Key Takeaways
- Single-member LLCs are disregarded for tax purposes. Bookkeeping supports your Schedule C.
- Multi-member LLCs file as partnerships. Bookkeeping must track partner capital accounts.
- LLCs taxed as S-Corps have the most complex requirements: reasonable salary and distribution tracking.
- Owner draws are NOT expenses. They reduce your capital account, not your profit.
- LLC bookkeeping protects your liability shield. Mixing personal and business funds can “pierce the veil.”
LLCs are the most popular business structure in America. The IRS reports over 4 million partnership returns filed annually, and millions more single-member LLCs file on Schedule C.
But here’s what most LLC owners don’t realize: your bookkeeping requirements vary wildly depending on three factors:
- Member count: Single-member vs. multi-member
- Tax election: Default taxation vs. S-Corp election
- State requirements: Texas franchise tax vs. California fees vs. other state rules
Get the approach wrong and you face tax problems, liability exposure, or both.
This guide covers exactly what bookkeeping your LLC needs based on its specific structure.
Table of Contents
LLC Tax Classifications: Why They Matter for Bookkeeping
The IRS doesn’t recognize “LLC” as a tax category. Instead, your LLC is taxed as something else. The classification determines your bookkeeping requirements.
Single-Member LLC (SMLLC)
Tax treatment: Disregarded entity. The IRS ignores the LLC and taxes everything on your personal return via Schedule C.
What this means: Your LLC’s income is your income. Your LLC’s expenses are your expenses. One person, one return.
Bookkeeping focus: Track income and expenses by category to support Schedule C lines.
Multi-Member LLC
Tax treatment: Partnership by default. The LLC files Form 1065 and issues K-1s to each member.
What this means: The LLC is a separate tax entity. Members pay tax on their share of profits, whether or not cash was distributed.
Bookkeeping focus: Everything a single-member tracks, plus partner capital accounts, guaranteed payments, and distribution records.
LLC Taxed as S-Corp
Tax treatment: S-Corporation rules apply. The LLC files Form 1120-S and issues K-1s to shareholders.
What this means: Owner-employees must take reasonable W-2 salary. Remaining profits pass through as distributions with different tax treatment.
Bookkeeping focus: All partnership requirements, plus payroll records, reasonable salary documentation, and strict separation of salary from distributions.
LLC Taxed as C-Corp
Tax treatment: Double taxation. The LLC pays corporate tax on profits, and owners pay again on dividends.
What this means: Rarely makes sense for small businesses. If you’ve made this election, you probably have specific reasons and professional guidance already.
Bookkeeping focus: Full corporate accounting, which is beyond the scope of this guide.
Single-Member LLC Bookkeeping
Single-member LLC bookkeeping is the simplest form, but “simple” doesn’t mean “optional.”
Requirements
Separate business bank account: This isn’t legally required, but it’s practically essential. Commingling funds creates audit headaches and can undermine your liability protection.
Track all income and expenses by category: Your Schedule C has specific lines for different expense types. Your bookkeeping categories should match.
Document business vs. personal use: If you use your vehicle, phone, or home office for both business and personal purposes, you need records supporting the business percentage.
Keep receipts for deductions: The IRS requires documentation. “I think I spent that” doesn’t hold up in an audit.
Key Bookkeeping Tasks
Record revenue and expenses: Every dollar in, every dollar out. This feeds your Schedule C.
Categorize for Schedule C lines: Advertising, car and truck expenses, contract labor, depreciation, insurance, interest, legal and professional services, office expense, rent, repairs, supplies, taxes and licenses, travel, meals, utilities, wages, other expenses.
Track owner draws vs. expenses: This is where single-member LLCs go wrong most often.
When you take $5,000 from your business account to pay personal bills, that’s not an expense. It’s an owner draw. It doesn’t reduce your taxable profit.
Prepare quarterly estimated taxes: Single-member LLCs pay self-employment tax on profits. If you don’t make quarterly estimated payments, you’ll owe penalties.
Year-end Schedule C data: Organize everything your CPA needs to complete Schedule C accurately.
