What Business Entities Can Open A Solo 401k?

Many business owners wonder what types of entities qualify for a Solo 401k. The name itself often creates confusion, leading some to believe it is limited to sole proprietors. In reality, the eligibility rules are broader than most people think.

This article explains which business entities can open a Solo 401k and highlights the key considerations for each structure. By the end, you’ll see how different entities fit within the rules and what that could mean for your retirement savings strategy.

Sole Proprietorship

A sole proprietorship is the simplest business structure. If you start a business and are the only owner, you are automatically considered a sole proprietor—even if you never register your business with the state.

Key points to remember:

✅ Being a sole proprietor does not automatically qualify you for a Solo 401k.

✅ A sole proprietorship may hire employees, which could disqualify you from the plan.

✅ You can only open a Solo 401k if you have no employees other than a spouse.

✅ Part-time workers are counted if they are age 21 or older and work at least 500 hours per year for two consecutive years.

Contribution Rules for Sole Proprietors

📝 Note: Sole proprietors do not pay themselves a W-2 salary. Contributions are based on adjusted earned income, which comes from Schedule C profit. This is calculated by:

This adjusted number is what determines how much you can contribute to a Solo 401k as both employee and employer.

Partnership

Many business owners assume that having partners automatically disqualifies them from a Solo 401k. That isn’t the case. Partnerships are eligible as long as there are no employees other than a spouse. Partners are not considered employees, so they do not trigger the restriction.

Here’s how it works:

✅ A Solo 401k plan for a partnership is drafted to exclude partners from employee status.

✅ The exclusion applies to their role, not their name. For example, the plan cannot say “Jim is excluded.” Instead, it states that partners are not included as participants.

✅ This structure keeps the plan compliant with nondiscrimination rules.

Contribution Rules for Partnerships

📝 Note: Partnerships do not issue W-2 wages to partners. Instead, each partner reports income on Schedule K-1 and calculates net self-employment earnings on Schedule SE. This figure determines how much you could contribute to the Solo 401k.

✏️ Hypothetical Example: 

Imagine a two-partner business with $150,000 in profit, split evenly. Each partner reports $75,000 on their Schedule K-1. After accounting for the self-employment tax adjustment, contributions would be based on this adjusted amount. 

Each partner could make employee contributions up to $23,500 (or $31,000 if age 50+), plus employer contributions of roughly 20% of their adjusted income.

LLC

An LLC can open a Solo 401k if it has no employees, other than a spouse. This includes part-time workers who are at least age 21 and have completed 500 hours of service per year for two consecutive years. 

Both single-member and multi-member LLCs qualify. In a multi-member LLC, the plan is drafted to exclude members from being treated as employees, which keeps the plan in compliance.

Key points for LLCs

✅ A Solo 401k is available to LLCs with no eligible employees.

✅ Both single-member and multi-member LLCs qualify.

✅ Multi-member LLCs must have plan documents that exclude members from employee status.

Contribution Rules for LLCs

If taxed as a sole proprietorship

If taxed as a corporation

✏️ Hypothetical Example: 

S Corporation

An S corporation can open a Solo 401k if it has no employees. Only earned income from the business counts toward contributions, not shareholder distributions.

Things to know about S corporations

✅ A Solo 401k is available if there are no employees.
✅ Only earned income qualifies, not shareholder distributions.
✅ Compensation is taken from W-2 wages (Box 1), with Box 12 pre-tax contributions added back.

Contribution Rules for S corporations

✏️ Hypothetical Example: 

If an S corporation pays the owner $90,000 in W-2 wages, the owner could contribute $23,500 (or $31,000 if age 50+) as an employee and up to $22,500 as an employer.

📝 Note: Distributions paid to you as a shareholder are not considered earned income for Solo 401k purposes and cannot be used to calculate contributions.

C Corporation

Business owners running a C corporation may also open a Solo 401k, provided the company has no employees. As with an S corporation, only earned W-2 wages qualify. Dividends or shareholder distributions are not considered eligible income for contribution purposes.

How contributions work with a C corporation:

✅ You can contribute up to 100% of your W-2 wages, capped at $23,500 ($31,000 if age 50+).
✅ As the employer, the business may contribute up to 25% of your compensation.
✅ The IRS calculates this based on your W-2 Box 1 wages, with Box 12 pre-tax contributions added back.

📝 Note: Contributions must come from W-2 wages, not from investment gains or dividends the corporation distributes.

✏️ Hypothetical Example:

If you pay yourself a W-2 salary of $80,000 from your C corporation:

In Summary

Solo 401ks are not limited to sole proprietors. Any business owner without employees (except for a spouse, who is always allowed to participate) can open one. Once employees meet the 500-hour and two-year rule, the plan no longer qualifies as a Solo 401k.

All eligible business structures enjoy the same tax benefits and investment options. The key difference is how contributions are calculated:

📌 For deeper insights into contribution strategies and plan features, check out our other articles:

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