If you own an LLC, it’s important to ensure that you are actually eligible for its legal and financial protections. After all, these protections come with conditions. You need accurate financial records to demonstrate compliance with state requirements of LLCs. Without them, you may lose your legal and financial protections. Many owners learn the hard way, but you can protect yourself by adopting a consistent approach to your LLC accounting and bookkeeping. These processes generate the records necessary to defend your entity in court, and help ensure that you enjoy all the benefits of this business structure.
What is an LLC
A Limited Liability Company is a unique business structure that offers legal and financial protections to entrepreneurs. Although it is distinct from a corporation or a partnership, it provides some of the benefits of both. One such advantage is the limited liability protection that shields owners and members from certain financial risks, such as legal disputes and lawsuits. Additionally, owning an LLC can help to reduce your taxes since individual members are taxed on their income and not at the entity level. This structure allows owners and members to retain more of their earned income, providing a considerable financial benefit.
One significant advantage of forming an LLC is the flexibility it offers in terms of structure and financial reporting obligations. Unlike a corporation, it allows you to choose an ownership structure; you can operate as a sole proprietor or invite a group of members to share profits and losses by making capital contributions. In exchange for these benefits, your company must fulfill certain financial reporting and legal requirements mandated by the state. While these obligations are important, they are less onerous than those required of corporations.
Compliance with financial reporting and legal obligations is essential for an LLC, and accurate LLC accounting is key to meeting these obligations. However, many entrepreneurs lack the specialized knowledge and experience to manage their finances effectively. Taking a do-it-yourself approach can put the business’s assets and legal protections at risk, not to mention the potential costs and penalties associated with poor record-keeping. If you don’t have a background in finance, it’s advisable to hire a bookkeeper and/or accountant to handle everything for you. This way, you can be confident that your business is equipped with the necessary documentation to thrive and maintain its legal protections.
LLC Accounting
One advantage of this business structure is that there are only a few requirements for financial reporting. While few in number, it is important to follow these rules closely if you want to protect your assets and prevent the government from negating your legal liability protections. Basic LLC accounting requirements include:
- No commingling of transactions
- Separate bank and credit card accounts for personal transactions and business purposes
- Proper reimbursement of the owner for business-related expenses paid with personal funds.
When establishing your business entity, there are a few crucial steps you should take right away. One of the most important is to create separate bank accounts and cards for your business. To do this, you will need to use your tax ID number to set up a business checking account and credit card under the name of your company. By doing so, you will be able to maintain a clear separation between your personal and professional finances. This is critical because the IRS strictly penalizes companies that commingle personal and business transactions and may even nullify your business status.
Creating a bookkeeping system is a top priority when starting a business, and it’s crucial to work with an experienced accountant to ensure that you get it right. The longer you wait to establish a system, the more challenging and expensive it will become. Without it, your business will lack a solid foundation of financial information. Additionally, if your entity’s financial records are not up to par, it may not hold up in court. Therefore, it’s essential to seek the guidance of a financial professional to assist you in setting up your system. With the help of BooksTime’s knowledgeable experts, you can establish a system that satisfies all of your business’s financial and legal needs.
LLC and Taxes
One of the reasons this business structure is so popular is its significant tax benefits. As an owner or member, you only pay taxes on income you earn from salaries or distributions, but not at the entity level. That means you can take home more of your hard-earned income.
The IRS classifies LLCs in one of three categories, according to the structure of the business:
- Single Member, for sole proprietors
- Multi-Member, for entities owned by a group of members
- Corporation, for owners/members that choose to be taxed as corporations
There are a few other burdens that you should be aware of as an owner. If you have employees, you will have to pay payroll taxes. Members, who are not classed as employees, are also required to pay self-employment taxes. Finally, companies that sell goods or services are required to collect sales tax for payment to state or local authorities.
How to do Accounting for an LLC
To meet the legal obligations of an LLC, having a reliable financial reporting process is essential. However, it doesn’t necessarily mean you have to hire a full-time finance professional to manage it. Employing an in-house financial expert may be costly for small businesses, as it involves expenses like salaries, office space, and other associated costs. Moreover, having an on-site professional comes with the risk of disruptions due to sick leave, vacations, maternity leave, or abrupt resignations.
Fortunately, there is now a more efficient and cost-effective option available for financial reporting needs. Recent technological advancements have transformed the accounting process, making it possible for outside companies to handle these tasks remotely. With remote bookkeeping, you not only save a significant amount compared to hiring a full-time employee, but you also get the added benefit of having your financial information safely stored and easily accessible. This approach also simplifies oversight and management of the process. At BooksTime, our team of experienced bookkeepers and accountants is ready to provide your business with the financial backbone it needs to hold up in court.
As a business owner, your time is valuable, and poring over every payment and expense can be an unnecessary drain on your resources. Accurate financial reporting requires both time and professional knowledge, as even small mistakes can lead to costly consequences. It’s simply not worth the risk of attempting a do-it-yourself approach. Instead, consider delegating your financial reporting needs to a specialized company to protect yourself and your business. At BooksTime, our team of bookkeepers and accountants has extensive experience serving LLCs across a wide range of industries. Our online bookkeeping services provide the utmost convenience, effectiveness, and security, allowing you to save both time and money.
