The first year of an LLC is when the habits that decide your tax outcome get set. The good news is that most of the important steps are inexpensive and easy to do early. The bad news is that most mistakes cannot be undone cheaply later.
1. Decide how the LLC is taxed
A single-member LLC is generally disregarded for income tax and reported on Schedule C, E, or F. A multi-member LLC is taxed as a partnership by default. Either can elect corporate treatment. Choose before the first tax year starts if you can, because election deadlines are strict. See single-member LLC tax filing, multi-member LLC tax filing, and LLC taxed as S corp.
2. Get an EIN when you need one
According to the IRS, an EIN is needed if the LLC has employees or owes certain excise taxes. A single-member LLC otherwise can use the owner's taxpayer identification number for income tax, though many owners get an EIN to open a bank account or because state law requires one. Multi-member LLCs need an EIN. Only apply through the IRS itself, since third-party sites sometimes charge for a free service.
3. Separate the money
- Open a business bank account and use it for all business activity.
- Use a business credit card for business expenses.
- Document owner contributions and draws, rather than paying personal bills from the business or the reverse.
- Separation protects your records and supports the liability protection an LLC is meant to provide.
4. Keep books from day one
Set up accounting software and reconcile monthly. A first-year backlog is the easiest one to avoid and the most expensive to fix. See monthly bookkeeping cost and what to do when your books are months behind.
5. Understand startup costs
Costs you incur before the business opens, such as market research, legal and accounting fees, and training, are treated as startup or organizational costs. Federal rules allow a limited amount to be deducted in the first year, with the remainder amortized over a set number of months, and the immediate deduction phases out when total costs are large. The exact amounts and election mechanics are in IRS Publication 583 and the Form 4562 instructions, so confirm the current figures with your preparer rather than relying on a rule of thumb.
6. Plan for estimated taxes
If you expect to owe tax when you file, you generally need to make quarterly estimated payments, including self-employment tax. New owners are commonly surprised by a first-year bill. See quarterly estimated taxes for LLC owners and how much to set aside for business taxes.
7. Cover state requirements
- Annual reports or statements of information, with deadlines that vary by state.
- State franchise taxes or LLC fees, which differ widely. California, Delaware, Texas, and Tennessee, for example, each treat LLC fees or franchise taxes differently.
- Sales tax registration if you sell taxable goods or services.
- State payroll registration if you hire employees.
- Local business licenses and permits.
8. If you hire
Employees bring payroll withholding, deposits, and quarterly filings. Even one employee triggers the obligations. See small business payroll services and watch worker classification carefully.
9. Keep records that support deductions
- Receipts and invoices with business purpose noted.
- Mileage logs for vehicle use.
- Home office measurements and use records, if claimed.
- Contracts, agreements, and the operating agreement.
10. The five costliest first-year mistakes
- 1Mixing personal and business money.
- 2Skipping estimated payments.
- 3Missing state annual reports and fees.
- 4Missing the S corporation election window when it would have helped.
- 5Failing to track startup costs and early purchases.
Do you need professional help? Read do I need an accountant for my LLC. Our tax planning service can set up your classification, estimates, and first-year plan. To schedule a consultation, tell us your state, your expected income, and whether you have partners or employees.
