The short answer
An LLC is a legal structure under state law, and its federal tax classification decides how the books look. A single-member LLC is generally disregarded and reported on the owner's Schedule C, with owner draws. A multi-member LLC is generally a partnership filing Form 1065, with capital accounts and guaranteed payments. An S corporation files Form 1120-S and pays owner-employees reasonable wages through payroll before distributions. Choosing a structure belongs with a CPA or attorney.
Legal structure and tax classification are two different things
Owners often say "I'm an LLC" when the question is really how the business is taxed. The IRS says an LLC is a business structure allowed by state statute, and that it treats an LLC as a corporation, a partnership or part of the owner's return (a "disregarded entity"), depending on the number of members and any elections made.
By default, a domestic LLC with two or more members is a partnership, and a single-member LLC is disregarded for income tax, unless it files Form 8832 to be treated as a corporation. A corporation, including an LLC taxed as one, becomes an S corporation by filing Form 2553, signed by all shareholders. The IRS lists the requirements: a domestic corporation, only allowable shareholders, no more than 100 shareholders, and only one class of stock.
Which classification fits your business is a tax and legal decision for your CPA or attorney. This guide starts after that decision and shows what each one does to the books. If you are still setting up, see setting up books for a new Idaho business.
Single-member LLC: Schedule C and owner draws
If a single-member LLC owned by an individual does not elect corporate treatment, its activity generally goes on the owner's Form 1040, usually Schedule C. The books look like a sole proprietorship's. IRS Publication 334 says you cannot deduct your own salary or any personal withdrawals from the business, and that a sole proprietor is not an employee of the business.
In practice the owner's money moves through two equity accounts: owner investment for money put in, and owner draws for money taken out. Neither is income or expense. One card for the business explains how to keep personal spending out of the books in the first place.
Two details trip people up. For employment and certain excise taxes, the IRS treats a single-member LLC as a separate entity, so if it hires employees it reports payroll under its own name and EIN. And when a disregarded LLC fills out a Form W-9, the IRS says it shows the owner's Social Security number or EIN, not the LLC's EIN.
LLC taxed as a partnership: capital accounts and guaranteed payments
A partnership files Form 1065, an annual information return, but does not pay income tax itself. It passes its profit or loss through to the partners on Schedule K-1. The IRS says partners are not employees and should not receive a Form W-2.
That changes owner pay. The Form 1065 instructions describe guaranteed payments as payments to a partner for services or for the use of capital that are figured without regard to partnership income, and the return reports them on their own line (line 10). They are recorded and reported separately from distributions, so the books need their own account for each.
The equity section also changes. Each partner needs a capital account that tracks contributions, their share of income or loss, and distributions. The instructions ask the partnership to report each partner's capital account on Schedule K-1 using the tax-basis method, so books that track each partner separately save your CPA a reconstruction at year end.
| Bookkeeping item | Single-member LLC (disregarded) | LLC taxed as a partnership | S corporation |
|---|---|---|---|
| Federal income tax return | Owner's Form 1040, usually Schedule C | Form 1065, with a Schedule K-1 for each partner | Form 1120-S, with a Schedule K-1 for each shareholder |
| How owners are paid | Owner draws, which are not deductible wages | Guaranteed payments and distributions; partners are not employees | Reasonable wages through payroll for owner-employees, then distributions |
| Equity accounts | Owner investment and owner draws | A capital account for each partner | Stock, retained earnings and distributions by shareholder |
| Owner payroll | None for the owner | None; partners do not get a W-2 | Yes: withholding, payroll returns and a W-2 |
| Extra records the CPA needs | Asset purchases, mileage and home office records | Each partner's contributions, distributions and guaranteed payments | Shareholder loans, distributions and basis details for Form 7203 |
S corporation: owner wages, distributions and basis
An S corporation files Form 1120-S and also passes income through to shareholders on Schedule K-1. The difference is owner pay. The IRS says an S corporation must pay reasonable compensation to a shareholder-employee for services before making non-wage distributions, and it can reclassify distributions as wages. It lists factors such as training and experience, duties and responsibilities, and time devoted to the business. The amount is your CPA's call. The books record it as payroll, with withholding, payroll returns and a Form W-2, and record distributions separately from wages.
Two more S corporation items reach the books. The IRS says health insurance premiums paid for a shareholder-employee who owns more than 2 percent are deductible by the corporation and reportable as wages on that person's W-2. And shareholders use Form 7203 to figure their stock and debt basis, so contributions, shareholder loans and distributions need to be recorded clearly, by shareholder.
What to set up in the books for each
Whatever the classification, the setup work happens in the chart of accounts, the bank accounts and the payroll system. A checklist that holds up for most small businesses:
- Every classification: a business bank account and card used only for the business, and an equity section that matches how owners put money in and take it out. See a chart of accounts you'll read.
- Single-member LLC: owner investment and owner draw accounts, and an EIN-based payroll setup if you hire employees.
- Partnership: a capital account and a distributions account for each partner, a guaranteed payments account, and a written record of each partner's contributions.
- S corporation: payroll for owner-employees at the amount your CPA sets, a distributions account for each shareholder, and loan accounts with written terms for any money shareholders lend the company.
- Any change of classification: a clean cutover date, with the equity accounts closed or restated at that date as your CPA directs.
Weighing the bookkeeping side
Neither structure is simpler for everyone. A disregarded single-member LLC usually has the lightest books: no owner payroll and one return. A partnership adds a capital account for each partner and a separate return. An S corporation adds owner payroll, payroll returns and basis records. Those added costs are one input to the decision, and your CPA weighs them against tax and legal factors this guide does not cover.
If you are changing classification, timing matters to the books. The IRS says an election on Form 8832 generally cannot take effect more than 75 days before it is filed or more than 12 months after. Whatever the date, the books need to switch on that date.
Setting up the equity accounts, owner payroll accounts and reports for a new classification is part of small business bookkeeping and QuickBooks setup and cleanup. Running payroll and filing the returns are separate jobs; name who does each in writing. For how the accounting method interacts with all of this, see cash vs. accrual accounting.
