How to Do Bookkeeping for an LLC

Bookkeeping is the systematic recording of financial transactions, providing a clear view of your Limited Liability Company’s (LLC) financial health. Maintaining accurate financial records is a requirement for compliance with tax authorities like the IRS and helps protect your personal assets from business liabilities. These records allow an owner to make informed decisions about spending and growth and are what lenders and investors examine to assess the viability of your business.

Foundational Setup for LLC Bookkeeping

Establishing your LLC’s bookkeeping starts with opening a dedicated business bank account. This action is central to maintaining the “corporate veil,” the legal separation between your personal assets and the business’s debts. Mixing business and personal funds can lead a court to “pierce the corporate veil,” making you personally liable for business obligations, so a separate account is vital for simplifying tracking and tax preparation.

Next, choose an accounting method, which dictates when you record income and expenses. Under the cash method, you record income when you receive it and expenses when you pay them. The accrual method records income when it is earned and expenses when they are incurred, regardless of when money changes hands, providing a more accurate picture of long-term profitability. While many small LLCs start with the cash method, the IRS requires businesses with average annual gross receipts over $31 million for 2025 or those that maintain inventory to use the accrual method.

You will also need a system for recording transactions. While single-entry bookkeeping can work for very simple businesses, double-entry bookkeeping is the standard for most LLCs. This system records every transaction with two entries, a debit and a credit, ensuring the accounting equation (Assets = Liabilities + Equity) remains in balance. This method provides a self-checking mechanism to catch errors and is necessary for generating comprehensive financial statements.

Establishing Your Chart of Accounts

The Chart of Accounts (COA) is the organizational backbone of your financial records, providing a complete list of every account in your general ledger. It functions like a filing system, categorizing all financial transactions to make them easier to manage and analyze for financial statements. The COA is built around five primary account types: Assets, Liabilities, Equity, Revenue, and Expenses.

Assets are resources the LLC owns that have economic value. Common asset accounts for an LLC include:

• Business Checking Account
• Accounts Receivable (money owed to you by customers)
• Inventory
• Fixed Assets like equipment or vehicles

Liabilities represent your LLC’s financial obligations to others, such as Accounts Payable, Business Loans Payable, and Sales Tax Payable. Equity represents the owner’s stake in the company and includes accounts like Owner’s Capital for investments and Owner’s Draw for money the owner takes for personal use.

Revenue accounts track all money generated from business activities, such as Service Revenue or Product Sales. Expense accounts record all the costs incurred to operate the business. These can be broken down into specific categories to provide a detailed view of where money is being spent, including:

• Rent Expense
• Utilities
• Marketing and Advertising
• Office Supplies
• Salaries and Wages

Recording Key LLC Financial Activities

The daily work of bookkeeping involves recording all financial activities, with tracking income and expenses being the most frequent task. When you make a sale, you record the revenue from either a direct cash receipt or an invoice. Every time the business spends money, the transaction must be recorded and categorized into the appropriate expense account from your Chart of Accounts.

A significant transaction for LLCs is the owner’s capital contribution, which occurs when an owner invests personal funds or assets into the business. To record a cash contribution, you would debit your Cash account and credit an Owner’s Equity account. If a non-cash asset like a computer is contributed, you record it at its fair market value, debiting an asset account and crediting the Owner’s Equity account.

It is also important to correctly manage an owner’s draw or distribution, which is when an owner takes money from the LLC for personal use. This is not a business expense and does not affect the company’s profitability. Instead, it is a reduction of the owner’s equity, recorded by debiting an “Owner’s Draw” account and crediting the Cash account.

The Impact of LLC Tax Classification

An LLC’s tax classification influences its bookkeeping requirements because the records must support the specific tax forms required by the IRS. The default tax treatment depends on the number of members, but an LLC can elect to be taxed as a different entity. This choice has consequences for how profits are recorded and how owners are compensated.

A single-member LLC is a “disregarded entity,” meaning the IRS treats it as a sole proprietorship for tax purposes. The LLC’s income and expenses are reported on Schedule C, which is filed with the owner’s personal Form 1040 tax return. Bookkeeping for a single-member LLC must be detailed enough to accurately complete all categories on Schedule C.

A multi-member LLC is automatically taxed as a partnership and must file an informational return, Form 1065. A bookkeeping requirement is maintaining separate capital accounts for each member. These accounts track each partner’s contributions, share of profits or losses, and distributions, with the final numbers reported to each partner on a Schedule K-1.

An LLC can elect to be taxed as an S Corporation by filing Form 2553. This structure requires an owner who works in the business to be paid a “reasonable salary” as an employee, which is recorded as a payroll expense. This salary is subject to payroll taxes and reported on a W-2 form, while any remaining profits can be taken as distributions.

An LLC can also elect to be taxed as a C Corporation by filing Form 8832. Under this structure, the LLC files its own tax return, Form 1120, and pays corporate income tax on its profits. Profits distributed to owners are treated as dividends, which are taxed again on the owner’s personal return, a concept known as double taxation.

Generating and Understanding Financial Reports

The culmination of your bookkeeping is the creation of financial reports, which translate transaction data into a clear picture of your LLC’s performance. These statements are the primary tools for analyzing your business’s health and making strategic decisions.

The Profit and Loss (P&L) Statement, or income statement, summarizes your revenues and expenses over a specific period. It follows the formula: Revenue – Expenses = Net Income (or Loss). This report answers whether your business was profitable during that period.

The Balance Sheet offers a snapshot of your company’s financial health at a single point in time. It is structured around the accounting equation: Assets = Liabilities + Equity. This report shows what your LLC owns, what it owes, and the owner’s net investment.

The Statement of Cash Flows details how cash has moved through your business over a period, breaking it down into three categories: operating, investing, and financing activities. Operating activities include cash from sales and payments for expenses. Investing activities involve the purchase or sale of long-term assets, while financing activities include owner contributions, draws, and loan payments.