Financing a company and not getting taxed on your initial budget?

Question

If I understand correctly, in most countries (but let's assume USA in particular). Let's say I'm a normal employee. I make money, pay my taxes, and save some. After a few years I have $200k saved. I decide to quit my job and start a LLC company. I make a company bank account and put $100k of my personal savings in that company bank account for the company to get started.

If I understand correctly at the end of the company's fiscal year it will get taxed on that $100k as company income (or whatever portion it hasn't spent). Even though I was already taxed when I earned the money I'm effectively getting taxed again.

Is this true? It seems strange to get double taxed. Once when I earned the money and again as my company when I gave it to my company.

Of course if my company has real income from sales or contracts (not just money from my personal account to the company bank account) then of course I'd expect to have to pay taxes.

Is this double tax issue normal? Is there a way around it? For example maybe, instead of putting $100k in the company account put only exactly as much is needed to run the company each month. Company needs $2k to pay rent this month then transfer $2k from personal account to company, company spends $2k, no income at company accrued.

It sounds painful to have to make those transfers every few weeks but of course it sounds worse if say after a year expenses are only $20k, there's $80k left in the company account (100% was my money before I transferred it) and now the government demands 20%-50% of that $80k

Is that just the way it is or is there some proper way to avoid it?

Answer 1

No, that's not true. The company is only taxed on its profits, which are broadly calculated as income minus expenses.

Your initial money, or any money you give the company in future, is not income, but an investment. You can either treat it as share capital (equity), or as a loan - a loan is probably better if you are the only owner as it makes it easier to get it back if you want it without being taxed again.

The exact details of how you do each of these things will vary by jurisdiction, but make sure you have your choice documented in writing to make it easier to prove to the tax authorities later.

Note that there may be an element of double taxation when you take profits out of the company: those profits will be taxed in the company (corporate tax) and then as income to you personally. The details will vary by jurisdiction and there may be some reliefs to reduce or eliminate the double taxation, or the tax rates in each case may be low enough to make this favourable anyway - often it makes most sense to pay yourself a small salary and pay the rest as dividends.