Common Single-Member Mistakes
Using personal accounts for business: Makes expense tracking nearly impossible and creates audit risk.
Recording owner draws as expenses: Overstates deductions, understates taxable income. This is how people get in trouble.
Missing self-employment tax payments: Self-employment tax (15.3% on profits) surprises many first-year LLC owners.
Not tracking mileage or home office: These deductions require contemporaneous records. Reconstructing them at year-end is both difficult and audit-risky.
Multi-Member LLC Bookkeeping (Partnership)
Adding partners adds bookkeeping complexity. Each partner needs their own capital account, and transactions between partners and the LLC require proper documentation.
Requirements
Everything a single-member LLC needs, plus:
Partner capital accounts: Each partner’s equity stake must be tracked separately. Capital accounts show contributions, allocated profits/losses, and distributions.
Guaranteed payment tracking: If partners receive payments regardless of profit, those are guaranteed payments. They’re deductible by the LLC and taxable to the partner.
Allocation documentation: How are profits and losses split? If it’s not pro-rata based on ownership, you need documentation.
Form 1065 preparation data: The partnership files its own return. Your bookkeeping must support it.
Key Bookkeeping Tasks
Everything from single-member, plus:
Maintain individual capital accounts: Each partner’s account tracks:
- Beginning balance
- Plus: Contributions
- Plus: Allocated profits (or minus losses)
- Minus: Distributions
- Equals: Ending balance
Record partner contributions and distributions: Money partners put in increases their capital account. Money taken out decreases it.
Track guaranteed payments: These appear on the partner’s K-1 separately from their share of profits.
Document special allocations: If profits are split differently than ownership percentages, the operating agreement and bookkeeping must both reflect this.
Prepare K-1 schedules: Each partner receives a Schedule K-1 showing their share of income, deductions, and credits.
Partnership-Specific Concepts
Capital accounts: Think of this as each partner’s running balance sheet with the business. It’s different from their ownership percentage.
Guaranteed payments: Partner compensation that’s paid regardless of whether the business is profitable. Like a salary, but different for tax purposes.
Distributions: Return of capital to partners. Not an expense. Not taxable at distribution (partners already paid tax on the allocated profit).
Allocations: How profits and losses are divided. Can follow ownership percentages or be specially allocated per the operating agreement.
For more on partnership tax requirements, see our partnership tax services page.
LLC Taxed as S-Corp Bookkeeping
S-Corp election adds the most bookkeeping complexity. The trade-off is potential self-employment tax savings, but only if executed correctly.
Requirements
Everything from multi-member LLCs, plus:
Payroll system for owner-employees: Owners who work in the business must receive W-2 salary through proper payroll.
Reasonable salary documentation: The IRS scrutinizes S-Corp owner salaries. You need documentation supporting why your salary is “reasonable” for your role.
Distribution tracking separate from salary: Salary and distributions are completely different things with completely different tax treatments.
Shareholder health insurance tracking: Health insurance for >2% shareholders gets special treatment. It must be included in W-2 wages and tracked separately.
Form 1120-S preparation data: The S-Corp files its own return.
Key Bookkeeping Tasks
Everything from partnership bookkeeping, plus:
Process owner payroll with proper withholding: Social Security, Medicare, federal and state income tax. This must run through actual payroll, not as a distribution.
Maintain shareholder distribution records: Distributions can only come from positive equity. They’re recorded separately from salary.
Track >2% shareholder health insurance: The company pays the premium. It’s added to the shareholder’s W-2 wages. The shareholder then deducts it on their personal return. Proper tracking is essential.
Document reasonable salary basis: What would someone else pay an employee in your role? Industry surveys, job listings, and comparable companies all help establish reasonableness.
Prepare K-1 schedules: Like partnerships, each shareholder receives a K-1.
Why S-Corp Bookkeeping Is Different
Owner must take W-2 salary: This isn’t optional. Owners who perform services for the S-Corp must receive reasonable compensation.
Salary requires payroll tax compliance: W-2 wages come with employer and employee FICA taxes, unemployment taxes, and withholding requirements.
