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Simplifying Accounting for a Small Limited Liability Company

By Stephen Nelson

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Published: 17Oct2009
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Small businesses and entrepreneurs increasingly favor the limited liability company option for their new businesses. And lots of good tax and legal reasons justify this popularity.

Unfortunately, the accounting and bookkeeping required for the small LLC--particularly for the one owner limited liability company--can quickly become too complicated. Sometimes, in fact, the extra bookkeeping complexity can turn the business owner's finances into a mess.

Fortunately, the small limited liability company can do several things to simplify LLC accounting and avoid messes:

Don't Elect Corporation Tax Treatment

Perhaps the big reason that accountants love LLCs concerns their tax accounting treatment. The owners of an LLC, called members, may make elections to have their LLC treated as a corporation.

Just to explain this in a bit more detail, by default, a one member LLC is treated as a sole proprietorship for tax accounting purposes. And, by default, a multiple member LLC is treated as a partnership for tax accounting purposes.

But both "sole proprietorship" LLCs and "partnership" LLCs can also elect to be treated as a regular corporation (called a C corporation) or as a subchapter S corporation for tax accounting purposes.

Now, don't get me wrong: An election to treat an LLC as a corporation can make wonderful tax sense in some situations. A C corporation usually makes fringe benefits tax-free to owners. An S corporation often minimizes either corporate income taxes or employment taxes. However, in many circumstances, you complicate your accounting and bookkeeping by making the election way beyond any value the "corporate" tax treatment gives you.

Accordingly, if you want to keep your accounting and bookkeeping simple--especially when you're operating a one-owner business without employees--don't rush into making tax elections that will only complicate your accounting.

Do Choose Cash-basis Accounting

Another, quick simple technique to ease the accounting burden of your small business? Use cash basis accounting. Cash basis accounting, for the most part, means that you can use a checkbook-based bookkeeping program like Quicken.

With cash-basis accounting and a checkbook program, you count income when you receive cash. Almost always, you count expense deductions when you disburse cash.

Accountants often recommend accrual basis accounting rather than cash basis accounting because accrual basis accounting better estimates profit. But accrual accounting requires you to use a more complicated (but also more powerful) accounting software program like QuickBooks. And accrual basis accounting requires the person doing the accounting to possess more advanced accounting skills.

In comparison, cash basis accounting simplifies your accounting. And that simplicity means you'll find it far easier to do the books and keep your financial records straight.

Do Skip Payroll Accounting--If You Can

A first, important caution: You can't simply call someone who's really an employee something else like an "independent contractor."

However, you should attempt to avoid having to prepare payroll checks and payroll tax returns. Payroll processing greatly complicates your small business's bookkeeping.

Avoiding payroll processing, therefore, probably means you take one of two courses of action. First, you can delay hiring your first employee.

Note: If you're the only worker in a sole proprietorship or an LLC treated as a sole proprietorship or if owners are the only workers in a partnership or an LLC treated as a partnership, you don't have employees.

A second course of action for avoiding payroll is outsourcing the payroll accounting to someone else who specializes in business accounting or payroll processing. This approach costs you money, of course. But outsourcing makes your payroll processing someone else's headache--not your headache.

Do Keep Your Balance Sheet Clean

Another accounting tip for small limited liability companies: Try to keep your balance sheet clean.

Specifically, minimize the assets you depreciate. (You can do this by using Sec. 179 elections that let you write off most fixtures and equipment at time of purchase rather than depreciating the items over three or five or seven years.)

Further, avoid where possible, loading up on business debt. Don't, for example, sign up for and then use half a dozen business credit cards. Don't treat some of your personal contributions as loans rather than just owner capital contributions. Don't, whatever you do, get into one of those games where you're having the business borrow money from one credit card to pay off the loan you got from your father-in-law because you had to pay off the bank loan you used to pay down the American Express card balance.

You need a pretty good bookkeeper to keep track of extensive fixed assets and complicated borrowing. And if you try to incorporate this stuff into your business without a good bookkeeper, you'll probably quickly find yourself with terribly messy and probably mostly unreliable accounting records.

Do Avoid Financial Complexity When Possible

And one final general tip: Keep your business financial affairs simple. In other words, don't so complicate your business's finances that you nearly need an MBA in finance just to figure out what's going on.

The extra benefit of fancy-pants financial engineering, all-too-clever tax planning and state-of-the-art accounting systems often doesn't save you money once you consider the costs of all this expensive sophistication. But the sophistication absolutely does make your business finances more complicated to manage.

CPA Stephen L. Nelson owns a Seattle accounting firm. Nelson also publishes a do-it-yourself limited liability company web site

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