6% for
either in 2007).
(d) Sales and Use Tax.
Kentucky imposes a general sales tax on retail sales of tangible
personal property and certain types of services at the statewide
rate of 6%. There are generally no local sales taxes, except
that localities are permitted to levy taxes on hotel and motel
receipts. Sales and use tax returns must be filed with the
Kentucky Department of Revenue. Note that the sales tax is imposed
on the consumer, not on the seller, and it is unlawful for a
seller to advertise that it will assume or absorb the liability
for the tax.
Kentucky has signed on to the Streamlined Sales Tax Agreement
(SSTA) among the states and made a number of changes in its sales
and use tax laws in 2004 and 2005, before the SSTA became effective
in Kentucky, on October 1, 2005. One of the more important changes
is that delivery charges on taxable sales are now considered to be
part of the sales price, even if separately stated, and are thus
also subject to sales or use tax.
There are numerous exemptions from the sales tax, the most
important of which is the resale exemption. If you are a
wholesaler or retailer who purchases goods that you will
resell, your purchase of such goods may qualify as an exempt
sale for resale. Similarly, if you sell goods to wholesalers
or retailers for resale by them, your sale may also qualify
as an exempt sale for resale. In any such transaction, the
exemption is ordinarily available only if the purchaser gives
the seller a valid resale certificate, certifying that the
items are being purchased for resale, and not for use or
consumption by the buyer. For any resale transaction, use
Form 51A105, Resale Certificate, copies of
which may be downloaded from the Department of Revenue's
web site.
Until 2007, it was unclear if broadband Internet access
services were subject to sales and use taxes. However, in
the tax appeal of Bellsouth Telecommunications, Inc. v.
Finance and Administration Cabinet, et al, Ky. BTA (2007),
the Department of Revenue ruled that broadband Internet
access services sold by a telecommunications company are
not subject to Kentucky sales or use taxes and ordered such
sales taxes that had been collected to be refunded.
A shadow tax, the use tax, is also imposed at the same
rate as the sales tax. It is primarily intended to tax
property that is acquired from sources outside of the state,
in transactions not subject to sales tax, when such property
is used or consumed within Kentucky. Use tax may also apply
to items purchased on an exempt basis, such as for resale,
if such items end up being used or consumed, instead of
being resold.
Before making any taxable sales, you will need to register
with the Department of Revenue on Form 10A 100, Kentucky
Tax Registration Application.
Vendors who collect Kentucky sales tax are allowed to keep
a small percentage of the tax to defray their administrative
costs of collecting, accounting for, and remitting the tax.
The allowable percentage that may be retained is 1.75% of the
first $1,000 of the tax due with the return and 1% of the
excess over $1,000. However, effective after June 30, 2006,
the maximum amount of tax that may be retained by the vendor
is limited to $1,500 per month. This cap was imposed by
H.B. 380 in 2006, notwithstanding the language of Kentucky
Revised Statutes Section 139.570, which does not set any
cap on reimbursement. The law was clarified in 2008, and
now imposes the monthly cap of $1,500 on sales tax discounts
for periods after June 30, 2008.
For more information on sales and use tax registration
and compliance, see contact information for the offices of
the Kentucky Department of Revenue in Section VI(a).
(e) Real and Personal Property Taxes.
In Kentucky, as in every other state, any business real
estate you own will be subject to real property taxes. In
Kentucky, taxpayers must file real property tax returns
with the county property valuation administrator each year
between January 1 and March 1. Real property taxes are
imposed at the county level.
Each year, by July 1st, the state Department of Revenue
sets the state real property rate.
The 2005 state real property tax rate was set at 13.1 cents
per $100 of assessed value. The rate was reduced to 12.8
cents per $100 in 2006 and to 12.4 cents in 2007.
The Commonwealth (state) of Kentucky also imposes personal
property taxes on tangible personal property and, unlike many other
states, Kentucky does not exempt business inventories from tax.
("Personal property" is any kind of property that is not real estate.)
