How to Do Accounting for an LLC

Understanding LLC Accounting Basics

The first step in LLC accounting is gaining familiarity with some key concepts and terms. While sole proprietors can often manage basic bookkeeping themselves, LLCs involve additional members and more complex tax scenarios. Before diving into the specifics, members should learn the fundamentals.

Single-Member vs Multi-Member LLC Accounting

LLCs can be structured as single-member or multi-member entities. Single-member LLCs have one owner, while multi-member LLCs have multiple members (or “partners”). These two structures have slightly different accounting implications.

Single-member LLCs are taxed as sole proprietorships by default, so accounting is fairly simple, and income/losses are reported on the member’s personal tax return. Multi-member LLCs are taxed as partnerships, so a partnership tax return must be filed, with profits/losses passed through to members’ personal returns.

Cash vs. Accrual Accounting

LLCs can use either the cash basis or accrual basis of accounting.

Under cash basis, income is recorded when received, and expenses are recorded when paid. This method is simpler but can obscure cash flow.

Under accrual basis, income is recorded when earned, and expenses recorded when incurred. This matches revenue and expenses to the time period in which they actually occur.

Most small LLCs use the cash method for simplicity, but larger LLCs may use accrual accounting for accuracy in financial statements. The method can affect tax planning, so it should be determined early on.

Setting Up Your LLC Accounting System

With the basics down, it’s time to establish a process for managing the LLC’s finances. Proper setup of accounts and bookkeeping practices is key to maintaining proper records.

Choosing Accounting Software

LLC accounting software like QuickBooks helps track income, expenses, account balances, and other transactions. It automates processes like invoicing and reconciling accounts. Choose software that fits your industry and experience level.

Separating Personal and Business Finances

One advantage of an LLC is personal asset protection. Avoid co-mingling personal and business finances by setting up dedicated business bank accounts and credit cards. Don’t pay personal expenses from the business account.

Creating a Chart of Accounts

Your chart of accounts is a list of all the accounts you need to track for your LLC, like cash, accounts receivable, fixed assets, and liabilities. Set up these accounts in your accounting software.

Recording Business Transactions

With your accounts established, you can begin recording the LLC’s financial transactions through double-entry bookkeeping. This is the practice of recording every transaction across two accounts to keep the books in balance.

Tracking Income and Expenses

Record all business income and expenses. Income includes sales, services, interest earned, etc. Expenses include advertising, rent, utilities, contractor services, and more. Enter these transactions in the appropriate accounts.

Organizing Receipts and Documentation

Keep documentation for every transaction. Organize receipts and invoices by date or category. Store digital copies for easy access. Thorough documentation builds helpful financial records over time.

Managing Payroll and Member Distributions

For multi-member LLCs, properly accounting for member profits and employee payroll is key. Use appropriate accounts, tax forms, and payroll systems.

Member Draws vs. Guaranteed Payments

Don’t confuse member draws against profits and guaranteed payments for services. Guaranteed payments are subject to payroll taxes. Understand the distinction for proper accounting and tax treatment.

Paying and Reporting Employee Payroll

If your LLC has employees, handle payroll correctly by withholding taxes and distributing W-2s. Use a payroll provider to simplify payroll taxes and filings.

Tax Implications and Reporting for an LLC

As a pass-through entity, an LLC’s profits and losses pass to the members’ personal tax returns. Understand your tax obligations to maximize write-offs and savings.

Self-Employment Taxes

LLC members pay self-employment tax on ordinary business income. This covers Social Security and Medicare taxes. Calculate this correctly on Schedule SE with your Form 1040.

Relevant Tax Forms

Single-member LLCs report business income on Schedule C.

Multi-member LLCs file Form 1065 and issue Schedule K-1s to report each member’s share.

Claiming Deductions and Credits

Take advantage of every business expense deduction, like health insurance, retirement plans, mileage, and business use of your home. LLCs are eligible for tax credits like the R&D and energy efficiency credits.

Regular Financial Reviews and Audits

Consistently review your LLC’s books to catch errors or inconsistencies. Audits ensure compliance with accounting standards and tax requirements.

Monthly or Quarterly Reviews

Schedule time every month or quarter to review bank statements, account reconciliations, income statements, and cash flow. Look for double payments, missed invoices, recording errors, unnecessary expenses, etc.

Annual Financial Audits

Larger LLCs with extensive documentation may require an unbiased third party financial audit each year. Auditors verify compliance with GAAP standards and accounting accuracy.

Tips for Streamlining LLC Accounting

Managing an LLC’s finances does not have to be a complex, time-consuming process. With the right systems and habits, members can streamline accounting and bookkeeping tasks for greater efficiency. Consider the following tips:

Leverage Accounting Software

Accounting software like QuickBooks provides an all-in-one solution for tracking income and expenses, generating invoices, running payroll, reconciling accounts, and producing financial statements. Cloud-based software allows remote access from any device. Look for software with features tailored to LLCs like managing member profit distributions.

Automate Recurring Payments

For consistent expenses like rent, subscriptions, or loan payments, set up automatic billing from business accounts to save time on monthly payments. Review bank and credit card statements regularly to verify accuracy.

Digitize Records with Scanning Apps

Use scanner apps like Scanner Pro to create digital copies of all paper receipts, invoices, bank statements, and other documentation. Organize digital files in cloud storage for easy access by members and accountants.

Schedule Regular Reviews

Set quarterly or monthly time on your calendar to review statements, run financial reports, reconcile accounts, and look for any inconsistencies. Periodic reviews help catch small issues before they become major problems.

Outsource Payroll

Payroll services like Gusto can automatically handle paycheck direct deposits, payroll tax filings, and issuing tax forms like W-2s. This simplifies payroll for multi-member LLCs.

Consult a Bookkeeper

An experienced bookkeeper can handle day-to-day transactions, produce financial statements, and ensure your books are audit-ready. This frees up members’ time for higher-level business tasks.

Streamlining accounting processes is key to maintaining proper financial records as an LLC grows. Implementing organizational systems, automating tasks, and seeking help from financial professionals can reduce administrative burdens.

Conclusion

For LLCs, proper accounting requires understanding unique tax scenarios, establishing solid bookkeeping habits, separating business and personal finances, and reviewing the books regularly. While maintaining an LLC’s finances may involve more record-keeping than a sole proprietorship, staying on top of the books will ensure your LLC remains compliant and in good standing.

With foundational accounting knowledge and the right organizational system, LLC members can manage required financial reporting and make smart business decisions based on accurate data. Don’t let the books intimidate you. Start with the basics and seek help from financial professionals when needed. Keeping diligent financial records will only strengthen your LLC over time.