Distributions only allowed when equity is positive: You can’t distribute more than the company has in accumulated equity.
Health insurance treatment is complex: The rules for shareholder health insurance are specific and different from how other employees’ insurance is handled.
For detailed guidance on S-Corp requirements, see our S-Corporation tax services page.
Owner Draws vs. Expenses: The Critical Distinction
This is the most common LLC bookkeeping mistake. Understanding it prevents tax problems.
The Mistake
You transfer $5,000 from your business account to your personal account. You record it as “Salary Expense.”
This is wrong for any LLC that hasn’t elected S-Corp status.
The Reality
For single-member LLCs and partnerships, owner withdrawals are not expenses. They’re draws against your equity.
- Draws don’t reduce your profit
- Draws reduce your capital account
- You pay tax on profit regardless of what you drew out
Example
Your LLC makes $100,000 profit. You draw $80,000 throughout the year.
Wrong approach: Record $80,000 as “owner salary expense.” Show $20,000 profit. Pay tax on $20,000.
Correct approach: Show $100,000 profit. Record $80,000 as draws (equity reduction). Pay tax on $100,000.
The tax is the same whether you took the money out or left it in the business.
How to Record Correctly
In QuickBooks, Xero, or similar software:
- Create an equity account called “Owner Draws” or “Member Distributions”
- When you transfer money to personal accounts, categorize it to that equity account
- Never categorize owner draws as an expense
S-Corp Exception
If your LLC elected S-Corp status, salary to owner-employees is an expense. But only the salary portion processed through payroll.
Distributions (amounts above salary) are still not expenses. They reduce retained earnings/shareholder equity.
Protecting Your LLC Status Through Bookkeeping
Your LLC provides liability protection. But that protection can disappear if you don’t treat the LLC as a separate entity.
What “Piercing the Corporate Veil” Means
Courts can ignore your LLC and hold you personally liable for business debts if you’ve treated the LLC as your personal piggy bank rather than a separate entity.
This happens more often than you’d think. And bad bookkeeping is often the evidence used against owners.
How Bad Bookkeeping Enables Piercing
Commingling personal and business funds: Using the same accounts for business and personal expenses blurs the line between you and the LLC.
No separate business account: If you never set up a business account, the LLC isn’t operating as a separate entity.
Personal expenses through business: Paying your mortgage, groceries, or vacation from business accounts creates evidence of commingling.
Lack of records: If you can’t demonstrate that the LLC operated as a separate entity, courts may conclude it didn’t.
What Proper Bookkeeping Documents
Separate finances: Different accounts for business and personal. Clean separation.
Legitimate business purpose: Expenses are for business operations, not personal benefit.
Arms-length transactions: If the LLC transacts with members, terms are fair and documented.
Meeting minutes (multi-member): Major decisions are documented, showing the LLC operates formally.
The Bottom Line
Good bookkeeping isn’t just about taxes. It’s about maintaining the liability protection you formed the LLC to get.
State-Specific LLC Requirements
Your state adds requirements on top of federal obligations.
Texas
Franchise tax: Texas LLCs must file an annual franchise tax report. Most small businesses qualify for “no tax due” status, but the report is still required.
No state income tax: Texas doesn’t tax individual income, so your LLC’s profits aren’t taxed at the state level. But you still owe federal self-employment tax.
Annual report: Texas requires an annual public information report filed with the Secretary of State.
California
$800 annual franchise tax: Every LLC pays at least $800/year, regardless of income. This is due even if the LLC loses money.
LLC fee: For LLCs with income over $250,000, an additional fee applies, ranging from $900 to $11,790.
State income tax: California taxes LLC income at state rates, in addition to federal.
Other States
Requirements vary significantly:
- Annual report fees range from $0 to several hundred dollars
- Some states have separate LLC taxes
- Multi-state operations create nexus questions
If you operate in multiple states, work with a CPA who understands multi-state compliance.
When Your LLC Needs Professional Bookkeeping
DIY works for some LLCs. But at certain points, professional help makes more sense.
Triggers for Professional Bookkeeping
Transaction volume: 100+ monthly: The time required starts competing with revenue-generating activities.
