Solo 401k in LLC? Or Sole Prop?

Question

Hi Im about to open a Solo 401k and am deciding on whether to open it with an LLC or just as a sole proprietorship.

I plan to buy real estate with it.  Any thoughts on which is better?  And what if I decide to take out leases instead of buying? thanks!!

Brian Eastman · Answer

@Noah Mencia

I want to be sure your actual question is being answered, as it is somewhat unclear.

Are you wondering if it makes a difference what the employer sponsoring the Solo 401(k) is - LLC or Sole Prop?  George has provided a very summary answer on that front.

Or, are you asking whether the plan itself needs to form a LLC for purposes of investing?  If so, this is not generally necessary as the 401k trust can directly hold title to assets, but can be beneficial for purposes of asset segregation in some cases.

George Blower · Answer

@Noah Mencia

From a solo 401k perspective either will work provided you are performing self-employment activity and don't have any full-time W-2 employees; however, if you are looking to maximize your solo 401k contributions, then an LLC taxed as an S-corp will be best because you are not required to deduct 1/2 of self-employment income tax before performing the solo 401k contribution calculation.

Dmitriy Fomichenko · Answer

Noah,

Since you are currently operating as a sole-proprietor that is how your plan should be established. If later you decide to incorporate the plan can be amended at that time to reflect the change in plan sponsor. From the 401k perspective it doesn't make a huge difference, but from the tax perspective there might be significant benefits depending on your income and how your business is taxes. For that you should seek guidance from experienced tax professional.