LLC Bookkeeping Requirements: What You Must Track

Running an LLC as a small business comes with substantial costs. The longer your venture operates, the more money it spends. Bookkeeping helps you track your LLC’s income and expenses, showing you its financial performance and simplifying tax preparation and reporting. Moreover, you can use bookkeeping to set reasonable business budgets and stay compliant with federal and state regulations.

This important part of your LLC’s operations can be done using a single-entry or double-entry method. But regardless of how you’ll track business finances, you must know what to record. NCH’s tax and accounting experts share the most common LLC bookkeeping requirements below.

Key Takeaways

• Generally, LLCs should track their income, expenses (including payroll), member contributions and distributions, assets, and liabilities with bookkeeping. 
• Receipts, invoices, bank statements, and other financial-related records must be maintained for accurate tax reporting and potential deductions.
• If you run a multi-member LLC, use a capital account to track all capital contributions and member distributions. It’ll help you file your business tax returns properly and prevent potential disputes among members.
• LLC bookkeeping requirements also include creating payroll journal entries (for LLCs with employees) and tracking business assets and liabilities.
• Record-keeping periods vary by document type and jurisdiction. Current federal guidelines set record retention periods at 3 years or more, while some U.S. states may require your LLC to maintain business records for a longer period.

Business Income

Bookkeeping for an LLC typically involves tracking its income. All transactions made by your business (and how much it earned from these activities) must be recorded, including:

• Customer payments and sales revenue
• Investment income and interest earned
• Rental income from business property
• Refunds from suppliers or vendors
• Insurance claim payments
• Other kinds of business income

Whenever your LLC generates income, keep supporting documents such as invoices, receipts, bank deposit slips, and transaction reports from payment processors. This step is also important for recording business expenses.

Business Expenses

You’ll need to track your LLC’s business expenses as well. Such costs can include equipment and supply purchases, professional service fees, advertising and marketing expenses, and insurance premiums.

Each of your LLC’s expenses should be categorized to avoid confusion and simplify taxes. Many accounting software programs can organize business expenses into their specific categories. For example, newspaper advertising costs are classified as advertising and marketing expenses.

Alternatively, consider categorizing and recording business expenses with a professional bookkeeper’s assistance. And if you want to deduct these costs from your LLC’s taxable income, maintain all records related to them. You’ll need these documents to support your deductions.

Capital Contributions & Member Distributions

LLC bookkeeping requirements also include capital contributions, profit and loss allocations, and member distributions. They should be recorded in capital accounts or continuous tallies of the stakes of LLC owners (members) in the business.

• Capital contributions consist of initial and additional contributions.
  • Initial contributions can be classified as cash deposits into the LLC’s business bank account, property, or services provided by each member.
  • LLC members can also choose to keep funding the business themselves or be required to do so.
• An LLC’s profits and losses are allocated to each member. Both are reported on their personal income tax returns.
• Member distributions are amounts given to LLC members based on the terms outlined in the company’s operating agreement.

Recording all of these transactions will help you file your business tax returns properly and prevent disputes among LLC members. The entries for your LLC’s capital contributions and member distributions must show transaction dates, amounts, recipients, and notes on each payment.

Employee Payroll

LLCs with employees face additional bookkeeping obligations under federal and state employment laws. Payroll-related transactions are recorded on payroll journal entries that usually document a company’s entire payroll run. These entries detail employee salaries and wages, payroll taxes, employee benefits, and deductions.

Payroll journal entries are made for an accurate recording of the payroll-related expenses listed in your LLC’s general ledger. Overall, they help you:

• Achieve financial transparency.
• Compute and report payroll taxes correctly.
• Set reasonable budgets and financial projections.
• Support specific expenses during audits or stakeholder meetings.

Company Assets & Liabilities

If your LLC has assets and liabilities, it must record both on a balance sheet. Business owners, bookkeepers, stakeholders, and auditors use balance sheets to determine a company’s overall value.

The assets and liabilities you should include in your LLC’s balance sheet may vary depending on the venture’s industry and activities. We’ve listed some examples of business assets and liabilities in the table below.

When to Keep All Necessary Records for Bookkeeping

At the federal level, taxpaying businesses are advised to keep supporting documents for business income, tax deductions, and credits reported on their income tax returns until the period of limitations for those documents ends.

The Internal Revenue Service (IRS) gives you a certain amount of time to amend your business tax return to claim a credit or refund. Federal auditors can also use that period to assess additional tax. Here are the current general guidelines set by the IRS for record-keeping.

• For tax returns: You can keep records for 3 years or more, depending on any of the scenarios listed below.
  • Tax returns filed to claim credits or refunds – 3 years from when they were filed or 2 years from when you paid the tax
  • Tax returns filed to claim losses from worthless securities or improper debt deductions – 7 years
  • Unfiled or fraudulent returns – Indefinite retention
  • Employment tax records – At least 4 years after the due date or payment date of your LLC’s tax
• For property-related records: The IRS recommends maintaining these records until the period of limitations ends for the year when you dispose of the property.
• Other records: Check how long these documents should be kept before discarding them.