Multi-member structure: Capital account tracking and partner allocations add complexity most owners don’t want to manage.
S-Corp election: Payroll compliance and reasonable salary documentation benefit from professional attention.
Multi-state operations: Nexus and filing requirements across states create compliance burden.
Growing revenue: More money at stake means more value from getting it right.
The DIY vs. Professional Math
If your LLC generates $300,000 annually and you spend 10 hours monthly on bookkeeping, that’s 120 hours per year.
At your effective hourly rate of $125 (based on profit divided by hours worked), that’s $15,000 worth of your time.
Professional bookkeeping costs $400-$1,000/month ($4,800-$12,000 annually).
The math often favors professionals.
LLC Bookkeeping Software Options
The right software depends on your LLC’s complexity.
QuickBooks Online
Best for: Most LLCs, especially those working with CPAs.
80%+ of CPAs work with QuickBooks. If your CPA needs access to your books, QuickBooks provides the smoothest experience.
Strengths: CPA compatibility, extensive integrations, strong reporting.
Limitations: Price increases annually. Interface can be cluttered.
Xero
Best for: Tech-savvy owners, international operations, inventory-heavy businesses.
Strengths: Modern interface, strong multi-currency, unlimited users on all plans.
Limitations: Fewer CPAs are trained on Xero. US support not as robust.
Wave
Best for: Simple single-member LLCs with minimal transactions.
Strengths: Completely free accounting. Simple to use.
Limitations: Limited CPA access, basic reporting, no inventory features.
Growthy
Best for: High-volume businesses tired of manual categorization.
Strengths: AI learns your categorization patterns. Reduces manual entry significantly.
Limitations: Newer to market, smaller integration ecosystem.
For detailed comparisons, see our bookkeeping software comparison.
Frequently Asked Questions
Does a single-member LLC need bookkeeping?
Yes. Even though single-member LLCs are disregarded for tax purposes, you still need to track income and expenses to complete Schedule C, document deductions for potential audits, and maintain the separation required for liability protection.
How do I pay myself from my LLC?
For single-member LLCs and partnerships: transfer money from business to personal accounts and record it as an owner draw (equity reduction). For LLCs taxed as S-Corps: pay yourself W-2 salary through payroll, then take additional amounts as shareholder distributions.
What records should an LLC keep?
Bank statements, credit card statements, invoices, receipts for expenses (especially over $75), contracts, formation documents, operating agreement, meeting minutes (multi-member), payroll records (S-Corp), and tax returns for at least 7 years.
Should I elect S-Corp status for my LLC?
It depends on your profit level and circumstances. S-Corp election typically makes sense when profits exceed $50,000-$80,000 annually, but the calculation involves salary levels, retirement contributions, state taxes, and compliance costs. See our S-Corporation tax services for guidance.
Can I do my own LLC bookkeeping?
Yes, if you have a simple structure (single-member), moderate transaction volume (under 100/month), and the discipline to do it consistently. Multi-member LLCs and S-Corp elections add complexity that often benefits from professional help.
How do I track partner capital accounts?
Create a separate equity account for each partner in your software. Record contributions as credits to their account, distributions as debits, and allocate profits/losses per your operating agreement. Run capital account reports quarterly to verify accuracy.
Next Steps
Your LLC’s bookkeeping requirements depend on its structure. Single-member is simplest. Multi-member adds partner tracking. S-Corp election adds payroll complexity.
Whatever your structure, the fundamentals remain: separate accounts, accurate categorization, proper documentation, and regular reconciliation.
If you’re handling it yourself, use our bookkeeping checklist to stay organized.
If your LLC has grown beyond what DIY can handle, or if you’ve elected S-Corp status and want to ensure compliance, SDO CPA’s bookkeeping services are designed specifically for businesses with complex structures.
We handle single-member LLCs, partnerships, and S-Corps. Our bookkeeping team understands the entity-specific requirements that generic bookkeepers miss. And because we also provide tax services, your books are always prepared with tax compliance in mind.
Schedule a consultation to discuss bookkeeping for your LLC.