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Setting Up Quickbooks for an LLC

Operating your business as a limited liability company? As you probably know, getting the QuickBooks accounting program setup correctly in your situation can be, well, tricky. But in a sense, that's a good thing. The trickiness stems from the tax accounting flexibility that the LLC option provides.

Fortunately, you can follow these three accounting tricks to keep your QuickBooks LLC setup under-control and well-organized.

Trick #1: Pretend the LLC Is Something Else

A limited liability company, for tax accounting purposes, is always treated as something else. For example, a one owner LLC operating a business is treated as a sole proprietorship. An LLC with multiple owners that operates a business is treated as a partnership.

What's more, both LLCs with a single owner and those with multiple owners can make elections to be treated for tax accounting purposes as regular corporations (called C corporations) or as Subchapter S corporations.

And all this leads to the first tip for setting up QuickBooks for an LLC. When you run the QuickBooks EasyStep Interview to setup QuickBooks, don't indicate that you're setting up QuickBooks for a limited liability company. Rather, indicate that you're setting up QuickBooks for the sort of taxpayer the LLC will be treated as.

For example, if you're a one owner LLC that hasn't made any special elections to be treated as a corporation, tell QuickBooks you're a sole proprietor. If you're a multiple owner LLC that hasn't made any special elections, tell QuickBooks that you're a partnership. And if you have made an election to be treated as a C corporation or an S corporation, tell QuickBooks that's what you are--a C corporation or an S corporation.

Trick #2: Combine Child and Parent LLCs in a Single QuickBooks Datafile

A common asset protection technique is to have a parent LLC or a parent corporation own child LLCs. A retailer with three locations, for example, might put each store location into a separate LLC. These three child LLCs might then be owned by a parent LLC or parent corporation.

Separate LLCs, however, shouldn't be segregated into separate QuickBooks datafiles. Rather, the LLC's accounts, income and deductions should be tracked within the parent's QuickBooks data file.

This combination seems (at first glance) just plain wrong. But here's the logic. In a parent-child structure, the child (so to speak) is owned by the parent. And that means that for tax accounting purposes, both the parent and the children combine their income and deductions. That combination means that both the parent LLC's and the child LLCs' income and deductions need to be combined into a single QuickBooks data file.

One caution, however. Because each LLC (whether parent or child) is a different legal entity, you should use separate QuickBooks accounts for each LLC's separate assets and liabilities.

For example, each LLC might have its own bank account within the QuickBooks data file. And each LLC should track its own accounts receivable, furniture and fixtures, and liabilities with separate, specific-to-that-LLC accounts.

Trick #3: Customize Forms for Each LLC as Necessary

If you're working with parent-children LLC situation, one other setup tip should be mentioned.

While for tax accounting purposes, you can and should combine the parent LLC and the child LLC transactions, you still want to recognize and visually highlight the separate legal identity of the parent LLC and of any child LLCs.

Within QuickBooks, an easy way to do this is to use separate customized forms for each LLC. An LLC with its own bank account will have its own check forms of course. And those check forms will have the LLC name on them.

But go a step further than that. If an LLC invoices customers or clients or sends a customer or client statements, that LLC should have its own customized invoice template or statement--one that uses that LLC's name.

Similarly, if an LLC issues purchase orders to vendors, that LLC should have its own purchase order template that uses the LLC's name.

Each QuickBooks form window includes boxes and buttons for creating customized forms.

About the author:

CPA Stephen L. Nelson is the author of Maximizing Employee Retention Credits.