Advice for LLC setup in regards to Solo 401k

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s2kmw
Posts: 29
Joined: Mon Feb 23, 2015 11:50 am

Advice for LLC setup in regards to Solo 401k

Post by s2kmw »

I have been trying to figure out the best way to do this and the more I read, the more I get confused. I currently have a traditional-IRA for myself and spouse and would like to eventually set up a solo-401k for both us to 1) roll over the t-IRAs to make room for backdoor Roth and 2) to save more for retirement. I plan on getting 1099 income in the future and I would like to set up an LLC and wanted some advice as how to structure it. I am married and filing jointly, and not living in a communal property state. From what I have read so far, I can set up the LLC as:
1. single member LLC taxed as sole proprietor and have my wife as an employee, then set up solo 401k sub accounts for both of us
2. multi member LLC taxed as partnership with my wife and me as 50/50 owners, need to file 1065 and schedule k-1

Pro/cons for either way? Or would anyone have another suggestion? My goal would be to be able to set up solo-401k's for the both us to roll over the t-IRAs and to save more for retirement.

Thank you!
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: Advice for LLC setup in regards to Solo 401k

Post by Spirit Rider »

One other option.

3. No LLC, sole proprietor, filing as a Qualified Joint Venture. Each spouse files a Schedule C/SE combo and uses the results for their contributions. Essentially a pseudo-partnership without the complication of a partnership return. I believe LLCs are an overused business entity and could be better served with just business liability insurance.
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PaddyMac
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Re: Advice for LLC setup in regards to Solo 401k

Post by PaddyMac »

And another option: We used to be SP, but are now a General Partnership. The paperwork is very simple (one page), and free templates can be found online.

The benefit of being GPs instead of SP as Husband & Wife, is that you can decide what % of the profit is allocated to each partner and this is easily changed if need be. The advantage to uneven splits is that in a good year, you can pay one partner well over the SSN max and save on SE taxes. In a bad year, you could give the main breadwinner more income to boost their SS account.

Either way, Vanguard only requires that you have an appropriate EIN number - and SE income of course - to open a 401k.

By the way, as Sole Proprietors, we files one joint Schedule C and two Schedule SEs where we each took half the income.
Topic Author
s2kmw
Posts: 29
Joined: Mon Feb 23, 2015 11:50 am

Re: Advice for LLC setup in regards to Solo 401k

Post by s2kmw »

I read about qualified joint venture, but want the asset protection that an LLC would provide to separate from my personal assets in case something happens. May still do it if it's less headache compared to going the LLC route.

Any comments on the 2 scenarios I gave as far as comparisons of cost-effectiveness, amount/ease of filing taxes/paperwork, which scenario is easier to maintain?
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: Advice for LLC setup in regards to Solo 401k

Post by Spirit Rider »

LLCs only provide certain components of asset protection. Most credit you are going to get will require a personal guarantee of which the LLC will provide no barrier to creditors. You should still get business liability insurance. In my case many of my clients have required liability insurance regardless (and maybe especially because) you are a C-Corp, S-Corp, LLC. Many owners of LLCs at some point or another comingle credit and/or bank assets. Existing case law has shown that his can be used to pierce the LLC shield and determine that you and the LLC are one in the same.

There is a reason it is not called a No Liability Corporation. LLCs do not provide the magic shield that many think. Not to mention the increased costs. If I had it to do all over again, I probably wouldn't have established one.

I don't have any direct experience with options 1 or 2, but here are some basic effects of the differences.

Option 1:
You have the complexity of setting up and running payroll for the spouse. The retirement contributions are tied to a FMV wage and the number of hours of actual work.

Option 2:
You have the complexities of a partnership return. Provided that both partners meet the level of material participation in the business, the contributions can be based off of the substantiated allocation of income in the business.
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