Legal form versus tax treatment
Under the default federal rules, a single-member LLC is generally treated as a disregarded entity, meaning it reports on the owner's personal return. A multi-member LLC is generally treated as a partnership. An LLC can also elect to be taxed as a corporation. Your CPA can tell you which one applies to yours.
Because the wrapper is the same but the tax result differs, ask your preparer for the exact treatment and write it at the top of your books notes. Your bookkeeper needs that fact.
Single-member LLC books
Books look much like a sole proprietor's. Equity has an owner contribution and an owner draw account. There is no salary for the owner under the default treatment. The liability protection the LLC offers depends partly on acting like a separate entity, so a separate bank account and clean records matter.
Do not use the business account for groceries and then fix it later. Courts and preparers both look at whether the owner treated the company as distinct.
Multi-member LLC books
When there are two or more owners, the equity section needs a capital account for each member. Contributions, distributions and each member's share of profit are tracked per person. The operating agreement usually says how profit and loss are split, and the books must follow it.
Fixed payments to a member for services, if any, are tracked separately from ordinary distributions. A member should not be run through payroll as an employee unless a professional has advised that treatment for the situation.
LLC taxed as a corporation
If the LLC elected to be taxed as an S corporation or C corporation, the owner who works in the business may need to be on payroll. Distributions to owners are then separate from wages. The books gain payroll accounts, payroll tax liabilities and, for S corporations, careful tracking of basis.
An election like this is made with the IRS and sometimes the state, so keep a copy of the acceptance letter in your records file.
What stays the same either way
Every LLC should reconcile accounts monthly, keep receipts, keep its formation documents and operating agreement in one folder, and track any state annual filing. Recording the date the LLC started and the date of any tax election helps a preparer apply the right rules to the right months.
Before changing how your LLC is taxed, talk to a CPA or attorney. Fix the books in step with the change, not months afterward.
A quick self-check for your own LLC
Find three facts and write them on one page: the date the LLC was formed, the number of members, and the tax treatment your last return used. If you cannot find the third, ask your preparer, because filings from past years show it. These three facts tell your bookkeeper which equity accounts to build.
If the facts do not match what the books show, for example two members but a single owner equity account, fix the setup before the next filing season rather than after.
Worked example with numbers
A single-member LLC taxed as a sole proprietor takes $3,000 a month. The books record draws against equity and no payroll for the owner. If the same LLC elects S corporation status, the owner is paid a reasonable salary through payroll, say $2,000 a month, with payroll taxes recorded as expense, and any other money is a distribution. The entity's profit now sits after the salary expense.
The legal structure did not change; the tax treatment did. Ask your preparer which treatment you have and whether it fits.
Mistakes that cost money
Assuming an LLC is automatically taxed a certain way. Paying yourself the wrong way for your treatment. Forgetting the extra annual filings that corporate treatment requires.
Check your work
Write down your entity's tax treatment on the first page of your books so everyone records owner pay the same way.
Common questions
Does an LLC need its own EIN?
A multi-member LLC does. A single-member LLC with no employees may not need one for federal income tax, but banks and payers often ask for it. Confirm with your preparer.
Can I change my LLC's tax treatment later?
Often yes, by election, but timing rules and consequences apply. Get professional advice before filing anything.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.