Creating a new business to “hang” a Solo 401K on

[Ari Newman]

Hi All,

I'm trying to determine the best structure, and the necessary entities so that I can create a new Solo 401K (for me/wife) and rollover funds from my existing 401K. My current business (where the 401K plan exists) is a single member LLC, w/Scorp election and in a field not related to real-estate . In the real-estate world, my primary focus has been on rental properties, master-leasing, notes and the occasional quick-flip. I am looking to create a legitimate business, that would pay us a salary and also allow us to continue to make retirement contributions. I'd love some feedback on this idea:

Create a multi-member LLC, (me/wife; later on the kids?) and take the S-corp election. We would primarily act as a property management firm, but only manage properties that our other entities own. We would create management agreements (with ourselves), hold annual meetings, collect rent and pay ourselves a salary, file 1120-S Tax return, etc. The only downside to this scenario, is that most of the rent revenue would become ordinary income in the new company, instead of simply being an entry on schedule E. There might also be some other tax disadvantages that I'm not aware of. Other services that the new company would provide; Notary, project management, etc. All these would be ordinary income activities in my mind.

Given the type of business services that we would provide, is this the best course? Any other suggestions would be most appreciated!

Ari

[Nicholas Aiola]

@Ari Newman The structure you describe is fairly common but it's important to make sure it's the right structure for you based on your specific scenario. As you and @Carl Fischer both mentioned - converting passive rental income into ordinary income subject to SE tax by way of paying your PM company a management fee could be costly if the proper steps aren't taken or if your tax situation doesn't allow for any benefit of your proposed structure.

You also want to be sure an S Corp election is right for you. The main benefit of an S Corp is mitigating SE tax but there are associated costs (additional tax filings, payroll, etc.) and potential tax disadvantages (how will an S Corp affect your QBI deduction? What benefits are you intending to capitalize on - how will health insurance premiums, retirement contributions, etc. be affected?) that come along with it.

In order for this type of advice to be meaningful, you will have to work with a CPA who can dig into the numbers and have a conversation about your goals to ensure the structure is right for you and your business specifically.