Individual 401K LLC

A single-member LLC is disregarded for tax purposes, so she is, as you said, a sole proprietor.

One of the upper limits for her will be the net profit from the business, with appropriate adjustments for 1/2 self-employment tax and some other percentage calculations. Your income has no bearing on this whatsoever.

The funds themselves can come from anywhere, if that is what you are asking -- they don't have to come out of her business bank account (although for record-keeping purposes, that might be a good place).

To make this work, you have to establish a written plan before the end of the year. You can then make elective salary deferrals, also before the end of the year (hurry, you don't have much time left). You can also make employer profit-sharing contributions up to the due date of the tax return (she is considered both employer and employee in this case).

IRS Pub 560

has more details and a worksheet to use in Chapter 5. I recommend going to the web site of Fidelity or T. Rowe Price (or your favorite financial institution) and download the kit they provide, which will also have the various worksheets and forms you need to get started, and which are a little more user-friendly than the IRS publication.

As long as the plan assets remain under $100,000 you won't have to meet any further filing requirements. When the plan gets larger, or if she hires employees, or if she terminates the business, then there are some final filing requirements to be met.

-Mark Bole

While this is the default, and the way most people treat their LLCs, this is not the only possible tax treatment. LLCs can be taxed as corporations. (Included for completeness; not because the OP is treating the LLC this way.)

You may be thinking of IRS Pub 3402, that says "*Generally*, when an LLC has only one member, the fact that it is an LLC is ignored or 'disregarded' for the purpose of filing a federal tax return." Emphasis added.

But see also IRS FAQ - Keyword: Limited Liability Company (LLC), "If the LLC has only one owner, it will automatically be treated as if it were a sole proprietorship (referred to as an entity to be disregarded as separated from its owner) unless an election is made to be treated as a corporation. ... The election referred to is made using the Form 8832."

A plus for Price is that they offer Roth 401(k)s (think Roth IRA in 401(k) form - post-tax employee contributions, growing tax free).

Thanks to Rich Carreiro for pointing out that the law was recently changed to increase this to $250,000.

Mark Freeland snipped-for-privacy@sbcglobal.net

Mark,

Thanks for the reply.

Another question: With a sole member LLC, I don't really understand the concept of 'salary' or 'profit-sharing'. Would she be able to complete her taxes by mid-April and then put net profits into her 2006 individual 401K (up to the maximum allowed)? (This assumes she had created the plan in 2006.)

Dave S

Mark Bole wrote:

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