LLCs are by far the most popular entity type amongst small businesses. When you are setting up a business entity, you are setting up a small business and you need to run it like a real business, including doing proper LLC accounting. This is important because if you do not run your LLC business as a real business, then you will not be treated as one before the court. Thus, if you know nothing about bookkeeping and accounting, hire a bookkeeper and CPA to do the work for you.
A good accounting system is a critical part of operating your LLC. The first thing a good business owner should do is consult with an experienced accountant to set up or to help set up the LLC’s bookkeeping system. Keep in mind that the longer you delay this, the more expensive and difficult the process will become.
Moreover, your LLC does not exist before the law if you do not keep the records that are needed for court, which means that you are not getting that limited liability protection that you think you have. It does not mean you need to have an office for a CPA. Nowadays, bookkeeping and accounting services can be easily provided online and will cost you a fraction of what you would pay an in-office employee. At the same time, you will be confident that all the legal and accounting requirements are met by your company.
Here are basic LLC accounting requirements you should know:
- No commingling of transactions
- Set up and use separate bank and credit card accounts for your personal transactions and separate ones for business purposes
- Properly reimburse the owner for business-related expenses paid with personal funds.
When you set up your entity, as a new business owner, you want to do a few things right away. You want to set up a business checking account in the name of your company using the tax ID number. Similarly, you want to have a credit card in the name of the business.
You want everything to be coming and going out of your business accounts because the IRS does not like when you mix together your personal transaction and those of your business. They do not like you charging personal items for business and vice versa. Actually, they can just negate your business if you do not adhere to this requirement.
You want to make sure that all bank (payment system) deposits that are paid to your company go to your company’s bank account. Having a business card (and actually paying for all the business-related expenses with it) will automatically create an expense report for your business. In addition, a detailed record of all the expenses will allow you to get maximum tax deductions.
Of course, you will have your internal bookkeeping records, but having your income and expenses being tracked by the financial institution is a great backup that you can check your records against and use as proof for the IRS. What will be leftover from the income after you subtract the expenses will be your net income. You can use it to pay yourself a salary or pay yourself via distributions.
LLC and Taxes
It is often mistakenly considered some type of tax loophole. Unfortunately, this is not so. Moreover, LLCs simply protect you as a business owner from personal liability in the event of a lawsuit. When it comes to paying taxes, you are either considered as a Sole proprietorship if you are the only owner of the company or as a Partnership if there are more than one member.
Nonetheless, LLC does have some advantages over other entity types. A major advantage is that you will have to pay taxes on your business income only once. You can also choose to be taxed as an S-corporation and not pay self-employment taxes. It is also simpler to deduct business expenses for tax purposes.
Author: Charles Lutwidge