S-Corp, C-Corp or LLC

I apologize if this is not relevant to this group.  I am a software consultant. I work through my LLC. My LLC has a Solo 401K plan in which I contribute $19500 + 25% profit as per the law. Unfortunately, my wife legally cannot contribute to this plan because she doesn't work for this company. But we want to maximize her retirement contribution. So, we are considering to buy a business (thinking to buy a Laundromat at this moment) for her so that she can contribute to the retirement plan. Considering this situation, which type of company should we open to run the business - S-Corp, C-Corp, LLC or partnership ? I understand I need to talk with a CPA, but I want to enhance my knowledge even before talking with a professional. 

One more thing: We have significant medical expenses. We bought health insurance from the marketplace. We have a HSA account where we contribute the maximum. But that is not enough to cover our medical expenses. I have read about HRA. I also learned that in some cases HSA and HRA are compatible. Which business type will be good to open a HRA ? Is there any example for this ?

Please advise considering both the situations.

Is this the same question you asked earlier?  If so, it is very inefficient to ask it twice.  However, if you need to add information to the original question, please use the Edit feature.

39 minutes ago, david rigby said:

Is this the same question you asked earlier?  If so, it is very inefficient to ask it twice.  However, if you need to add information to the original question, please use the Edit feature.

This is completely a different question. Please feel free to read. This is about right business type for maximizing retirement contribution and a HSA/HRA question.

10 hours ago, Blue_Sky said:

Considering this situation, which type of company should we open to run the business - S-Corp, C-Corp, LLC or partnership ?

From a retirement plan standpoint, it doesn't matter.  Max contributions devolve to pretty much the same number.  I doubt a C Corp is advisable (you have to carefully zero out corporate income otherwise there is corporate tax) and I doubt an S corp is worth the trouble of setting up that separate entity and then having to take payroll to make retirement plan contributions.  Most, or at least many, people who are setting up a partnership or sole proprietorship these days do so an LLC and then elect to have the LLC taxed as a partnership, or a sole proprietorship as applicable or desired.  If you are not worried about liability (and I think that risk is somewhat overblown but that is a different discussion) then you can skip the shell Limited Liability Company and just set up a partnership or sole proprietorship.

I don't know the answer about HSA and HRA combo.  My business (C corp) has both and when I researched it a few years ago I determined it was ok, but not crystal clear.  I don't remember the details on the reasoning.  It might be a little agressive - someone might come along and say that it's not ok.  (I have no problem telling someone they need to hire a retirement plan professional for that stuff while not doing the same myself for other stuff.  ?)

10 hours ago, Blue_Sky said:

So, we are considering to buy a business (thinking to buy a Laundromat at this moment) for her so that she can contribute to the retirement plan.

Just be aware (in case you weren't already) that if this business has any employees, nondiscrimination testing applies and you may be required to contribute on behalf of the employees.

8 hours ago, C. B. Zeller said:

Just be aware (in case you weren't already) that if this business has any employees, nondiscrimination testing applies and you may be required to contribute on behalf of the employees.

I am sure there will be employees. So, what is the solution ? Can we not contribute to SEP IRA ? I guess, we cannot. Me and/or my wife will be the only owner/s. I think solo 401 k is not appropriate, right ? I am so confused....

8 hours ago, Bird said:

If you are not worried about liability (and I think that risk is somewhat overblown but that is a different discussion) then you can skip the shell Limited Liability Company and just set up a partnership or sole proprietorship.

I will certainly have to consider the liability part as there will be business loan. 

15 hours ago, Blue_Sky said:

I am sure there will be employees. So, what is the solution ? Can we not contribute to SEP IRA ? I guess, we cannot. Me and/or my wife will be the only owner/s. I think solo 401 k is not appropriate, right ? I am so confused....

And be aware that - if you decide to buy a laundromat (or whatever business venture) because you think it is a good investment, and it has employees and you decide not to install a plan there because they would have to be covered and it would be too expensive - nondiscrimination testing will apply across all (both) of the businesses.  It doesn't matter if you own one and your wife the other or jointly, they all get treated as one business because of attribution of ownership between spouses.  Effectively, it means you would have to cover the employees, probably at the same 25% employer contribution rate in your own "solo" k.  

Blue_Sky, the problem is that many of these questions CAN be answered in a conversation, but it's incredibly difficult to walk someone through all the permutations via a message board. Talk to your CPA or do a search for a local Third Party Administrator (TPA) to assist.

On 10/30/2020 at 9:19 AM, Bird said:

Effectively, it means you would have to cover the employees, probably at the same 25% employer contribution rate in your own "solo" k.  

So, which retirement option and business type will cover only the employers ?

1 hour ago, Blue_Sky said:

So, which retirement option and business type will cover only the employers ?

