Most Common Mistakes to Avoid in Bookkeeping for LLC

Bookkeeping for LLC is a core part of the business finances and can have a significant impact on the growth and profitability of your business. It can encompass a variety of tasks, such as billing a customer, recording a fixed asset, or paying compensation to employees. 

Since bookkeeping is the backbone of any business, there are many potential mistakes that can damage your accounting and financial system. This article will introduce the most common mistakes to avoid in bookkeeping for an LLC. 

Mixing business and personal expenses

It may appear simple to cover a work expense with private money. However, combining your funds tends to make financial reporting (and taxes) more difficult in the long term. 

To prevent this stumbling block, make an effort never to use your cash to support business costs. Here is some advice to help you stay on track:

  • Manage your company’s finances with separate business bank accounts.
  • Have a separate payment method for your business (e.g., only using credit cards or checks instead of cash).
  • Stick a logo on your business credit cards to differentiate them from your personal cards.
  • Keep a small sum of money in your corporation checking account to pay unexpected business costs (so you aren’t inclined to use personal funds when you have your business accounts).

Failure in reconciling bank statements and accounts

This mistake in bookkeeping for LLC can result from mixing business and personal expenses. It could become a serious issue in the future if you don’t use separate bank accounts for your personal and corporate finances.

Using a single bank account can cause confusion between your personal and formal company spending. The IRS may request a detailed record of your entirely business-related expenditure if you are audited.

It’s a good idea to use separate bank accounts for personal and official activities. This simple practice helps you reconcile your bank statements and invoices at the end of each month. You can also identify the source of your finances and avoid any possible auditing events.

Throwing away receipts

If you lose your receipts (or throw them away), you won’t be eligible to claim the business deductions you created on your tax forms. We have already published several articles about the importance of keeping business receipts, make sure to check them out! 

Here are a few points to bear in mind to storing your business receipts:

  • It is perfectly acceptable to keep and use the online version of your receipts.
  • You may need to keep your receipts for up to six years. 
  • You can scan your receipts and save them in a cloud system such as Google Drive, Dropbox, or Shoeboxed to keep them safe for years without being damaged by fire, flood, or faded ink. 
  • Try to keep as detailed records of all business expenses (especially for meals and entertainment) as possible. You can claim a significant deduction from them. 

Recording payments to yourself as an expense

Don’t record the payouts as a possible cost when you charge yourself as a sole trader or a separate LLC. It’s a simple mistake to make. However, it will reduce your total financial gain and showcase an utterly bogus total for the earnings you must pay taxes on. Instead, deposit these funds into “Owner’s Draw.”

Neglecting sales tax

One of the most costly minor business bookkeeping blunders is failing to account for and pay sales taxes. Not paying enough attention to the measurement and processing of sales taxes can lead you to IRS penalties and fines. If you input information improperly, you may wind up with an invalid overall sales amount and, as a result, the obscene amounts of revenue taxes due.

We suggest that you work with your accountants and lawyer to ensure that your company complies by submitting the correct amounts of sales tax.

Tracking reimbursable expenses improperly

Accounting for business expenses from your own money is often a must, and one small business accounting error is failing to document refundable charges. If you fail to track these expenses, you potentially lose money and lack the right to claim tax breaks.

The solution is to build a documentation system that allows your organization to manage and document all reimbursable expenses regularly and easily. And Shoeboxed can help you with that!

Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.Access your Shoeboxed account from your web browser or smartphone app. Stay audit-ready with Shoeboxed for FREE now!

LLC vs. LLP vs. Sole Proprietorship: Choosing a Business Structure and Why It Matters

Choosing the right business structure has a huge impact on the financial health of your business. Here’s a breakdown of the big three you should know about.

Choosing the right business structure has a huge impact on the financial health of your business.

The wrong structure could leave you vulnerable to lawsuits or leave you with a large tax debt, while the right structure will protect your assets and ensure steady growth.

For small business owners, the choice between an LLC, LLP, or sole proprietorship can be confusing at best. Here’s a breakdown of the three major types of small business structures, and the pros and cons of each.

Sole Proprietorship
What it is: A sole proprietorship means that you are an individual, independent contractor who is in business for and with yourself; the term “solopreneur” perfectly embodies this business structure. Sole proprietorships are the most popular business structure in the United States.

Pros: A sole proprietorship is easy to form and cost effective. This business structure allows you to hit the ground running – all you need to start your business is, well, some business! When your first customer makes that first purchase, a sole proprietorship is born. As long as you have any required certifications and licenses for your particular industry, you don’t even have to make any special tax considerations for your business until it’s time to file.

Cons: As a sole proprietorship, all of the costs and risks associated with your business are yours, and yours alone. Since you and your business are one entity, you are personally liable for any and all debts or legal action brought against your company, and your personal assets, such as your car, house, and bank accounts, are at risk.

What it is: A Limited Liability Corporation (sometimes called a Limited Liability Company) is a business structure that can be formed by an individual or multiple people. Unlike a sole proprietorship, an LLC differentiates between the individual and the business, offering personal protection from business liabilities.

Pros: In most states, LLCs can be formed by any professional or group looking to do business together. This means you can work with other people and pool your resources to start a business. Under an LLC, your personal assets, such as your savings and your house, are usually protected if the company is sued. It may also be easier for startups to raise capital as an LLC.

Cons: LLCs are expensive and time-consuming to start compared to sole proprietorships, and require a lot more paperwork up front. Members of an LLC may not be held personally liable for company debts, but they can be held liable for mistakes made by another member of the LLC. For instance, if one business owner defaults on a loan made to the LLC, all parties can be held responsible. Also, if an LLC is formed as an S or C corporation, it can be taxed twice on the same profits by the IRS.

What it is: A Limited Liability Partnership is similar to an LLC, but offers slightly different tax implications. In many states, LLPs can only be formed by licensed individuals like lawyers, architects, and doctors.

Pros: Unlike some LLCs, which may be double-taxed by the IRS, LLPs are treated as partnerships and offer ‘pass through’ taxation. This means that partners in the LLP are only taxed once on their personal income taxes. Another big advantage of forming an LLP is that partners are protected from one another, in that they’re not liable for the other’s mistakes. If one partner behaves badly and the LLP gets sued, the other partner can’t be held personally responsible for their actions.

Cons: This business entity is not available to everyone, and is restricted to licensed professionals only in many states.

The business structure you choose should take into consideration your industry, budget, assets, and business goals. Consider consulting a tax professional to see which structure is the best bet for your business.

No Rendering of Advice – The information contained in here represents the opinion of Shoeboxed, Inc. and is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional accountant or attorney. We advise not to act upon this information without seeking the service of a professional accountant. Any U.S. federal tax advice contained in this website is not intended to be used for the purpose of avoiding penalties under U.S. federal tax law.
Accuracy of Information – While we use reasonable efforts to furnish accurate and up-to-date information, we do not warrant that any information contained in or made available is accurate, complete, reliable, current or error-free. We assume no liability or responsibility for any errors or omissions in the content of this website or such other materials or communications.

Sole Proprietor vs. LLC: How Your Taxes Will Change

taxesOver 75% of small businesses in the United States operate as sole proprietorships. This means that your business has a single owner – you – and that all risks and liabilities are taken on by you and no one else.

Remaining a sole proprietorship is a great choice for companies that are not interested in huge growth or in sharing decision-making with partners or a board of directors. If, however, your business is growing and you’re thinking of becoming an LLC, it’s important to know how your tax responsibilities and incentives will change. Continue reading “Sole Proprietor vs. LLC: How Your Taxes Will Change”