How To Start A Kentucky Sole Proprietorship

Starting a business comes with taking care of many steps, one of which is forming a business structure. This is an important step to take care of early in the journey as several future steps rely on the business structure being in place.

Sole proprietorships are just one type of business structure, with others including general partnerships, corporations, and Limited Liability Companies (LLCs). In the state of Kentucky, sole proprietorships make up a significant portion of the business structures. Out of the total 345,528 small businesses,¹ a notable 70.7% are operated as sole proprietorships.² This data reflects the popularity and practicality of this business structure in Kentucky.

In this guide, you’ll learn what a sole proprietorship is, including its advantages and disadvantages. We will also provide a step-by-step guide on how to register your sole proprietorship in Kentucky.

Related: How to start a business in Kentucky

What is a sole proprietorship?

A sole proprietorship is the simplest business structure, as it involves only one individual who is responsible for all aspects of the business. In Kentucky, this business structure requires minimal up-front setup, making it an attractive option for many entrepreneurs.

Sole Proprietorship Advantages

Simplicity and ease of formation: Setting up a sole proprietorship in Kentucky is relatively simple and can be accomplished with little to no paperwork.

Tax simplicity: Sole proprietorships offer straightforward tax management because the owner reports business income and expenses on their personal tax return.

Control: As the sole proprietor, you have complete control over all decisions and operations of the business, giving you the freedom to adapt and grow at your own pace.

Sole Proprietorship Disadvantages

Unlimited personal liability: One significant drawback of sole proprietorships is that the business owner is personally responsible for all business debts and liabilities. This means that personal assets, such as your home or vehicle, could be at risk if the business fails or faces legal issues.

Difficulty raising capital: It may be more challenging for sole proprietors to obtain funding as you can’t sell a portion of your business to investors like you can with a corporation or LLC.

Limited life: A sole proprietorship ceases to exist when the owner retires or passes away, making this business structure less ideal for long-term planning. Their death, retirement, or incapacitation can disrupt or even terminate the business if no succession plan is in place.

Considering the potential disadvantages, forming a Limited Liability Company (LLC) may be a better choice if liability protection is essential for your business. An LLC provides more legal and financial protection than a sole proprietorship, while still offering flexibility in management and taxes.

Steps to Start a Sole Proprietorship in Kentucky

In Kentucky, setting up a sole proprietorship doesn’t require state-level registration. However, there are vital steps to ensure your business is legal and ready to operate.

Step 1: Come Up with a Business Name

The first step is to select a business name. As a sole proprietor in Kentucky, you can operate your business under your full first and last name or a separate business name. For example, Jane Doe could operate as “Jane’s Boutique.” If you operate as a sole proprietor using your real name, no business name registration is required, according to Kentucky Revised Statute 365.015(1).³

Step 2: File the Assumed Name Form

If you’re using a business name different from your own, you’ll need to file a form the Certificate of Assumed Name (also known as a DBA or Doing Business As) with the county clerk’s office in the county where the business is located.

Related: How to file a Kentucky Certificate of Assumed Name

Step 3: Research Business License Requirements

Regardless of the business structure, all companies may need specific licenses depending on their activities and location. Some of the common business licenses in Kentucky include:

Local business license: Check with your city officials or economic development office for information about requirements and fees.
Kentucky tax registration: All businesses in Kentucky must register for a tax account with the Kentucky Department of Revenue.
Occupational license: Some professions require licensing, such as detectives, cosmetologists, and architects. Visit the Kentucky Office of Occupations & Professions for more information.
Employer Identification Number (EIN): If you have employees or prefer to separate personal and business finances, register for an EIN with the Internal Revenue Service (IRS).

Related: What business licenses are needed in Kentucky?

Sources

1. Small Business Administration ︎
2. Internal Revenue Service ︎
3. Kentucky Revised Statutes ︎