QuickBooks/Tax Question

[Koss]

Multi-member LLC makes the election to be an S Corp.

When setting up a new company in QuickBooks, would you select--

Multi-member LLC (Form 1065)

or

S-Corporation (Form 1120S)
[A corporation that has elected to pass liability to its shareholders]

Neither option seems correct.

If you choose the LLC, then QuickBooks assumes that the entity will file Form 1065, which is not the case.

Selecting the S-Corp option associates the company with the correct tax form (1120S), but the description is inaccurate. An LLC that has made the S election is not "a corporation that has elected to pass liability to its shareholders." Under state law, it will always be an LLC.

Here's what concerns me:

When using QuickBooks to prepare financial statements, do we want it set up as an LLC or as an S Corp?

BMK

[MilTaxEA]

I set them up as an S-Corp. If you select MMLLC, then it will create the accounts assuming it is being treated as a partnership. Choosing S-Corp will create the correct accounts (with a little tweaking) and the expense/income accounts can automatically flow to the correct lines on your 1120S.

[Koss]

LLC as S Corp

Thanks for your reply.

My question is:

If we set it up as an S corp, and then we generate a balance sheet or other financial statements in QuickBooks, these statements will make it look like a corporation. It will refer to shareholders and capital stock.

While these are the correct accounts for tax purposes, is it appropriate to do this on a financial statement? The company is and always will be an LLC under state law. So it doesn't really issue stock, and it doesn't have shareholders. It has members, and the members own membership interests, not stock.

In general accounting, is it still appropriate to refer to the members' capital accounts, even though there is no reference to such an account on a K-1 for an S-corp?

I don't do a lot of general accounting work, and I think I'm getting confused about whether the tail is wagging the dog...

Does the tax classification determine how we do the general accounting, and how we prepare the general financial statements?

BMK

[S T]

Quickbooks likes to set up a "Standard" from pre-defined Accounts, but you can Change by Opening "Accounts" and you can edit Account Name and any description you would like.

The toggle for Tax Forms is strictly for the Form # - For Financial's as in Profit and Loss or Balance Sheet, would reflect your own personalized Description.

Sandy

[Koss]

LLC vs. S Corp

The toggle for Tax Forms is strictly for the Form # - For Financial's as in Profit and Loss or Balance Sheet, would reflect your own personalized Description.

You're kind of confirming what I'm concerned about. This is more of an intellectual exercise. The LLC in question is microscopic, so we're not going to be filing financial statements with the SEC, or any other regulatory agency. Right now the LLC is not seeking financing, so there aren't even any bankers involved.

But down the road, I can see someone generating a balance sheet from QuickBooks, and then getting a call from the banker, who may ask, "How can this company have shareholders if it is an LLC? An LLC doesn't issue stock."

Of course, the banker presumably would also be looking at the most recent 1120S, so maybe it would make sense somehow. Maybe it doesn't really matter in most cases.

But I'm still stuck on the fact that the company remains an LLC under state law. It is state law that governs whether a company can issue stock. And the LLC operating agreement governs the mechanism for transferring members' ownership interests.

Making the S election does not transform the LLC into a corporation. And quite frankly I think a lot of people do not understand this. The LLC certainly has limited liability, and it is considered an S corp for federal tax purposes. But under state law it remains an LLC. So I think we have to be careful about how we characterize it on financial statements and other documents that are not tax returns.

BMK

[BHoffman]

'Member this

Hi Burton - I agree that people get confused about LLCs and the fact that they are not legal corporate entities.

The financial statements would clearly show "LLC" in the Company Name header, so the business is identified. I'd be pretty scared of a banker who didn't understand S elections and how they are treated.

If the engagement calls for notes and disclosures, then the S election would be disclosed.

There should be no reference to "shareholders" on the financials as they are called "members". One of the differences in financial statement presentation would be that Retained Earnings should be called "Members' Equity". The placement of the apostrophe changes for those SMLLCs (Member's). I usually show the current year drawings as a contra account in equity because the users of statements I prepare are interested in that.

Let's talk about Additional Paid In Capital and LLCs with S Elections another day. That's always fun

[Hamacher]

My take

I assume your not preparing reviewed or audited statement with full disclosures, etc. If that is true, you can do what I do. I prepare all financial statements on the tax basis. That way you can be consistent. Just make sure that you change your heading to read Statement of Income - Tax Basis and Balance Sheet - Tax Basis. That way there is no confusion.

My $.02