Choice of entity refers to choosing the legal form for operating your business. A business may be operated as (1) a corporation; (2) a general partnership or limited partnership; (3) a limited liability company (LLC); or (4) a sole proprietorship. Each state has its own laws for the formation, operation, and maintenance of these business entities.

The primary considerations in choosing the best form for operating your business are (1) protecting your personal assets from the liabilities of the company; (2) tax strategies designed to deduct early losses, avoid double taxation, and convert ordinary income into long term capital gain at a lower tax rate; (3) an entity that will be attractive to potential investors and lenders; (4) an entity that allows you to offer equity incentives to employees (stock options); and (5) the cost of forming the entity and properly maintaining it—including filing the required documents with state agencies.

In Kentucky, the choice of entity for operating a business is an important decision that affects legal liability, taxation, investment attractiveness, employee incentives, and administrative requirements. The options include corporations, general partnerships or limited partnerships, limited liability companies (LLCs), and sole proprietorships. Corporations offer limited liability protection but may lead to double taxation, whereas LLCs provide limited liability without double taxation, making them a popular choice. Partnerships can be general or limited, with the latter offering limited liability to certain partners. Sole proprietorships are the simplest form with no separation between personal and business assets, thus offering no liability protection. Kentucky law requires different formation documents for each entity type, such as Articles of Incorporation for corporations and Articles of Organization for LLCs, filed with the Kentucky Secretary of State. Ongoing requirements include annual reports and appropriate tax filings. Tax considerations, protection of personal assets, costs of formation and maintenance, attractiveness to investors and lenders, and the ability to offer equity incentives are all critical factors when choosing the appropriate business entity in Kentucky.