Under certain circumstances, none - that's the point.  If you want a qualified plan (one where you get deductions to reduce income) and you have eligible employees, you can't arbitrarily exclude them (I'm being very general here).  The question is too open-ended to answer well.  As Bill Presson notes, you need to talk to someone who is knowledgable about plans - likely not a CPA - who can look at your existing plan and evaluate it for booby traps, before you buy or start another business.

4 hours ago, Blue_Sky said:

So, which retirement option and business type will cover only the employers ?

You are always free to max out an IRA for you and your wife.   But if you are looking for a plan that allows you two to put in $10ks with pre=tax dollars and nothing for employee that doesn't get any benefit that basically doesn't exist.    That is the government "price" to give you the nice tax benefits, you have to share with the employees.  

If you are willing to give your employees say a 3% of pay contribution which isn't all that expensive you open up a lot of options in the form of a Safe Harbor 401(k) plan.    If you are willing to do that once again visit a local CPA or TPA and they can help you come up with a plan to maximize what can be done at the lowest cost to you in regards to the employees.   But the employees getting nothing isn't really going to happen. 

Okay, I understood. How about this ? If I have W-2 and 1099 hourly contractors/employees and my wife works there as a 1099 contractor, can she contribute in sep ira ?

Here is the problem with you newest idea.

The decision if a person is a employee or independent contractor isn't arbitrary nor is it something you just decide or negotiate.  There are laws that define who is an employee or an independent contractor (by the way a 1099 employee is an oxymoron.  If you get a 1099 you are never an employee.  If you are an employee you get a W-2 always).  While the laws on this have their grey areas it isn't as simple as saying you are an independent contractor.  

I will gladly concede there are plenty of places that misclassify their people in this regard and get away with it.  However,  as a matter of law you need to figure out if you will have employees or independent contractors.  

If you don't have employees you don't have an issue as they don't have to be covered by a 401(k) plan.   If you misclassify your employees and the IRS figures it out they will drop the boom on you.  My first job out of college was with the IRS and they trained us to look for misclassified employees as a standard part of an audit of a small company.  

Your choice on this one.  

2 hours ago, ESOP Guy said:

Here is the problem with you newest idea.

The decision if a person is a employee or independent contractor isn't arbitrary nor is it something you just decide or negotiate.  There are laws that define who is an employee or an independent contractor (by the way a 1099 employee is an oxymoron.  If you get a 1099 you are never an employee.  If you are an employee you get a W-2 always).  While the laws on this have their grey areas it isn't as simple as saying you are an independent contractor.  

I will gladly concede there are plenty of places that misclassify their people in this regard and get away with it.  However,  as a matter of law you need to figure out if you will have employees or independent contractors.  

If you don't have employees you don't have an issue as they don't have to be covered by a 401(k) plan.   If you misclassify your employees and the IRS figures it out they will drop the boom on you.  My first job out of college was with the IRS and they trained us to look for misclassified employees as a standard part of an audit of a small company.  

Your choice on this one.  

Well, there can be W-2 contractors with no benefit at all in a company. There can be 1099 contractors as well in the same company. I worked many times as a W-2 contractors with no benefits.

Thoughts ?

18 minutes ago, Blue_Sky said:

Well, there can be W-2 contractors with no benefit at all in a company. There can be 1099 contractors as well in the same company. I worked many times as a W-2 contractors with no benefits.

Thoughts ?

A W-2 contractor is a contradiction in terms. W-2 is the wage statement provided to employees.

What you might be thinking of is a situation where you are doing work for company A using their equipment and facilities but you are getting a paycheck and a W-2 from company B. Company A has a contract with company B where they agree to pay them for some employees for a period of time. In this case you are a common law employee of B and what is known as a "leased employee" of company A. Leased employees are still required to be included in plan testing (the technical term is they are "non-excludable"); however, many employers, especially large ones, will exclude them anyway but still be able to pass the coverage test.

17 hours ago, Blue_Sky said:

Well, there can be W-2 contractors with no benefit at all in a company. There can be 1099 contractors as well in the same company. I worked many times as a W-2 contractors with no benefits.

Thoughts ?

No, people might have been sloppy with their terms but you are either an employee and you get a W-2 or you are an independent contractor and you get a 1099.   You can have leased employees but they are employees.   You can have some  interesting arrangements with Profession Employee Organizations (PEO) but those people are still someone's employee. 

The determination if you are an employee isn't based on you getting benefits.   You determine if you have an employee or not and then you work through the benefits issues.  You can have employees without benefits because most benefits are mandatory as long as you give them to no one.  

You could also convince me that someone treated you as some kind of odd mix contrary to the law.  As I said a lot of people misclassify people and get away with it.  

2 hours ago, ESOP Guy said:

No, people might have been sloppy with their terms but you are either an employee and you get a W-2 or you are an independent contractor and you get a 1099-R. 

Probably not an "R", but yes, a 1099.

10 minutes ago, david rigby said:

Probably not an "R", but yes, a 1099.

Yes, too much time in the retirement world.

I have edited out the error.