LLC adopts a 401k plan

[Santo Gold]

I have a small LLC that wants to adopt a 401(k) Plan. The only 3 people who work at the company are the 3 owners and all 3 will contribute to the 401(k).

Since LLC owners do not have a salary, but rather take "draws" during the year, they should still be able to make 401(k) contributions from these draws correct? For example, an owner takes monthly draws of $5,000 and therefore has $60,000 in compensation for the year. He also plans on having $500 deposited as a 401(k) contribution each month. Can he do this on a monthly basis or does he have to wait until after the end of the year, have his income determined, and then make a 401(k) contribution all at once at that time?

Thanks

[Guest Eric.]

I have a small LLC that wants to adopt a 401(k) Plan. The only 3 people who work at the company are the 3 owners and all 3 will contribute to the 401(k).

Since LLC owners do not have a salary, but rather take "draws" during the year, they should still be able to make 401(k) contributions from these draws correct? For example, an owner takes monthly draws of $5,000 and therefore has $60,000 in compensation for the year. He also plans on having $500 deposited as a 401(k) contribution each month. Can he do this on a monthly basis or does he have to wait until after the end of the year, have his income determined, and then make a 401(k) contribution all at once at that time?

Thanks

Since all 3 are owners and they are the only ones working there, it sounds like a self-employed 401k arrangement would fit well and the contributions are deducted from their income from the business to arrive at their taxable income (because yes, you are correct, there is no "salary payment").

There are a couple other alternatives - but based solely on the simple facts provided, the arrangement above sounds appropiate.

[K2retire]

LLCs have a choice to be taxed as either a corporation (in which case your owners should have W-2 wages) or partnerships (in which case your owners would effectively be self employed).

In most cases the monthly draw is irrelevant to the calculation of their income. Even if they are withdrawing $60,000 a year, if there is a net loss, they have no earned income from which to make deferrals.

[Guest Eric.]

As k2retire noted - yes, multi-member LLC's can elect to be treated as corporations or partnerships. My response naturally assumes they elected to be treated as partners, as the original question states the owners are not taking salary, but are taking draws.

[WDIK]

In most cases the monthly draw is irrelevant to the calculation of their income. Even if they are withdrawing $60,000 a year, if there is a net loss, they have no earned income from which to make deferrals.

(For emphasis only.)