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Editorial 6 MIN READ

Kentucky in May 2023: the $40 LLC with the $175 catch

Why the cheapest formation in the country is not actually the cheapest once the LLET shows up

The Editors
Staff, Incorporator.org
6 min read Updated
Contents 5 sections
  1. The front-door fees
  2. The LLET, which is the real number
  3. What HB 8 of 2022 changed
  4. Where Kentucky actually makes sense
  5. Sources

Kentucky LLC costs $40 to file and $15 a year to keep on the rolls. Those two numbers make Kentucky one of the cheapest formations in the country, and they are also the least interesting numbers in the state's 2023 fee picture.

The interesting number is $175. That is the floor of the Limited Liability Entity Tax, and it lands on the same LLC that just paid $40 at the front door.

The front-door fees

You form a Kentucky LLC by filing Articles of Organization with the Secretary of State under KRS Ch. 275, the Kentucky Limited Liability Company Act. The filing fee is $40, whether you file on paper or through the state's online portal. The articles ask for the basics: name, registered office, registered agent, whether management is member-managed or manager-managed, and a signature by the organizer. Processing in the online portal is effectively same-day. Paper is a week or two, depending on mailroom load.

Annual maintenance is a separate filing called the Annual Report, not a tax. It is due by June 30 each year and costs $15. Miss June 30 and the Secretary of State moves the entity into "bad standing" in late summer, and after a further notice window the entity is administratively dissolved. Reinstatement is a separate filing with its own fee, so the $15 is cheap only until you forget it.

At the SOS window, then, Kentucky is a flat $55 in year one ($40 plus $15) and $15 a year after. That is genuinely low. Compared against Delaware's $90 formation and $300 annual tax, a Kentucky LLC saves roughly $285 a year on the state-register line item.

The Department of Revenue does not care about those numbers.

The LLET, which is the real number

Kentucky imposes a Limited Liability Entity Tax on every entity that enjoys limited liability under state law, LLCs included. It is codified at KRS 141.0401. The rate is the lesser of 0.095% of Kentucky gross receipts or 0.75% of Kentucky gross profits, with a hard minimum of $175 per year.

The minimum is what matters for most small LLCs. A consulting practice with $200,000 of Kentucky gross receipts owes $190 under the 0.095% formula, above the floor. A rental-property LLC with $40,000 of gross receipts would owe $38 under the formula and therefore pays the $175 minimum instead. The ceiling is also soft: large-revenue entities compute under both methods and pay the lesser, so the LLET is typically a small percentage of net margin in practice, not a pure gross-receipts tax.

Stack the pieces for a sole-member LLC in its first full year: $40 formation, $15 annual report, $175 LLET. That is $230 to the state, before any federal tax and before the corporate income tax discussed below. The Delaware comparison tightens considerably. Delaware is $90 plus $300, which is $390 at steady state. Kentucky is $230. The gap is real but much smaller than the front-door fees suggest, and the Kentucky filing has more moving parts because the LLET is administered by the Department of Revenue on a separate form (Form 725 for single-member LLCs, Form 765 for partnerships, rolled into Form 720 for C-corps).

What HB 8 of 2022 changed

House Bill 8 of the 2022 Regular Session, signed April 13, 2022, is the reason the 2023 numbers look different from the 2021 numbers. Two pieces of that bill matter for an LLC forming now.

The first is the corporate income tax rate. KRS 141.040 imposes a flat corporate income tax on C-corps and on LLCs that have elected C-corp treatment. HB 8 cut the rate from 6.0% to 5.0% beginning with tax years on or after January 1, 2023. The bill also built a trigger mechanism for further reductions tied to General Fund receipts and the Budget Reserve Trust Fund balance, so the 5.0% figure is the current rate and not necessarily the terminal one. A single-member LLC taxed as a disregarded entity does not hit this rate; a multi-member LLC taxed as a partnership does not hit it either. It is only operative for entities that have chosen corporate treatment, which is a minority of Kentucky LLCs but not a trivial one.

The second piece is the Pass-Through Entity Tax election. HB 8 added KRS 141.209, which lets an LLC taxed as a partnership or S-corp elect to pay Kentucky income tax at the entity level rather than passing the income through to its members. Members then claim a credit for the tax paid on their share. The election is made annually and is effective for tax years beginning on or after January 1, 2022. The reason founders care: the $10,000 federal SALT cap under the 2017 Tax Cuts and Jobs Act does not apply to taxes paid at the entity level. A Kentucky PTE election therefore preserves the full deductibility of state income tax for members who would otherwise have hit the cap on their 1040. Roughly thirty other states have enacted similar workarounds since the IRS blessed the structure in Notice 2020-75. Kentucky is now one of them.

The PTE election does not eliminate the LLET. The LLET is a separate regime under KRS 141.0401 and applies regardless of the income-tax election the entity makes.

Where Kentucky actually makes sense

Kentucky is cheap to enter and moderately priced to keep, and the moderate-pricing part is consistent rather than load-bearing. An LLC that does not owe more than the $175 LLET minimum writes the same check every year, which is easy to plan around. An LLC with Kentucky operations and real margin will pay a modest percentage of that margin to the state and owe it on a predictable schedule.

For a Kentucky resident running a Kentucky business, the question of state of formation is nearly always resolved by the foreign-qualification rule: if you form elsewhere, you will still register in Kentucky and still owe the LLET on Kentucky-sourced receipts, plus a $90 Certificate of Authority fee at the SOS and the same $15 annual report. Out-of-state formation adds friction and saves nothing.

For a nonresident weighing Kentucky as a formation state, the case is weaker. Wyoming's $100 formation and $60 annual report, with no state income tax and no LLET analogue, will be cheaper at every revenue tier. Delaware's $90 and $300 buys a court of equity, which Kentucky does not offer. Kentucky's pitch is to operators on the ground.

The one place where the HB 8 package genuinely moves the needle is a profitable multi-member LLC with Kentucky members who itemize and are already SALT-capped. The PTE election under KRS 141.209 converts a non-deductible state income tax bill into a deductible entity expense, and the savings on the federal return will usually exceed any administrative cost of making the election. That is the one recent change worth walking into a CPA's office to discuss before the next return is due.

If you are forming this month, file the Articles online, calendar June 30 for the annual report, and put $175 in the LLET column of your tax projection regardless of what revenue does. The third number is the one that surprises people.

Sources

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