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In 2020, I worked as a sole proprietor and kept a 'business' account for my earnings. These were taxed twice - both as personal income and business income. Beginning 2021, I created an LLC (with me the only employee) mostly for the tax advantage and to provide legal protection for personal assets.

When I setup the bank account for my LLC, the bank asked if I wanted to transfer the monies from my previous sole proprietor business account. I should've said no, but said yes. To access these funds now, I believe they need to be considered distributions, and pay capital gains tax. Does it matter that 1) these funds were already taxed twice, and 2) were earned prior to becoming an LLC?

The amount is $80k, and I'd planned to use that for personal expenses. This was possible as a sole proprietor, but I fear that I can't touch that money unless it's for business expenses, or subject to that capital gains tax. Feel like I've already set myself up with a major fail right out of the gate.

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    Sole proprietors only have personal income and are not taxed twice. Either you were not a sole proprietor in 2020 or you paid taxes that you shouldn't have.
    – new name
    Jan 28, 2021 at 18:21
  • Thanks for the comment, my wording was probably unclear. When saying "taxed twice" I'm referring to being taxed on my profits for both income taxes AND the 15% self-employment tax.
    – Kristin Paxton
    Jan 28, 2021 at 18:58
  • To fix other wording, I'm pretty sure capital gains tax doesn't apply here.
    – new name
    Jan 28, 2021 at 21:31

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"To access these funds now, I believe they need to be considered distributions, and pay capital gains tax. "

This is likely not the case. When you transferred personal money to the LLC, you should have recorded it as either a loan or some form of capital increase. Taking the money out should be considered a reduction of your assets in the LLC, not a taxable distribution.

However you may want to review whatever documentation you have from that point in time to be sure that you can record everything appropriately. As an example - did you intend for it to be a loan, but never charged the LLC interest for the use of your funds? Legal advice may be required to ensure everything is above-board.

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If you don't have an accountant already, I highly recommend that you get one to help you with this.

I assume you have or will elect to have your LLC taxed as an S-Corp. From your comment, it seems that your goal is to reduce self-employment tax and the only way to do that is to elect taxation as an S-corp.

Assuming this is the case, you should be able to undo the transfer of money to your company bank account as explained in the excellent answer by @Grade 'Eh' Bacon. You'll need an accountant's help to get this right.

You should also note that Trump created a 20% tax deduction for sole proprietors and LLCs with pass through taxation (i.e., not S-Corp taxation). If you elect S-Corp taxation you lose this tax deduction. There is thus less, if any, benefit to electing S-corp taxation with this Trump tax deduction. Though who knows how long the Trump tax deduction will last...

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