State-Specific Document Retention Guidelines

Your LLC may also need to follow state-specific LLC record-keeping requirements. These guidelines vary by jurisdiction, so conducting research in advance is important. For example, some states set longer record-keeping periods.

Finally, your home state may require your LLC to submit annual reports with its financial records. Check with your Secretary of State or equivalent filing office for their specific requirements related to annual report filings.

Related Resources

• Learn how to keep your LLC in good standing all year round here.
• Is your LLC required to pay estimated taxes? Get the answer from NCH’s tax experts.
• Discover the most common record-keeping requirements for LLCs here.

Frequently Asked Questions

What financial records do I need for LLC bookkeeping?

You’ll need the following financial records for LLC bookkeeping:

• Receipts
• Invoices
• Bank statements
• Contracts
• Transaction records from payment processors

How long can LLCs keep their financial records & documentation?

According to the IRS, LLCs can keep their financial records and documentation for 3 years or more. The exact retention period varies depending on an LLC’s specific situation, as outlined in IRS guidelines.

Suppose your LLC manages employees. If the business has employment tax records, it must keep these documents for at least 4 years.

Should an LLC use personal bank accounts for business transactions?

No, an LLC shouldn’t use personal bank accounts for business transactions. This can reduce the company’s liability protection, allowing legal courts to disregard the separation between the entity and its owner(s). Instead, LLCs are advised to open and maintain business bank accounts to avoid mixing personal and business finances.

What happens if an LLC fails to maintain its business records properly?

If an LLC fails to maintain its business records properly, it can:

• Lose its legal protection.
• Miss out on applicable tax deductions, credits, or refunds.
• Face penalties from state and federal authorities, including the IRS.
• Get limited options for business financing.

Do single-member LLCs need to conduct bookkeeping?

Yes, single-member LLCs need to conduct bookkeeping. These LLCs will find income, expense, contribution, and distribution tracking easier since they’re only operated by one person. If single-member LLCs need help with the process, they can hire a professional bookkeeper.

Can bookkeeping be done using computer software?

Yes, bookkeeping can be done using computer software. Your options include QuickBooks Online, Xero, FreshBooks, and Wave. But before you start automating your bookkeeping process, identify your specific needs and see whether each program meets them.

Do LLCs need to hire a professional bookkeeper or accountant?

LLCs don’t necessarily need to hire a professional bookkeeper or accountant, especially if they’re new businesses. However, working with a qualified professional can help an LLC reduce errors, ensure compliance with federal tax regulations, and make their financial reports accurate. Many small businesses hire a professional bookkeeper or accountant as they grow.

How often should LLC bookkeeping records be updated?

LLC bookkeeping records can be updated daily, weekly, or monthly.

Daily updates work best for LLCs with plenty of transactions, like food services or online stores. But for most businesses, weekly updates are ideal.

Ultimately, you should strive to update your books as often as possible. This way, your business stays operational every day.

What financial reports should LLCs prepare regularly?

LLCs should prepare income (profit and loss) statements, balance sheets, and cash flow statements regularly. These reports show important data about a company’s profits, expenses, assets, and liabilities, capturing its overall financial health.

Reviewing the aforementioned financial reports monthly helps LLC owners assess their venture’s financial performance and make informed decisions from there.

Can improper bookkeeping affect an LLC’s ability to obtain financing?

Yes, improper bookkeeping can affect an LLC’s ability to obtain financing. Your potential lender may ask you for accurate financial statements to assess your company’s risk and profitability. Disorganized or incomplete records may raise concerns about an LLC’s overall financial health.

Expert Tips From NCH

1. Add your business bank account into bookkeeping software for direct imports of transactions. This reduces errors from manually inputting data and ensures that you never miss transactions during busy periods.
2. Make sure bookkeeping is done regularly. Your process should entail tasks such as reviewing and categorizing all expenses, reconciling bank statements, and updating each member’s capital accounts.
3. Keep receipts, invoices, and other documents supporting your LLC’s income, expenses, and profit and loss allocations organized. Store them in physical or digital storage.
4. Develop and implement clear policies for business expense approval and documentation. They’re especially important for multi-member LLCs with expenses that need to be tracked and supported properly.
5. Consider conducting financial reviews quarterly. You can use these reviews to assess your bookkeeping, identify potential issues early, and prepare for estimated tax payments and other important deadlines.

Bonus Resource

Learn about the basics of bookkeeping from NCH’s Cort Christie.

Improve Your LLC’s Financial Health with Bookkeeping

Bookkeeping gives you clarity over an LLC’s financial performance and position. It generally covers business income, expenses, assets, and liabilities, informing your venture’s future financial decisions and ensuring consistent compliance. The key is to take a systematic approach to bookkeeping that helps your business avoid significant legal consequences.

If you’re after a proper LLC bookkeeping process, consider hiring NCH’s bookkeeping experts for accuracy and detailed financial reporting.

Work With Our Bookkeeping Experts Today

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.