LLC stands for Limited Liability Company, and it’s one of the most common business structure in the U.S. An LLC, and any other business structure is eligible to open a solo 401k. However, there’s a small difference in how employer contributions get calculated depending on if your LLC is incorporated or taxed as a sole proprietorship.
What is an LLC?
An LLC is a kind of business structure in the U.S. that protects owners from personal responsibility for debts and liabilities. An LLC provides business owners with the same liability protections as a corporation, without the paperwork, board meeting, and record keeping requirements. It’s easier to set up an LLC than a corporation, but provides more flexibility in members and taxation options.
Any size of business can be an LLC, not just small businesses. For example, Johnson & Johnson and Alphabet (parent company of Google) are all structured as LLCs. An LLC can either be taxed as a corporation or as a sole proprietorship. Depending on which one your LLC is structured as, the solo 401k contribution limits can slightly differ.
Can an LLC open a solo 401k?
Yes, a business owner operating under an LLC is eligible for a solo 401k. In fact, any business entity can be eligible as long as they meet the two eligibility rules:
- Must have self-employment activity
- Must not have any employees, including part-time employees who are at least 21 years of age, and have worked over 500 hours per year for 3 consecutive 12-month periods (excluding their spouse).
As long as your LLC has no employees, you can make contributions to a solo 401k plan. Your spouse is the only exception to the no-employees rule. Your spouse is allowed to work as many hours as they want in your business, and you’ll both be eligible for your own solo 401k plans.
An LLC with any form of income qualifies for a solo 401k. There are no income limits. Whether your LLC makes a few hundreds on the weekends, or pulls in six-figures per year, all income levels count as self-employment activity.
Also read: Can an S corporation open a solo 401k?
Solo 401k contribution limits for an LLC depends slightly on whether your business is incorporated or not incorporated.
If your LLC qualifies for a solo 401k, here’s how much you can contribute in 2023.
The solo 401k contribution limit for 2023 is $66,000. If you’ll be over the age of 50 by December 31, 2023, you get an additional $7,500 in catch-up contributions, bringing your total contribution limit to $73,500.
- As an employee, you’re allowed to contribute 100% of your income up to a maximum of $22,500 ($30,000 if age 50+).
- As an employer, your contribution limit depends if your LLC is taxed as a corporation or as a sole proprietorship.
Is your LLC taxed as a corporation or as a sole proprietorship?
- If your LLC is taxed as a corporation, you can contribute up to 25% of your compensation.
- If your LLC is taxed as a sole proprietorship, you can contribute approximately 20% of your compensation.
Employer contributions must always made with pre-tax dollars into a traditional solo 401k account. Employee contributions can be pre-tax or Roth.
What if my LLC has partners?
If your LLC has multiple members, you can still open a solo 401k. Your plan provider will have to create a special solo 401k plan, where the other members are excluded from your plan. You and your spouse are the only ones who can act as the trustees of your solo 401k retirement account.
What if my LLC has employees?
If your LLC has employees, you won’t qualify for a solo 401k if they are at least 21 years of age, and have worked over 500 hours per year for 3 consecutive 12-month periods. Your spouse is the only one who can work in your business full-time.
You’re still allowed to hire employees who are:
- Part-time employees who work under 500 hours per year.
- 1099 contractors.
- Under 21 years old.
- Union employees.
- Non-resident alien employees.
How to open a solo 401k as an LLC?
Here are the steps to opening a solo 401k plan as an LLC.
- First, choose your plan provider (like Carry). Each solo 401k plan provider offers different benefits. For example, not all plan providers have a Roth option. Make sure the provider offers each benefit that you’re looking for.
- Get an EIN. You’ll need an Employer Identification Number to open a solo 401k for your business.
- Fill out an application and plan adoption agreement with your chosen plan provider.
- Get another EIN for your newly made, solo 401k trust. Your solo 401k trust is now the owner of all investment assets in your solo 401k plan. Therefore, it needs to have its own EIN in order to open its own bank and brokerage accounts.
- Open bank and brokerage accounts for your solo 401k trust. If your plan provider offers a Roth option, then you’ll need to have separate bank and brokerage accounts for your traditional solo 401k and your Roth solo 401k.
- Start investing.
If you open an Carry Solo 401k, most of the plan documentation is taken care of right from your dashboard. You’ll also get access to an integrated investment platform, so you don’t have to open separate bank and brokerage accounts elsewhere.