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Whether you have a derby catering service or a bourbon barbeque sauce business, you can start with a Kentucky LLC to protect your personal assets from business liability.
FORM A KENTUCKY LLC FOR YOUR SMALL BUSINESS IN 4 STEPS
- 1) Pick a Name
Kentucky LLCs must contain an LLC designator in their names. Options for this are “limited liability company,” with “limited” able to be abbreviated “ltd.” and “company” able to be abbreviated “co.,” or the abbreviations “LLC” or “LC.” The name must be distinguishable from every other name on the Secretary of State’s records, and cannot contain the word “cooperative.”
- 2) File Articles of Organization
To officially exist under Kentucky law, an LLC must file articles of organization with the Secretary of State. The requirements for the articles of organization are as follows: the name of the LLC, the name and address of the LLC’s registered agent, signed consent of the registered agent, the mailing address of the LLC’s principal office, and a statement saying if the LLC is member-managed or manager-managed. When these and any other desired provisions are in the articles of organization, they are filed with a $40 filing fee.
- 3) Execute an Operating Agreement
Kentucky law does not require that LLCs have an operating agreement; however, we recommend that you have a written Operating Agreement executed by every member of your LLC. This operating agreement will dictate the internal affairs and conduct of your LLC.
- 4) Continuing Requirements
FEIN: If your Kentucky LLC plans on hiring employees or having multiple members, you will need a Federal Employer Identification Number, either directly from the I.R.S. or from an incorporation service like Incnow.
Annual Report: Kentucky requires that all LLCs file annual reports with the Secretary of State and pay a $15 filing fee. Information in this annual report must include the name of the LLC, the name and address of its registered agent, the address of its principal office, and the name and address of each manager (if there are managers).
WHY FORM AN LLC IN KENTUCKY?
The Benefits and Advantages of Creating a Kentucky LLC
When drafting the LLC agreement (a.k.a. operating agreement) for your Kentucky LLC, take comfort in knowing that section 275.003 of the Kentucky LLC Act expressly states its purpose is “to give maximum effect to the principles of freedom of contract and the enforceability of operating agreements.” The Act gives LLC members contractual freedom to customize their contributions, rights, duties, and distributions of profits and losses. In addition, it allows members to protect their control of an LLC.
Kentucky Has a Growing Economy
Each year, Kentucky forms over 14,000 new LLCs. Kentucky has over 68,000 active LLCs. The U.S. Chamber of Commerce ranks Kentucky as the fourth best state for reasonableness of taxes and regulation, which was determined by considering taxes for new firms, taxes for old firms, business survival rate, and the cost of living.
- Advantages of Forming a Kentucky LLC
The Kentucky LLC Act gives members contractual freedom to create voting and non-voting classes of membership and customize their capital contributions and shares of profits and losses. Section 275.205 provides that the “[p]rofits and losses of a limited liability company shall be allocated among the members and among classes of members in the manner provided in the operating agreement.” This means an LLC agreement may not only govern the allocation of profits and losses, but may also govern the voting relationship among members. Members can use this flexibility to tailor their income streams and risks of loss and facilitate everything from complex, high-dollar-volume transactions to succession planning in family businesses and estate planning by gifts of non-voting interests.
The Act provides for an LLC’s unlimited life. Section 275.025 states that every limited liability company has perpetual duration unless its articles of organization provide otherwise. An LLC’s existence can therefore outlive its members’ lifetimes.
A “person” may organize an LLC by filing its articles of organization with the Kentucky Secretary of State. The definition of “person” is not just a natural person, but includes almost any kind of business or legal entity. Likewise, section 275.020 states organizers do not need to be members of an LLC. An LLC’s members may therefore have an entity or person who is not a member file the LLC’s articles of organization.
Dealing with Business Partners
The Kentucky LLC Act gives members contractual freedom to customize the duties each party to the LLC agreement owes to the other parties. Section 275.170 has a default rule that members and managers owe limited fiduciary duties of loyalty and care. It limits the duty of loyalty to acting as a trustee of the LLC’s property, which includes not deriving a personal profit or benefit that should have belonged to the LLC without obtaining consent from a majority of the disinterested members or managers. It limits the duty of care to refraining from “wanton or reckless misconduct.”
