LLC Accounting: Everything You Need to Know
LLC accounting is necessary when a business entity has a limited liability company that the state authorizes. 3 min read
2. Accounting Benefits for an LLC
3. LLC Taxes
4. What Is a General Ledger?
Updated July 10, 2020:
What Is an LLC?
LLC accounting is necessary when a business entity has a limited liability company that the state authorizes. It's not a corporation or a partnership, but rather gives business partners and sole proprietors the privileges of corporations. They won't get the extra tax or operation burdens either. When forming an LLC, the owner will need to be in charge of various responsibilities for the company. This includes being in charge of the following:
One of the best parts about an LLC is that the members in it have the right to agree how their distributions and allocations will be in order to meet the goals of their business. Every member will have a capital account that is their equity in the company's LLC. When a person becomes a member, they will make a property or cash contribution (known as a capital contribution) to the LLC. This contributes to the worth of the capital account.
Any profits and losses will be given to the members in the LLC. Profits will improve the amount in the capital accounts, while losses will reduce their capital accounts. If there is available property or cash in the LLC, a distribution may be made to the members. The value of this will decrease every member's capital account.
Accounting Benefits for an LLC
Members of an LLC have limited liability without the stress of running a corporation. This means members are free from some financial risks, such as when consumers may be unhappy and sue the company. Another benefit is LLCs are not taxed like corporations. This means double taxation does not occur for the LLC and its members.
There are no strict requirements for record keeping when it comes to an LLC. This includes management and accounting. LLCs aren't required to file an annual report, where corporations are in some states. This makes it much easier to process the accounting each month and year.
An entrepreneur will need to understand how LLCs are taxed by the state and federal government before forming a limited liability corporation. This will make sure the business taxes are filed according to the law. To be safe, it's smart to hire a qualified tax professional.
LLCs are not taxed by the Internal Revenue Service. Any revenue is reported through the tax returns of the LLC owners. Owners often have to pay self-employment taxes. There may also be different state taxes the LLC needs to pay depending on what the nature of their business is. The rules are enforced and administered by the Texas Comptroller of Public Accounts in the state of Texas. If the company decides to treat their LLC like a C corporation or as an S corporation, it's important to have a tax practitioner who is knowledgeable to do your tax return. This may include an attorney, CPA, or enrolled agent.
A limited liability company will decide how to handle their tax accounting, so the Internal Revenue Service will provide the standard rules. Companies can choose to opt out of the standard tax treatment and instead get taxed as a corporation. Limited liability companies often have the owners of their LLC subject to payroll taxes.
Sometimes LLC owners can pay as much in self-employment and payroll taxes as they end up paying in income taxes. Payroll taxes account for about 15 percent of the first $115,000 of income. After that, it's closer to 2.9 percent and 3.8 percent. The self-employment tax for a limited liability partnership is normally easy to understand if you know how an LLC gets taxed for income tax accounting purposes.
What Is a General Ledger?
An LLC's accounting practices are generally the same as other business entities with the exception of taxes. The most important document in an LLC is a general ledger. This is considered the LLC's financial backbone. Companies will use this general ledger to keep track of any money that's been received or tracked on a daily basis. It's similar to how a regular person keeps track of their banking transactions. Monetary and non-monetary assets are included on the general ledger.
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