Businesses must file a Tangible Personal Property
Tax Return, Form 62A500, with the Department of
Revenue each year between January 1 and May 15, listing all
taxable tangible personal property owned as of January 1st.
Payment is not due with the return, as the sheriff in each
county will mail out bills for the tax owed by September
15th.
Note that the Kentucky Supreme Court has struck down as
unconstitutional the part of the state intangible property
tax that applies to shares of stock in corporations.
In addition, under 2005 tax legislation that made major
changes in income and property taxation, the property tax
on most types of intangible property was repealed, effective
in 2006, except for various regulated industries, such as
insurance and public utility companies.
For more information of Kentucky property tax rates, see
the contact information for the Kentucky Office of Property
Valuation in Section VI(a).
(f) Other Business Taxes.
Kentucky imposes a number of excise and other taxes on businesses,
including:
(g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. Kentucky requires registration of assumed names. Every person doing business under an assumed name must file an assumed name statement with the county clerk in the county where residing or doing business and pay the applicable fee of $12.00. Corporations, LLC's, and partnerships that do business under an assumed name must file with the secretary of state's office, indicating all the counties in which they will carry on business, as well as filing in the county where the entity maintains its registered agent for service of process, or if no such registered agent is required, in the county in which the entity's principal place of business is located. A filing fee of $20 must be paid to the secretary of state. Registration of an assumed name is effective for five years, at which time it must be renewed, if still being used. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since Kentucky imposes a state income tax on individuals, you will need to also withhold Kentucky income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the Kentucky Department of Revenue on Form 10A 100, Kentucky Tax Registration Application, to obtain an employer's withholding account number. This application can also serve as your registration as a seller for the sales and use tax and, if you are incorporated, for corporation income taxes. However, if you have employees and need to register for state unemployment tax, you must do so separately by registering for an unemployment insurance reserve account with the Kentucky Office of Employment and Training, as discussed in Section V(b). For more information on Kentucky income tax withholding and registration requirements for employers, see the contact information for the offices of the Kentucky Department of Revenue. listed in Section VI(a). (b) Unemployment and Other State Payroll Taxes. If your business employs one or more individuals in each of 20 weeks during any calendar year or if your payroll amounts to $1,500 in any calendar quarter, you, as an employer will be required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the Kentucky unemployment tax are required to register with the Office of Employment and Training of the Kentucky Department for Workforce Investment on Form UI-1, Application for Unemployment Insurance Reserve Account, to obtain an employer identification number for unemployment tax purposes. New employers, other than in construction, are required to pay tax at a rate of 2.7% in 2009 on the first $8,000 of wages paid to each employee. The new employer tax rate and $8,000 taxable wage base are both set by statute. After you have had employees for a while, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under Kentucky law, cannot be charged to your employees or withheld from their wages. Employers subject to the unemployment tax are required to display an unemployment compensation notice in the workplace. For more information on your Kentucky unemployment tax obligations as an employer, see the contact information for the offices of the Office of Employment and Training of the Kentucky Department for Workforce Investment, listed in Section VI(a). (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In Kentucky, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Sole proprietors are generally not required to be covered. Also, partners in a partnership, or members of an LLC are generally not considered to be employees, if they are partners or LLC members who share in profits of the business and have decision-making powers. They are defined as "qualified partners" or "qualified members," and need not be covered, but may elect coverage. Nonqualified partners or members, who are more like employees, in that they render services and are not engaged in decision-making and don't share in the profits or losses, are required to be covered. IMPORTANT NOTE: Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. CAUTION: As an employer, you must notify injured employees of their benefits and post a notice in the workplace informing your employees of their workers' compensation coverage. For more detailed information regarding your obligations as an employer under the Kentucky workers' compensation laws, contact your insurance carrier or see the contact information for the Office of Workers' Claims (part of the Kentucky Department of Labor), listed in Section VI(a). (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still