Recordkeeping For Your Single-Member LLC

Three reasons it's important to keep good records for your SMLLC.



Running a single-member limited liability company (SMLLC) means keeping copies of a lot of different documents, like your formation documents, income and expense records, tax records, licenses filed issued by local, state, or federal governments, and business records and contracts. Besides keeping organized for general business purposes, there are at least three other key reasons you want to keep and have well organized records for your SMLLC. Good records for your SMLLC can help:

  • with filing your taxes
  • in dealing with lenders and other businesses; and
  • establish that your business is separate from you personally.

Here's a quick review of each of these points.

Preparing Your Taxes

One of the most important reasons to keep clear financial records is to make it easier for you to compute and pay your business’s taxes. The typical SMLLC is taxed as a sole proprietorship, which means you’ll pay taxes on your business income as part of your personal income tax return. This involves completing a Schedule C that breaks down your SMLLC’s income and, especially, expenses into various categories. These categories include things like equipment, supplies, advertising, and rent. If you’ve kept clear, organized financial records during the year, it should be relatively easy to plug in the right numbers for each category.

Some businesses use items, most often equipment or machinery, that are subject to depreciation. Part of good recordkeeping as it relates to taxes means keeping up to date with how much a given piece of business property has depreciated. Again, when tax time rolls around, you’ll save yourself a lot of aggravation if you have a file folder or binder section where you have documents tracking equipment depreciation.

Clear, well-organized records also can be one of your best defenses in the event the IRS audits your business. If, for example, the IRS questions a particular business expense—say, the purchase of a delivery vehicle—you’ll be in a much better position if you can show things like a purchase receipt, insurance documents including payment records, the vehicle title and registration in the name of your SMLLC, and a document showing the sales tax paid on the purchase. All of this could be kept in a single folder among your business records. (Of course, as mentioned earlier, under IRS rules you also should have copies of tax returns going back a minimum of three years that you could produce upon request.)

Working With Lenders

Let’s say that your SMLLC has been humming along successfully for a few years and now you want to expand the business. Maybe you need some new equipment; maybe you want to buy some real estate for a store or office. If your business itself doesn’t have the money for these types of purchases, you’ll probably need to get a loan. Banks, as well as many other lenders, won’t make loans without security. In other words, a bank will want your business to put up some kind of collateral that the bank can take possession of if you’re unable to keep up with your loan payments. A bank will want to see clear and detailed records regarding not only your business’s income and expenses (a profit-and-loss statement, a balance sheet), but also records showing the SMLLC’s ownership of property or other items that may be used as collateral.

In addition, even before applying for a loan, good financial records will allow you, possibly with the help of a financial expert, to analyze whether getting a loan is a good move at a particular point in time. The same records can help you to analyze what size loan might make sense. And, finally, they can be useful for helping you determine the tax implications of a loan.

Helping Prove Your SMLLC is Separate From Yourself

One of the main benefits of organizing your small business as a SMLLC is to gain the protection of limited liability. If your business has debts it can’t pay, or is responsible for a serious injury to a customer or client, limited liability means that no one can come after you, personally, for compensation. However, if it is not clear that your SMLLC is truly a separate entity from you, a court might allow someone to pierce your business’s limited liability shield. While courts are mainly concerned that you keep your company’s money and property separate from your personal assets, keeping separate records may also help. More specifically, as long as your SMLLC is adequately capitalized—that is, has enough money or other assets to continue paying its ongoing financial obligations—then clear business records might help defeat a legal challenge to the idea that your business is separate from you.

For more information about running a single-member LLC, check out the other articles in the  SMLLC section  of this website or pick up  Nolo's Guide to Single-Member LLCs: How to Form and Run Your Single Member Limited Liability Company  by David M. Steingold (Nolo).

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