Accounting for LLC: Best Practices, Steps, Resources, FAQs

Compared to other business structures, limited liability companies are quickly gaining popularity among many small business owners.

A limited liability company (LLC) is neither a partnership nor a corporation but still has identical rights to a corporation without the same tax liability.

It’s no wonder that the LLC business entity is so popular.

In a nutshell, an LLC gives the owners, or members, limited liability without the hassle of maintaining a corporation if the business is to remain small.

Members are protected against the financial risk of running a company, such as a potential lawsuit.

Some other benefits include the following:

• Liability protection for personal assets guarantees the members aren’t at risk if the business suffers a lawsuit, debt, or bankruptcy.

• Provides flexible tax options, allowing members to be taxed as an LLC or a corporation—more on this information later.

• Provides flexibility over the business structure. An LLC can have one member or many members to manage the company.

Though a limited liability company is a popular option in today’s world, that doesn’t mean it comes without certain accounting obligations.

As with any other business, a firm grasp of the steps toward well-established accounting guidelines needs to be discussed.

What are the steps to set up LLC accounting?

Careful and well-thought-out accounting will set up small businesses for future success.

Limited liability company owners should focus on building sound accounting strategies to maintain their business finances from the very beginning.

Step 1. Have separate business accounts

Separate business accounts are the first step toward sound financial reporting.

To start the process of opening a new business bank account, such as a business checking account or business savings account, and a business credit card—if necessary—the bank will need the company’s name and tax ID number.

In this way, personal and business finances will always remain separate.

Financially and legally, an LLC is a separate business entity, which means business transactions should never mix with personal ones.

Though you can transfer funds to the company from a personal account, the only time the LLC will transfer funds back is during the payment of wages for your role as a member or employee.

Keeping separate accounts will also help maintain good records.

For example, with separate personal and business accounts, it becomes easier to record the appropriate business receipts in the bookkeeping system.

When considering which bank to work with, as a business, it’s important to look at the following:

• The types of accounts the bank offers, and whether they meet the company’s needs

• Potential charged bank fees

• Online vs in-person bank services

• The number of the bank’s branches around your business’s area

Step 2. Choose appropriate accounting methods

Small business owners will need to choose the appropriate accounting method when setting up their LLC accounting financial strategy.

There are two popular accounting method models to choose from:

• Cash accounting: LLC owners who use the cash accounting method will record a financial transaction only when funds change hands. The cash method is a popular option among many small businesses because it’s one of the simplest accounting methods to use.

• Accrual accounting: Income and business expenses are recorded when the transaction occurs, even if the money has not yet changed hands. The accrual basis method is slightly more complicated and normally not required for small businesses.

Step 3. Record earnings and expenses in a general ledger

A general ledger is one of the key pieces of sound bookkeeping practices and the basis of an accounting system.

Recording all business earnings and expenses into the general ledger will ensure the business’s financial health is in order, financial statements are produced, and tax obligations are met on time.

Though many ledgers used to be massive handwritten books, that is no longer the case.

Online bookkeeping services present innovative ways of maintaining large volumes of financial records and even offer other services, such as an automated invoicing system.

How does an LLC pay taxes?

The Internal Revenue Service (IRS) provides an LLC with 3 options for filing taxes.

LLC owners get to decide which option to choose, but for further questions, it’s best to reach out to an accounting firm.

Option 1. Taxes for single-member LLCs

Limited liability companies with a single owner or member get taxed by the IRS as sole proprietorships.

According to the IRS, the member will pay taxes for the LLC on personal income taxes using the 1040 tax return.

Paying taxes as a sole proprietorship requires two forms attached to the original 1040.

A Schedule C is needed for filing taxes and reporting business income, and a Schedule SE is needed to pay self-employment taxes.

Option 2. Taxes for multi-member LLCs

An LLC with more than one member gets treated as a partnership where each owner pays taxes on their personal tax returns based on the profit share they own.

Unlike single-member LLCs, these members will attach a Schedule E form to their tax returns.