generally be subject to the Kentucky wage-hour laws, which provide for a state minimum hourly wage that is currently $6.55 an hour (as of July 1, 2008) and will automatically increase with future increases in the federal minimum wage, since the Kentucky wage is defined by reference to the federal minimum wage. However, while the federal increase scheduled for 2009 will go into effect on the 24th of July each year, the Kentucky minimum wage will increase a bit earlier, on the 1st of July, 2009. Kentucky law, like the federal labor laws, requires an employer to pay overtime at one and one-half times the regular hourly rate for hours worked in excess of 40 a week by an employee. Time-and-a-half overtime pay must also be paid for the seventh day, if an employee works seven days in a week, unless the employee is not allowed to work more than 40 hours during the workweek. Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees are exempted from the Kentucky wage-hour rules. In addition, Kentucky law exempts most employees of retail stores or workers in hotels, motels, or restaurants from the 40-hours-a-week overtime pay requirements, but not from the seventh day of the week overtime provisions. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, which you can obtain from the Division of Employment Standards and Mediation of the Kentucky Department of Labor. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws, in Kentucky. You may wish to obtain the pamphlet entitled Kentucky Labor Laws, which includes coverage of the state's child labor laws, from the Division of Employment Standards and Mediation of the Kentucky Department of Labor. Kentucky's child labor laws generally prohibit hiring children under the age of 14, except for children 11 or older, who are allowed to work as golf caddies. Children of the ages 14 or 15 may not before 7 a.m. or after 7 p.m. (9 p.m. from June 1 through Labor Day). When school is in session, they may not work more than 3 hours a day on a school day, or 18 hours a week, or when school is not in session, they may work no more than 40 hours a week. At no time may they work more than 8 hours in a day. Children of the ages 16 or 17 may not work before 6 a.m. or after 10:30 p.m preceding a school day, or after 1 a.m. preceding a non-school day. When school is in session, they may not work more than 6 hours a day on a school day, or 8 hours on a non-school day, or 30 hours in a week (generally). When school is not in session, there are no maximum daily or weekly limits on the number of hours a 16- or 17-year-old may work. Children under the age of 18 may not work in any occupation defined as hazardous, and the number of occupations considered hazardous is expanded for children under the age of 16. No minor under the age of 18 may be permitted to work more than five hours continuously without a meal break of at least 30 minutes. Employers who hire children under the age of 18 must post a child labor law poster in the workplace, which may be obtained from the Kentucky Department of Labor, Office of Workplace Standards. For more information on Kentucky wage/hour and child labor laws, contact the Kentucky Department of Labor at the address listed in Section VI(a). (e) State Occupational Safety and Health Laws. Nearly half of the states have their own OSHA-like agency, charged with administering the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. Kentucky is one of the states that has its own OSHA-type agency, the Division of Education and Training for Occupational Safety and Health of the Kentucky Department of Labor. To determine if your workplace is in compliance with federal and Kentucky job safety requirements, you may wish to contact that agency and request a free on-site safety consultation. You will not be cited for any violations detected, provided that you promptly correct the unsafe conditions. This differs from the rules for consultations by federal OSHA inspectors, who are required to cite you for any violations they find. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the Frankfort offices of the Division of Education and Training for Occupational Safety and Health of the Kentucky Department of Labor, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Kentucky labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to employees. State law in Kentucky generally requires an employer to pay wages at least as frequently as twice a month. In the case of a discharged employee, final wages must be paid no later than 14 days after termination or the next regularly scheduled payday, whichever is the earlier. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Kentucky does not have such a right-to-work law and allows union shop or agency shop contracts between an employer and a union. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in Kentucky, and display a poster informing employees of their rights. You can obtain this poster from the Division of Employment Standards and Mediation of the Kentucky Department of Labor, at the address listed in Section VI(a). Kentucky's civil rights laws prohibit employment discrimination by employers with 8 or more employees in the state during 20 or more weeks of the current or preceding year. Such employers may not discriminate on the basis of race, color, religion, national origin, age (for persons 40 and over), or because the person is a smoker, as long as the person complies with any workplace policy regarding smoking. Kentucky laws also prohibit discrimination in employment due to a physical disability or for being HIV-positive, for any employer of 8 or more individuals. Also, employers of two or more persons in the state during 20 or more weeks of the current or preceding year are prohibited from engaging in wage discrimination based on gender. (4) Reporting new hires. Under federal welfare reform laws, employers in all states are required to report newly-hired (or rehired) employees to a designated state agency (the Kentucky New Hire Reporting Center, which is located in Virginia, for Kentucky employers) within 20 days after the date of hire. If you are reporting electronically, reports must be filed twice a month (if needed), on dates not more than 16 days nor less than 12 days apart. See the contact information for the Kentucky New Hire Operations Center in Section VI(a) and their web site (where you can submit reports online) in the listing of Kentucky Internet sites in Section VI(c). VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Kentucky, as many states have done in recent years, has set up an office to help new or relocating businesses get started in Kentucky with a minimum of difficulty. The Business Information Clearinghouse of the Kentucky Cabinet for Economic Development can help your new or existing business to obtain all necessary state licenses and permits and provides a centralized source of information on state business regulation. It also acts as a referral service for government financial and management assistance, and serves as a regulatory reform advocate for business in Kentucky. Request their helpful publication, the Kentucky Business License Information FAQ, which offers useful information on the various permits and licenses you will need to get started. Contact this agency at the following address: Business Information Clearinghouse Branch Kentucky Secretary of State TAXES. Obtain state income, sales and use tax, and other miscellaneous business tax forms, instructions and information from the Kentucky Department of Revenue, which is the main tax collection agency in Kentucky and is now part of the Finance and Administration Cabinet. Also register with this agency as an employer, for state income tax withholding purposes, to obtain your employer's withholding account number. Kentucky Department of Revenue For information on property tax rates in particular locations in Kentucky, contact: Kentucky Department of Revenue STATE SALES TAX. Obtain your sales and use tax license or permit and information on the Kentucky sales and use tax law, from the Kentucky Department of Revenue, at the address listed above for that agency. STATE LABOR LAWS. Contact the appropriate division of the Kentucky Department of Labor about your obligations as an employer under various state labor laws, including:
Kentucky Department of Labor NEW HIRES REPORTING. Report newly hired employees by mail or fax within 20 days to the following Kentucky agency, which is located outside the state, at the following address: Kentucky New Hire Reporting Center EMPLOYER WITHHOLDING. Contact the Kentucky Department of Revenue at the address listed above for that agency, to register as an employer, for purposes of Kentucky income tax withholding. STATE UNEMPLOYMENT TAX. Contact the following state agency to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject. Office of Employment and Training WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the following agency for further information: Kentucky Department of Labor STATE ANTI-DISCRIMINATION LAWS. Contact the Kentucky Department of Labor, at the address and phone number listed above for that agency, for more detailed information on Kentucky civil rights laws that may apply to your business, and to obtain anti-discrimination notices you are required to post in the workplace. (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Kentucky to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you. State Headquarters (c) Internet Sites. For anyone with access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major Kentucky state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Kentucky. Since new sites are appearing frequently, you might also want to search for other Kentucky government Web sites by using one of the popular Internet search engines, such as Google or Yahoo. To start your Internet search for Kentucky government information, you may want to begin with the following Internet sites: Commonwealth of Kentucky home page: Commonwealth of Kentucky list of government agencies: Kentucky Department of Revenue (tax forms and information): Kentucky Department of Labor: Information on financial incentives, Kentucky Cabinet for Economic Development: Kentucky Secretary of State (corporate, partnership, and LLC filing, forms): Kentucky New Hire Reporting Center (report new hires by mail, fax, or via their web site): (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in Kentucky, or contact the following state agency about the wide range of state financing programs available in Kentucky: Kentucky Economic Development Finance Authority The Kentucky District Office of the U.S. Small Business Administration can be contacted for information regarding SBA loans and other business financial and technical assistance, at: U.S. Small Business Administration |
Copyright © 2009 Michael D. Jenkins
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