LLC vs S-Corp in Kentucky

The Kentucky Secretary of State handles entity formation. The IRS handles federal tax classification via Form 8832 and Form 2553. The Kentucky Department of Revenue administers the Limited Liability Entity Tax (LLET) and state income tax. A Kentucky LLC can elect to be taxed as an S corporation for federal purposes. Kentucky LLC basics. - Articles of Organization filed with the Kentucky Secretary of State. Filing fee is $40. - Annual report filed with the Secretary of State each year between January 1 and June 30. Annual report fee is $15. - Single-member LLCs default to disregarded entity for federal tax. Multi-member LLCs default to partnership tax. Either can elect S corp treatment with Form 2553. - The Kentucky Limited Liability Entity Tax (LLET) applies to LLCs, corporations, and S corporations. The minimum LLET is $175 per year. Entities with Kentucky gross receipts or gross profits over $3,000,000 owe more, calculated at $950 per $1,000,000 in Kentucky gross receipts or $7,500 per $1,000,000 in Kentucky gross profits (whichever is lower). The LLET is filed on Form 725 (single-member LLC) or on the applicable entity return. Kentucky income tax: flat individual rate applied to pass-through income. - Kentucky has a flat individual income tax rate (adjusted periodically; confirm current rate with KDOR). Pass-through income from an LLC taxed as a disregarded entity or partnership flows to the owner's Kentucky individual return. - Federal S corp status flows through to Kentucky. The S corp files Form 720S. Shareholders report their share of income on their individual returns and pay state income tax at the flat rate. Kentucky S corp basics. - Federal S corp election is recognized by Kentucky. The entity still owes the LLET (minimum $175). - Payroll. An S corp owner-employee must take a reasonable W-2 salary. Kentucky state withholding and state unemployment tax through the Office of Unemployment Insurance apply once the employer crosses wage thresholds. Why a Kentucky trades shop might still elect S corp. The main reason is federal self-employment tax savings. A disregarded-entity LLC owner pays self-employment tax on the full net profit. An S corp owner-employee pays payroll tax on wages only; the distribution portion avoids self-employment tax. The Kentucky LLET applies either way at the $175 minimum for most small trades operations. Rule of thumb. Start as a Kentucky LLC. When annual profit after a reasonable owner wage is high enough that payroll tax savings clear the payroll, retirement plan, and accounting costs, elect S corp. A CPA with Kentucky construction clients can run the breakeven for your numbers and confirm the current LLET calculation.