The Act gives members and mangers contractual freedom to “opt out” of most of the default rules, however, by including provisions in a written LLC agreement that modify the duties. Section 275.180 provides that a written operating agreement may “[e]liminate or limit the personal liability of a member or manager for monetary damages for breach of any duty provided for in [section] 275.170.”
Preventing Unwanted Business Partners
The Kentucky LLC Act allows members to protect their control of an LLC. An LLC agreement may prohibit members from assigning their membership interests. But if an LLC agreement does not prohibit it, an assignment does not dissolve the LLC or entitle the assignee to participate in management or to become a member. Instead, the assignee may receive only the distributions to which the assignor would have been entitled, and a majority of the non-assigning members must consent to the assignee becoming a member.
Section 275.260 provides that if a judgment creditor of a member obtains a charging order against the member’s membership interest, it “constitutes a lien on and the right to receive distributions made with respect to the judgment debtor’s limited liability company interest,” but it “does not of itself constitute an assignment of the limited liability company interest.” That is, a charging order requires the LLC to pay the judgment creditor any distribution that would otherwise be paid to the judgment debtor. But the judgment creditor does not have a right to participate in management.
Creditors Only Get Passive Rights, Not Control Rights
A court may foreclose on the lien and order the membership interest to be sold. A purchaser at the foreclosure sale obtains only the rights of an assignee and cannot become a member unless a majority of the non-assigning members consent. Obtaining a charging order and a foreclosure sale are the judgment creditor’s exclusive remedies. This restriction helps to protect your business from being taken over by unwanted creditors.
In addition, section 275.280 provides that a person ceases to be a member of an LLC when the person makes an assignment for the benefit of creditors, becomes a debtor in bankruptcy, or fails to contest a petition seeking the appointment of a trustee, receiver, or liquidator of the person or of all or substantially all of the person’s property. This also keeps other members’ creditors from taking over your business.
- Kentucky Registered Agent
A Kentucky LLC must continuously maintain an agent for service of process in the state. A commercial registered agent service may act as a Kentucky registered agent.
Because of the advantages of forming an LLC in Kentucky, over 14,000 new LLCs are formed in the state each year. Should you wish to have more flexibility and protection, you may instead form a Delaware LLC even if you operate in Kentucky. What are the advantages of a Delaware LLC? (Delaware LLC Advantages). We can then help you file an application for registration to do business in Kentucky with your Delaware LLC (Form Delaware LLC).
- Kentucky LLC Act Statutory References
§ 275.003 “Construction of Chapter” § 275.015 “Definitions for Chapter” § 275.020 “Procedure for Forming Limited Liability Company” § 275.025 “Contents of Articles of Organization” § 275.055 “Fees for Filing Documents with Secretary of State” § 275.115 “Registered Office—Registered Agent” § 275.150 “Immunity from Personal Liability” § 275.170 “Duties of Care and Loyalty—Approval of Conflict of Interest Transactions—Remedy for Breach of the Duty of Loyalty” § 275.180 “Operating Agreement Provisions on Personal Liability and Indemnification” § 275.190 “Annual Report” § 275.205 “Allocation of Profits and Losses Among Members” § 275.255 “Assignment of Interest” § 275.260 “Member’s Transferable Interest Subject to Charging Order” § 275.265 “Assignee of an Interest as a Member of the Company” § 275.275 “Admission to Membership in Company” § 275.280 “Cessation of Membership” § 275.385 “Transaction of Business by Foreign Limited Liability Company” § 275.415 “Registered Office and Registered Agent for Foreign Limited Liability Company”
Kentucky vs. Delaware LLC's: Which State Is Better?
|LLC Filing Fee
|Required to Name Members or Managers
|Reduce Fiduciary Duties?
|Charging Order as Exclusive Remedy
|Maximum Freedom of Contract
|Separate Equity Court?