bookkeeping basics

Bookkeeping for LLCs: Setup and Best Practices

A complete guide to bookkeeping for LLCs. Learn how to set up your accounts, handle owner equity, manage taxes, and keep your LLC books clean.

KW
Kevin Wilson
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You formed an LLC to protect yourself and establish a legitimate business. Now you need to keep the books properly—not just for taxes, but to maintain the liability protection your LLC provides.

Here’s everything you need to know about bookkeeping for your LLC.

Why LLC Bookkeeping Matters

Maintaining the Corporate Veil

Your LLC provides liability protection—but only if you treat it as a separate entity. Sloppy bookkeeping can lead to “piercing the corporate veil,” where a court disregards your LLC and holds you personally liable.

To maintain protection:

Tax Compliance

LLCs have unique tax situations:

Good bookkeeping ensures accurate tax reporting.

Business Clarity

Beyond compliance, good books give you:

LLC Tax Basics

Default Tax Treatment

LLCs don’t have their own tax category—they’re taxed based on structure:

Single-member LLC: Taxed as sole proprietorship

Multi-member LLC: Taxed as partnership

Tax Elections

LLCs can elect different tax treatment:

S-Corp election:

C-Corp election:

Understanding Pass-Through Taxation

For most LLCs:

You need to plan for taxes on profits even if cash stays in the business.

Setting Up Your LLC Books

Separate Bank Accounts

Required:

Never:

Commingling funds weakens your liability protection.

Chart of Accounts

A proper chart of accounts organizes your financial data:

Asset Accounts:

Liability Accounts:

Equity Accounts:

Income Accounts:

Expense Accounts:

Software Setup

Popular options for LLC bookkeeping:

Set up your LLC properly in the software:

Owner’s Equity and Draws

Understanding Member Capital

In an LLC, owners have “member capital” or “owner’s equity”:

Owner Contributions

When you put money into the business:

Journal entry:

Owner Draws

When you take money out:

Journal entry:

Draws vs. Salary

Draws (for LLCs taxed as sole proprietorship or partnership):

Salary (for LLCs with S-Corp election):

Multi-Member LLC Allocations

For LLCs with multiple members:

Recording Common Transactions

Business Income

When you receive payment:

Business Expenses

When you pay expenses:

Owner Taking Money Out

When you take a draw:

Owner Putting Money In

When you contribute capital:

Paying Personal Expenses from Business

Don’t do this. It weakens liability protection.

If you accidentally do:

Tax Considerations

Quarterly Estimated Taxes

LLCs don’t have withholding, so you must pay estimates:

Self-Employment Tax

LLC members pay self-employment tax on net profit:

This is in addition to regular income tax.

Deductible Expenses

LLCs can deduct ordinary and necessary business expenses:

Proper categorization ensures you capture all deductions.

Year-End Tax Planning

Before year-end:

Multi-Member LLC Specifics

Operating Agreement Matters

Your operating agreement governs:

Bookkeeping should align with your operating agreement.

Separate Capital Accounts

Track each member’s equity separately:

This flows to the K-1s for each member.

Guaranteed Payments

Some members may receive guaranteed payments:

These are different from profit distributions.

Schedule K-1 Preparation

Multi-member LLCs issue K-1s to each member showing:

Clean books make K-1 preparation straightforward.

Common LLC Bookkeeping Mistakes

Mistake 1: Mixing Personal and Business

The most common and most dangerous mistake. Keep them completely separate.

Mistake 2: Recording Draws as Expenses

Owner draws are not expenses—they’re equity distributions. Recording as expense overstates your deductions and understates owner’s equity.

Mistake 3: Forgetting Quarterly Estimates

No withholding means you must pay quarterly. Underpayment leads to penalties.

Mistake 4: Poor Documentation

Keep receipts and records for all transactions. The IRS expects documentation.

Mistake 5: Ignoring State Requirements

Some states have annual filing requirements, franchise taxes, or other obligations. Know your state’s rules.

Mistake 6: Not Tracking Basis

Your basis (investment) in the LLC affects:

Keep records of all contributions and distributions.

Your LLC Bookkeeping Routine

Weekly

Monthly

Quarterly

Annually

When to Get Help

Signs You Need a Bookkeeper

Signs You Need a CPA

The Bottom Line

Proper bookkeeping for your LLC isn’t just about taxes—it’s about protecting the legal benefits you created the LLC for and understanding your business’s financial health.

Key principles:

Good habits established now make everything easier—taxes, decisions, and growth.

Need help with your LLC bookkeeping? At Profit Path Books, we help LLC owners set up clean bookkeeping systems and implement Profit First for better financial management. Book a consultation to discuss your needs.

KW

Kevin Wilson

Profit First Professional and QuickBooks ProAdvisor helping small business owners in Utah and beyond achieve financial clarity and consistent profitability.

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