There seems to be some confusion around what business entities are eligible to open a solo 401k account. Because it's called a "solo" 401k, and also often referred to as an individual 401k or a one-participant 401k, many people assume that the plan is only for sole proprietors.
The good news is, that’s false. Whether you operate as a sole proprietorship, partnership, single-member LLC, multi-member LLC, S corporation, or C corporation, any business entity is eligible to open a solo 401k.
The “solo” or “individual” in the name refers to business activity, not business structure.
What does that mean?
The “solo” refers to the requirement that you must not have any employees in your business that work over 1,000 hours per year. The type of business you have doesn’t matter.
A solo 401k only has two requirements:
As long as you have no employees, you’re allowed to open a solo 401k. The only exception to this rule is your spouse. Your spouse is the only person allowed to work in your business for over 1,000 hours per year. And if they do, they can also open a solo 401k and your household can essentially double your contributions each year.
However, while any business entity can have a solo 401k, there are some key differences, particularly around contribution limits on the employer side.
Let’s take a look at each one.
A sole proprietorship is the simplest business structure to have. If you open a business, and you're the only owner, you're automatically a sole proprietorship by default (even if you don't register your business with the state).
But just because you have a sole proprietorship, it doesn't mean you automatically qualify for a solo 401k by default (which is what many people falsely assume). Despite its name, a sole proprietorship CAN hire employees.
A sole proprietorship can only open a solo 401k if it doesn't have any employees that work over 1,000 hours per year in their business (excluding their spouse).
Another assumption with the solo 401k is that any business with partners or multiple owners are disqualified.
You can open a solo 401k even if you operate as a partnership. The rule that your business must have no employees ONLY applies to employees. Partners are allowed.
In fact, this works the same way even if you have a different business structure (like an LLC, s-corp or c-corp) that has multiple partners.
To apply for a solo 401k as partnership, your plan provider will create a customized solo 401k plan that simply excludes them from the plan.
You can open a solo 401k as an LLC, as long as you have no employees that work over 1,000 hours in your business (excluding your spouse).
This is true whether you operate as a single-member LLC or as a multi-member LLC. For multi-member LLC's, your plan provider will simply exclude their roles from your solo 401k plan.
With an LLC, your contributions depend on whether you get taxed as a sole proprietorship or as a corporation.
For an LLC taxed as a sole proprietorship
For an LLC, taxed as a corporation
Business owners operating an S corporation can open a solo 401k if they have no employees.
However, only earned income is eligible. Distributions you receive as a shareholder do not count.
Business owners operating a C corporation can also open a solo 401k as long as they don't have any employees in their business.
As with an S corporation, only earned income is eligible. Distributions you receive as a shareholder do not count.
The assumption that only sole proprietors can apply for a solo 401k is false. Even sole proprietorships become ineligible for a solo 401k once they hire full-time employees.
A business owner with any business structure can open a solo 401k, as long as they have no employees that work over 1,000 hours per year in their business (excluding their spouse).
There are no age, income, or business structure restrictions.
And, all business entities receive the full tax advantages and perks of a solo 401k account. It's not like one type of business structure receives better perks than another.
However, there are some minor differences in how the contribution limits are calculated for each one.
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