Kentucky Rules on Sole Proprietorship

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No business structure is easier to set up in Kentucky than a sole proprietorship. This is one of the primary reasons that so many individuals choose to be sole proprietors, independently manage their businesses, and keep all business profits.

That doesn't mean that sole proprietorship in Kentucky is the best business structure for everyone, however. Nor does it mean that an individual can ignore Kentucky regulations about how to set up this type of business.

What Is a Sole Proprietorship?

A sole proprietorship is a type of business entity that requires few formalities to establish. Because it involves few governmental regulations, it is easy to set up and also to dismantle this type of business entity. That makes it a very popular option for sole business owners, self-contractors, and individual consultants working by themselves.

A sole proprietorship is not incorporated and has only one individual owner. In fact, many if not most sole proprietors do business under their own names since they do not need to use a separate business or trade name.

That owner is responsible for paying personal income tax on all business profits. Since no new business entity is created, the owner is also completely responsible for all debts and liabilities of the business.

Advantages of a Sole Proprietorship

The primary advantage of a sole proprietorship is ease of set up. Many states do not even require sole proprietors to register before operating their business.

The business is formed the minute the person starts doing business, although some professional licensing may be required. This is true, for example, for legal or medical sole proprietorships, but also for a number of other occupations.

The sole proprietor can sign contracts in their own name. They can also use their personal accounts to accept and pay for business items. The sole proprietor business ends when the individual ceases activity. It is that simple.

Disadvantages of a Sole Proprietorship

The primary disadvantage of a sole proprietorship is that these types of business entities do not protect the owner from personal liability. Other business entity types, like corporations or limited liability companies (LLCs), limit the amount of personal liability the owner assumes. With a sole proprietorship, any company debt is a personal debt of the owner.

Another disadvantage of sole proprietorships involves obtaining capital funding. Given the personal nature of the sole proprietorship, it is often difficult, or even impossible, for an individual to obtain funding to expand their enterprise without changing the corporate form.

Forming a Kentucky Sole Proprietorship

To form a sole proprietorship in Kentucky, it is not necessary to register the business as long as the owner is operating under their own name. That is because, in Kentucky, a sole proprietorship doesn't have any existence separate from its individual owner:

  • All business assets belong to the owner.
  • All profits are taxed to the owner.
  • All of the debts of the sole proprietorship are owed by the owner.

Since registration is not required, the owner avoids registration fees and renewal fees. And they do not need to open a separate business checking account, as is required for other business structures. Rather, they can conduct all their transactions using a personal checking account.

Registering a Kentucky Business Name

Although Kentucky does not require state registration for someone to conduct business as a sole proprietor in their own name, this changes if the owner wishes to use a different name. Anyone who wants to do business under a name other than their own must register the business name with an assumed name filing.

To start using a doing-business-as name, or DBA, in Kentucky, the owner must take certain steps:

The certificate of assumed name document must be filed with the county clerk in the county where the principal place of business is located. The filing fee is about $20. For more information about individual county requirements, contact the Kentucky Association of Counties.

Occupational and Professional Licensing in Kentucky

Kentucky requires all types of businesses, including sole proprietorships, to obtain any requisite professional licensing. Nail salons, plumbing businesses, tattoo studios and veterinary offices are among the numerous professional businesses that require licensing.

Licensing is handled by the business services section of the Kentucky secretary of state's office. Anyone wishing to determine whether a professional license is necessary in the state should visit the Kentucky One-Stop Business Portal.

Tax Registration in Kentucky

The tax process is simpler for a sole proprietor in Kentucky than for those using a corporate structure because sole proprietors are not required to obtain an employer identification number (EIN) from the IRS.

It is perfectly legal for a sole proprietor in Kentucky to use their own Social Security number to pay taxes rather than an EIN. However, a Kentucky sole proprietor is free to get and use an EIN if they wish to do so.

On the other hand, if a sole proprietorship has any employees, or if the business collects sales tax, the owner must register the business with the Kentucky Department of Revenue. This essentially includes all sole proprietorships and all other businesses that operate as retailers. Complete the business tax registration by submitting form 10A100, Kentucky Tax Registration Application.

Kentucky Permitting and Licensing

Like many states, Kentucky has dozens of different types of permits that are required for specific industries, too many to list in this article. A sole proprietor should visit the Kentucky One-Stop Business Portal and use the permits and licenses search tool. This will allow an individual to determine which, if any, are required for their sole proprietorship.

In addition, it is necessary to look on the local level – some counties and cities in Kentucky impose their own permitting or licensing requirements. These must also be taken into consideration if business is to be performed in a particular city.

For example, the city of Louisville has its own permitting and licensing requirements. If a sole proprietor intends to work in or out of Louisville, they should consult the city's business portal. There is a section in the portal regarding these municipal requirements.