Though an LLC doesn’t pay taxes as a corporate entity, it still needs to file form 1065.

The form is filed as a way to show the IRS that the individual LLC members are reporting income and losses correctly.

Additionally, a Schedule K-1 is also filed to show the member’s share percentage.

These members should also remember the self-employment tax, which is just as important for them as it is for single-member LLCs.

Option 3. Taxes for corporations

For LLCs who choose to get taxed as a corporation, Form 8832 needs to be filed requesting the designation.

In the case of those who are in a higher tax bracket and pay 30% or more in taxes, this could prove beneficial since C Corporations are taxed at a rate of 21%.

In the end, however, LLCs who choose this route are taxed twice.

The LLC first pays a 21% corporate tax, and then each shareholder pays income tax on dividends which could also be at a rate of 20% or higher.

Should LLCs outsource bookkeeping or keep it in-house?

There is no one right answer to this question.

Choosing to outsource bookkeeping or keep it in-house will depend on many factors. Bookkeeping and accounting are full-time occupations, even for small businesses.

For many LLCs, especially single-member LLCs, outsourcing this task could be a way to ensure it runs smoothly, especially with regard to some harder tasks, such as for tax purposes.

Whether you are the sole proprietor of your LLC, or you are a growing company, outsourcing bookkeeping and accounting could mean more expenses, but it also means you get help with building a sound business strategy and financial statements.

Outsourcing bookkeeping for your LLC will help meet tax obligations and maintain a record of the business’s income.

How should a business’s expenses be tracked?

The IRS has many regulations regarding maintaining not only income tax, which everyone is used to, but also tracking business expenses and income.

The IRS issues a list of business expenses, earned income, and payable taxes which need to be kept track of in the following manner:

• Business receipts

• Bank statements

• Bills for utilities used by the office

• Invoices

• Financial statements

• Proofs of payment

• Tax returns

A business owner needs to be aware that these records should be kept for a certain amount of time.

The IRS provides more information on how long documentation is stored, but it’s best to immediately decide on whether the documents will be stored online in a cloud-based system or physically.

What options do LLCs have to receive payments?

As a company, LLCs will always accept checks or direct deposits, but there are alternatives available regarding accepting payment:

• Pay online: Payments that are made online expedite invoices. Businesses using accounting software that’s cloud-based can normally integrate the online payment option to manage business payments.

• Automated invoicing: Businesses can use automated invoicing systems such as a cloud-based system for future recurring invoices. Rather than sending out invoices every month manually, the system will take care of the work and an automated payment will come through.

Frequently asked questions

Is there a way to simplify LLC accounting?

Accounting software is one way of simplifying accounting. Accounting software is there to help record all business transactions from business income to business expenses, maintaining everything that happens on the business account. A well-developed software will help with business expenses and use them to file federal income tax return information and state LLC taxes. Business owners will greatly benefit by having all bank accounts, including credit card accounts, in accounting software.

What tax obligations do LLCs have?

LLCs, like other companies, have to abide by the laws and regulations of the state and federal governments.

• LLCs need to account for the following taxes:

• Income tax. Income tax refers to the income the business has earned.

• Sales tax. Sales tax depends on the location of where the business is based.

Employment tax. FICA requires LLCs to pay self-employment taxes and contributions toward Medicare and Social Security.

In closing

LLCs, like any other business, need an accounting foundation to continue running smoothly.

Whether the LLC chooses to get taxed as a sole proprietorship or as a corporation, there are plenty of steps to take in order to ensure expenses and income are appropriately managed and recorded.

Financial information and correct documentation is the key to ensuring business information stays split from personal assets and transactions.

Personal funds and business transactions should always remain separate in the interest of the business and to remain in compliance.

For those who are unsure how to handle accounting for LLCs, it’s best to work with online software or outsource the accounting cycle process to ensure financial obligations are met in a timely fashion.

Agata Kaczmarek has held a passion for writing since early childhood. A professional writer for many years, Agata specializes in writing articles and blogs focused on finance as someone who holds a Master’s Degree in Accounting and Finance.

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