Forums: Discussions for entrepreneurs and small business.

I ran a consulting business for about 8 months before becoming an LLC.  Do I have to keep my SP business accounts separate from activities after switching to the LLC, or can all my accounting and tax filing for the year be under the LLC?

LLCs are disregarded entities for Federal income tax purposes. That means that, as far as the IRS is concerned, nothing changed when you formed your LLC. Keeping that fact in mind helps to explain a lot of different questions.

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Accounting Made Simple | Sole Proprietor Tax Guide

When you say "disregarded" entities does that mean banks look at LLC`s the same way? I was under the impression that I could establish a business entity that would be "seperate"-- financially-- from myself. (ie. seperate credit, liability, etc...)

 

For most everything else, an LLC is a separate thing from its owner.

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Accounting Made Simple | Sole Proprietor Tax Guide

If you have a business, no matter what type of legal or tax entity you choose, you can and should keep all the financial information related to your business separate from your own personal financial information.  By financial information I mean bank accounts, credit cards, income, expenses, etc.  Due to complaints from small business owners, sole proprietors are not required to keep these records separate.

If you wish liability protection you can purchase it from an insurance agent and every business should have liability insurance, although it`s not always required.  If that liability protection is not sufficient for your needs then you can consider establishing a legal entity for this purposes.  Once you establish a legal entity for your business you are required (as opposed to can and should) to keep all financial information separate from your personal information.  If you don`t you may not have the legal liability protection you thought you did.  The liability protection will start on the date this entity begins.  Thus if you did not keep things separate before this date you should start as of this date.

The entity that you choose will have different tax classifications.  It just so happens that if you chose a LLC and you are the only member of the LLC then the default classification, as far as the IRS is concerned, is a sole proprietorship.   You can choose to have a different tax classification if you wish to do so.  No matter what your tax classification, if you wish to maintain your limited liability from forming your LLC you should keep your records separate.





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Gina L. Gwozdz, CPA
http://GLGcpa.com
http://TaxTreasures.com

That`s an excellent explanation Gina gives (with some good advice bundled in).

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Accounting Made Simple | Sole Proprietor Tax Guide

That an LLC is a disregarded entity is substantially correct. But some clarification might help. From FORM W-9


The key question is whether you are a single-member LLC.

From the context of your original post, it seems that you are. Should that change, and you have other members that own a portion of the firm, for tax purposes, the LLC would be treated as though it were a partnership.

You might keep in mind that if you add owners, electing Sub-Chapter "S" Corporate status might provide a sound alternative to taxation as a Partnership, although the differences are more in other aspects and the tax consequences largely the same for a Partnership or a Sub S.


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Charles L. Johnson, Managing Member
Verve X3, LLC.
4416 Woodland Ride Dr.
College Station, Texas 77845
Main: (979) 633-4578
Cell: (979) 229-8301
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Web-enabled Business Applications? We can help.

Even if the LLC you are forming is not an SMLLC, your (Federal) tax situation won`t be changing. (Unless of course, you elect to be taxed as an S or C Corp, but I see no indication from the Original Poster of that intent.)

If you, at the moment, have one owner, you`ll continue to be taxed as a sole proprietorship. If you, at the moment, have multiple owners, you`ll continue to be taxed as a partnership.

(I think it`s generally safe to assume that somebody who is already incorporated wouldn`t be forming an LLC, and as such, they are either an SP or a partnership at the moment.)

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Accounting Made Simple | Sole Proprietor Tax Guide

I read the original post as meaning, " Does the original SP company information need to be kept separate from the LLC information"?, which is what I am curious about myself. If I interpreted the original post incorrectly, I apologize,.

I just changed from a DBA to an LLC; does the DBA information and LLC information need to be kept separate, or can they be combined as far as financial record keeping?


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M Hall
Website Critique Community
International Society of Curmudgeons

No need to start from scratch with your record keeping (assuming that you were already keeping it separate from your personal records/accounts).

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Accounting Made Simple | Sole Proprietor Tax Guide