Solo401 for myself/spouse - want to start a new medical practice - options?

[jerseymd2010]

Hi all,

   My wife and I currently have our own separate solo-401k's with Fidelity.  We are sole proprietors and earn 1099 income for telemedicine/locums medical service work.  We get paid as ourselves with our own SSN's.  We created these solo401k's a few years ago and have EIN's for the retirement plans.  Question:  If we start a practice together, and start a practice under an LLC - what would be our options?  What happens to the existing solo401k's?  Would they need to be re-characterized?  We do not plan on having employees at this time or in the near future, and would be husband/wife as owners of a new medical practice with the LLC.  Also, the 1099 income would continue as previous.  All help appreciated.

[DaveF1006]

It depends. First of all, if you start a practice together, you can either operate as a partnership or a qualified joint venture. Please read this IRS publication that explores these options.

Asa new company, you will need to transfer/rollover your individual 401K into the new company. You may need to contact your plan(s) administrators for further guidance in this matter.

[Opus 17]

First, stop, and go to an expert for advice.

Second, if you form an LLC, your tax options shrink significantly.  If you do not register as an LLC, then you have the option of filing as a partnership (form 1065) or as a qualified joint venture (2 schedule Cs, each listing each partner's share of the income and expenses of the practice).  If you form an LLC, you MUST file as a partnership on form 1065, unless you live in a community property state, where can choose to file as a partnership or to file 2 schedule Cs as a disregarded entity.  Your schedule Cs would each list half the expenses and half the income, even if you don't divide the actual work 50/50.

https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-compan...

Filing as a non-registered qualified joint venture is basically what you are doing now, and any name change under state licensing rules will be ignored by the IRS.  Registering as an LLC makes a big difference in how you file your tax returns.

If you file as a 1065 partnership, each partner gets a K-1 statement that passes through that partner's share of income and expenses to the partner's personal tax return.  You would file a 1065 for the partnership and then include your separate K-1 statements on your joint married return instead of including separate schedule Cs, as you should be doing now.

If you form an LLC, and you have any assets belonging to your current schedule C businesses, they will have to be transferred to the LLC, and you will want an accountant to help you with that.

If you form an LLC, you have the option of filing with the IRS to be taxed as an S-corporation instead of a partnership.  This is a major decision that should not be undertaken without professional advice since it will change your business accounting in important ways. 

Finally, getting to your solo-401k question.  If you elect to be taxed as an S-corp, you become W-2 employees of the S-corp and the S-corp will have to establish a new qualified retirement plan.  There are also some additional rules you have to follow since you will be principal owners as well as employees.  If you leave your situation as a qualified joint venture, you don't have to change anything.  If you form an LLC and are taxed as a partnership, then I believe that you can keep your solo 401ks, and your contribution limits will be based on the income reflected on the K-1 statements.  But you should verify this with a competent professional. 

[jerseymd2010]

Hi, thank you for the response.  My sole proprietorship and my wife's sole proprietorship will remain intact even with the new company.  Can I not keep the solo401k's as-is?  What happens if I continue to receive the sole proprietorship income - and I continue to use that income only to fund the solo401ks?  Let's assume I make the following income: sole proprietorship - 100k, wife's sole proprietorship 100k, and the new 'joint LLC practice' makes 200k.   Can I not juse use the 100k earned for the sole proprietorship to fund the solo401ks?  Why must a new retirement plan be made if not using the partnership income?

[Opus 17]

@jerseymd2010 

You are correct that if you continue to have a sole proprietorship, you can continue to fund your solo 401(k) from that income, regardless of other jobs you might have.  It was not clear to me that you were going to keep your separate sole proprietorships in addition to creating this new venture.  You would only run into problems if you were working for, let’s imagine a hospital that offered a 403(b) plan, and you wanted to participate in the 403(b) plan and the solo 401(k) at the same time.  

The tax issues surrounding creation of an LLC remain as I outlined them.