S Corp Bookkeeping Requires More Work Than an LLC

When it comes to choosing a business structure, many entrepreneurs gravitate towards the simplicity of a Limited Liability Company (LLC) or the potential tax benefits of an S corporation (S corp). However, one crucial aspect to consider is the level of bookkeeping required by each. S corp bookkeeping demands more rigorous and technical bookkeeping compared to LLCs. Several specific factors contribute to this increased workload and includes:

1. Balance Sheet Preparation

One of the key differences in bookkeeping between an S corp and an LLC is the requirement for a balance sheet. If a business’ assets and receipts are greater than $250,000, S corps are required to include a balance sheet with their annual tax return, specifically on Form 1120S. This balance sheet must accurately reflect the company’s assets, liabilities, and shareholders’ equity. Preparing this document requires meticulous tracking of all financial transactions throughout the year to ensure that the balance sheet is accurate. Even if an S corp’s assets and revenue is less than $250,000, we have always included a balance sheet for S corps for reason two and three below.

In contrast, LLCs, particularly those that are single-member, don’t have the same stringent requirement. Many LLCs might prepare a balance sheet for internal use or for loans and credit applications, but it’s not a mandatory part of the tax filing process.

2. Tracking Distributions

S corps are unique in that they can distribute profits to shareholders in addition to paying salaries. These distributions must be tracked separately from other types of payments to shareholders, such as wages. Properly recording and tracking these distributions is crucial because it affects the shareholders’ basis in the company and can have significant tax implications.

Each distribution needs to be accurately documented to ensure that it complies with the IRS guidelines and that it does not exceed the shareholder’s basis in the company, which could result in additional taxes. This adds another layer of complexity to the bookkeeping process, as it requires ongoing monitoring of both distributions and the corresponding shareholder equity.

3. Equity Reconciliation and Rollforward

Equity tracking is another area where S corp bookkeeping becomes more demanding. Unlike LLCs, S corps must maintain precise records of shareholders’ equity, including any changes due to capital contributions, distributions, and retained earnings. At the end of each year, the equity accounts need to be reconciled to ensure that they accurately reflect the company’s financial position.

This reconciliation process can be complex, particularly if the S corp has multiple shareholders or if there have been significant changes in ownership or capital structure during the year. Each transaction affecting equity must be carefully recorded and reflected in the year-end balance sheet, requiring a detailed and methodical approach to bookkeeping.

From a tax return perspective, equity must “roll” from year to year. Meaning, prior year equity + current year income + current year contributions – current year distributions must equal end of year equity. If it doesn’t, something hasn’t been accounted for accurately.

4. Payroll and W-2 Reconciliation

One of the most significant administrative burdens for S corps is managing payroll for owners who are also employees. The IRS requires S corp owners to receive a “reasonable salary” for their work, which means the corporation must run payroll, withhold appropriate taxes, and issue W-2 forms at year-end.

Bookkeeping for an S corp involves ensuring that payroll records are accurate and that they reconcile with the amounts reported on the W-2 forms. Any discrepancies between financial statements, tax returns, payroll records, and the W-2 forms can lead to IRS penalties and increased scrutiny. This process requires careful tracking of all payroll expenses, tax withholdings, and benefits to ensure complete accuracy. Officers’ compensation on your P&L and tax return (Line 7 of 1120S) should reconcile to Box 1 of your W-2. The employer portion of payroll taxes (per the YTD pay register) should agree to “payroll taxes” on the tax return.

Conclusion

While both LLCs and S corps offer distinct advantages, S corps generally require more detailed and labor-intensive bookkeeping. The need for a formal balance sheet, precise tracking of distributions, equity rollforwards, and payroll schedule reconciliation all contribute to the increased workload for S corp bookkeeping. Business owners who opt for S corp status should be prepared for the additional administrative responsibilities or consider enlisting professional accounting services to manage these tasks effectively.

Choosing the right business structure involves balancing the potential tax benefits with the administrative demands. For those who prioritize simplicity and ease of management, an LLC might be the more suitable choice. However, if the tax advantages of an S corp align with your goals, understanding the associated bookkeeping requirements is crucial for maintaining compliance and ensuring long-term success.

The regulatory and compliance aspects of an S corp may seem daunting, but S Corp Advantages takes care of all of this for you, so you can save on taxes and focus on growing your business.