Once you’ve started your LLC, it can be tempting to wipe your hands, congratulate yourself on your accomplishment and step back thinking your shiny new legal business entity will take care of itself. But the responsibility of owning an LLC doesn’t end once the business is formed. In fact, business owners are required to keep good records along the way to maintain their personal liability protection and stay in compliance with state and federal laws.
It’s true that LLCs have minimal paperwork obligations compared to other types of corporate entities. (For example, C Corporations and S Corporations are required to have annual meetings of the board of directors, and deal with various complex compliance procedures related to issuing stock and being publicly traded companies.) But managing an LLC still requires the business owner to adhere to some ongoing record keeping and paperwork to keeping the company in good standing and avoid the risk of your LLC being dissolved.
Here are the two main aspects of record keeping that LLC owners need to remember as they operate their businesses:
Separate Personal and Business Finances for LLC Protection
One mistake many LLC owners make is failing to keep strict boundaries between their business and personal finances. They may pay for business expenses with their personal funds or put personal expenses on their business credit card, for example. Some business owners don’t use any system for keeping track of their business expenses, or they may use personal assets to fudge the facts about their business finances.
All of this is potentially bad news for your business and personal life. The IRS relies on business owners to keep careful records of their business expenses throughout the year. If you claim to have spent $5,000 on business travel, you need to be able to back it up with documentation. The rules are often complex, but they exist for a reason: to keep business owners from cheating on their taxes and depriving the government of tax revenue owed. No one wants to pay fines or go to jail for tax evasion!
Used correctly, these rules also play an important role in maintaining the full LLC protection that your legal status affords the business. If you’re not separating your business finances from your personal finances and keeping good records, you’re taking money out of your own pocket!
Without recording your business expenses throughout the year, you run the risk of forgetting just how much you’ve spent and missing out on valuable tax benefits. Did you buy that new computer in January of the current tax year or last December? Did you spend $50 per month on printing supplies, or just $25? Without accurate record keeping, you might be under-reporting your deductible business expenses — and that means you’re paying more tax than you should be.
Careful record keeping to separate business and personal expenses is in your own best interest: it can help keep more money in your pocket at tax time, and it can keep your LLC on the right side of business tax laws.
File Required LLC Annual Reports
Even if you own a single-member LLC and are the only person who works at the company, you still need to file an Annual Report with your state’s secretary of state. (In some states, you have the option of filing a Biennial Report every two years.)
The Annual Report for an LLC is a simple filing where you are making a formal declaration to the state regulatory authorities. Generally, you’re updating them on basic information like the following:
- Whether your business still exists
- Whether you are still operating your business
- What details (if any) have changed, including ownership and location
Exact details and requirements of Annual Reports vary from state to state. Some states charge different fees to file; some states have earlier or later deadlines for Annual Reports. You need to check with the secretary of state where your business is based to make sure you are in compliance with all deadlines and requirements for annual reporting.
Why is it important to file your LLC’s Annual Report? Because it shows the state regulatory authorities that your business still exists and is operating in good standing with the law. Without an accurate Annual Report, your business might have to pay fees and penalties, or it may even be involuntarily dissolved. This would remove your personal liability protections and any tax advantages you might enjoy from owning an LLC. Don’t let it happen to you! Stay on top of your record keeping and file your Annual Report on time each year for any state where your business operates and is required to file.
Yes, owning an LLC is typically the least complex form of business incorporation, but you still need to do a few simple things throughout the year to maintain your business as a separate legal entity and protect your personal assets. By maintaining separation between your business and personal finances (with accurate tracking of your business expenses) and filing your Annual Report on time (including any necessary fees), your business will be in good standing with the state. You’ll also be ready to substantiate your deductions if the IRS ever comes asking questions!
Final takeaway: your record-keeping work is not done the day you set up your LLC. Maintaining ongoing records can help ensure your business survives and thrives as a legal entity while keeping your personal finances separate and protected.
Ready to take action to maintain your LLC protection? Talk to Incfile today — we can help you with filing your Annual Report and other aspects of starting and managing your business!
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