How to Do Accounting for an LLC

An easy, step-by-step guide to establish the books for Bookkeeping, financial and end of year tax reports

LLC accounting is essential for the limited liability status of an LLC, better decision-making, and organized tax returns. In this guide, we cover what steps the small business owner or writer forming an LLC needs to go through to build an accounting system that they can use as a reliable reference point.

So why does your LLC accounting set up matter?

Even if you are a sole proprietor, it is still important to keep your business finances separate from your personal finances. By keeping correct accounts it prevents loss of liability protection, creates trustworthy tax records and make reflective financial statements to run a business. Rest assured that you’re not going to be surprised at tax time, and it’ll be easier for you to determine profitability, maintain cash flow, and assist with any financial statements.

Open a business bank account Getting a dedicated business account is essential.

The first tangible step in LLC financial setup is to open a business bank account using the name of your newly established LLC. This account should be used to record all of your business receipts and expenses. When everything goes through the corporate account filing becomes easier and audit trails clearer. You should record the amount first contributed by members as equity and not income.

Choose an accounting method

Choose cash or accrual accounting. Cash-basis accounting generates income and expenses when the cash transaction occurs and is simpler for many small businesses. The key is that accrual-basis income and expenses both recognize income when earned and expenses when incurred, thus providing a truer read of your long-term financial health. The decision has implications for tax reporting and financial statements, so select the approach that best fits the complexity of your business and your future tax planning.

Establish a chart of accounts

Every transaction is simply categorized with a clean chart of accounts. Most organizations have assets (i.e., bank accounts and accounts receivable), liabilities (loans, credit cards), equity (member contributions and retained earnings), revenue (sales and service income) and expenses (office supplies, subcontractors, marketing). Customize the chart of accounts to fit your business, so you can easily generate reports that each party understands.

Implement consistent bookkeeping practices

Input invoice transactions in prescheduled manners to prevent from backing up. Establish a schedule — daily for sales, weekly for expenses and monthly for reconciliations. Keep a record of receipts and invoices, including the business reason for each. Consistency: By maintaining consistency, you can minimize errors and give yourself the ability to generate financial reports when they are required of you.

Track income and invoices

For service-based LLCs, hold onto those invoices and accounts receivable like they’re going out of style. Register revenue when your accounting method dictates and chase late invoices. Keep an aging schedule that lists which customers are in arrears. Good cash flow is essential — and too often a struggle for small businesses, though.

Manage expenses and categorize correctly

There’s no equality in business expenses. Classify 2clear their regular operating expenses, separate from one-off payments or capital outlay. Categorization right on the money and helps when finding deductions for taxes. Organize and retain supporting documentation — receipts, contracts and mileage logs — associated with entries.

Owner draws and business payroll should be separate

If the LLC has members who are pulling funds out, treat them as owner draws or distributions rather than wages unless they’re paid as employees through payroll. For LLCs taxed as corporations or with employees, follow standard payroll procedures and withholdings. Clear draws and distributions reports are necessary for equity tracking.

Reconcile accounts monthly

Reconcile business bank accounts and credit card statements to books each month. Reconciliation prevents missing transactions, recurring items, or bank errors from spiraling out of control. Routine reconciliations are the heart and soul of good financial reporting and make tax time much less anxiety inducing.

Prepare basic financial statements

At a minimum: Create a monthly profit and loss statement and balance sheet. The profit and loss account reveals income and expenditure over a period, incomes and profitability. The balance sheet shows assets, liabilities and equity at a specific point in time. These statements allow you to monitor performance, make budgeting decisions and provide financials when necessary to lenders or partners.

Plan for taxes and recordkeeping

Know the tax responsibilities associated with your LLC form and tax option. (If necessary, make estimated tax payments and keep track of expenses that can be deducted.) Keep records at least several years to substantiate deductions and respond to any questions. Good recordkeeping will insure that you do not lose any of your eligible deductions and make sure to file in time.

Implement controls and document policies

Build straightforward internal controls to guard against errors and fraud. That might mean, for example, that two people have to approve large payments; the person who records transactions can’t be the same one who approves expenses; and there should be digital backups of those records. Write down your accounting policies and procedures, so they can be kept in place consistently even if duties are switched.

Periodic meeting with a financial adviser may be in order

And even if your bookkeeping is solid, occasional check-ins with a finance professional can be worthwhile. A review can confirm that: Transactions are posted correctly Tax planning strategies are accurate The chart of accounts meets the needs of you business You don’t require constant watching, but periodic bipartisan checks will prevent costly mistakes.

Scale accounting as you scale the business.

Accounting Requirements Change As Your LLC Grows. You might want to do payroll, manage inventory or need more extensive reporting. “Then you need to update your chart of accounts and processes for new activities, and make sure the financial team is trained and supported.”

Final tips

Start simple and stay consistent. The best LLC bookkeeping system is one that you keep up with. Separate business and personal funds, reconcile once per month, create simple financial statements to track your progress. There is no fear of misinformation, the dangers and loss associated with misinformation are eliminated, clouded vision as a result of improper LLC accounting structure distorting perception/startling growth insights do not happen.