LLC, S Corp, or Sole Proprietor: Which Retirement Plan Fits Your Business
You picked your business entity based on liability, taxes, and maybe what your accountant suggested at the time. An LLC because it was easy. An S corp when someone told you it saved on self-employment tax. A sole proprietorship because you were just starting out and kept meaning to formalize it. What you probably didn't know is that the entity choice you made years ago also decides which retirement plans you can use and how much you can put away. And for most owners, that's the difference between saving $23,500 a year and saving $200,000 or more.
The solo 401(k): your baseline plan
A solo 401(k) is available to any self-employed person with no full-time employees besides a spouse. That includes sole proprietors, single-member LLCs taxed as sole proprietorships, and S corp owner-employees.
The math works the same across entity types at the employee level. You defer up to $23,500 in 2026, plus $7,500 if you're 50 or older. On top of that, the business contributes a profit-sharing contribution of up to 25% of compensation. The combined total caps at about $69,000 for the year ($76,500 with catch-up).
But here's where the entity choice matters. For an S corp, your profit-sharing contribution is calculated on your W-2 wages, not on the full business profit. If your reasonable compensation is $100,000 and the business clears $400,000, your 25% profit share is capped at $25,000, not at the $69,000 ceiling. That leaves a gap between what the law allows and what your entity structure actually delivers. We covered this interaction in detail in a recent post on how your entity choice caps your solo 401(k).
A sole proprietor or single-member LLC doesn't face that cap. Your profit-sharing contribution is based on your net self-employment earnings, which is the full business profit minus the deduction for half the self-employment tax. So the same $400,000 of profit lets you contribute more.
The SEP IRA: simple but limited
A SEP IRA works for any entity type and is the easiest plan to set up. You contribute up to 25% of compensation, capped at about $69,000 in 2026. The appeal is speed: you can open and fund a SEP as late as your tax filing deadline, including extensions.
The limitation that catches owners by surprise is the employer contribution requirement. When you contribute 25% of your own compensation, you must contribute the same percentage for every eligible employee. A solo practice with two staff members means the 25% contribution applies to their wages too. That cost can make the SEP IRA more expensive than it looks on paper.
A SEP IRA looks attractive at $150,000 in profit and no employees. At $400,000 with two staff, a solo 401(k) or a safe harbor plan usually works better.
The cash balance / defined benefit plan: the six-figure option
This is the plan that changes what is possible. A cash balance plan is a type of defined benefit plan that works like a hybrid: the business contributes to a hypothetical account for the owner, and the owner draws it at retirement. The annual contribution is not capped at $69,000. It can reach $150,000 or more, depending on age, compensation, and how the plan is designed.
This plan works best with an S corp because the contribution is a business deduction that reduces your corporate income. The contribution math also benefits from the W-2 structure: your plan is designed around your compensation as a percentage of total payroll, and a clean S corp with a defined compensation running through payroll produces the most predictable result.
We've walked through how a cash balance plan adds $150,000 beyond the 401(k) ceiling and how pairing it with the right entity structure unlocks the full retirement deduction for owners over 50.
Who shouldn't use a cash balance plan? Anyone with volatile income that can't sustain the required annual contribution. Once the plan is in place, the funding commitment is mandatory. Owners with many full-time employees also face a higher cost, because each employee must receive a contribution too.
What fits your entity type
Sole proprietor or single-member LLC. Your best starting point is a solo 401(k). You avoid the employee-coverage problem of a SEP, and your profit-sharing contribution is based on full net earnings rather than W-2 wages. If your profit consistently exceeds $300,000 and you're 50 or older, a cash balance plan layered on top of the solo 401(k) can add significant retirement savings. Talk to a San Diego tax strategist about whether the math works for your situation.
S corp owner-employee. Your solo 401(k) contribution is capped by your W-2 wages. That makes the cash balance plan a natural second move. The plan deduction reduces the S corp's taxable income at the entity level, and the required contribution is a fixed obligation that works well when your compensation is predictable. Reviewing your reasonable compensation first is critical, because a salary that is too low pinches the plan contribution.
Multi-member LLC taxed as a partnership. Your options include a SEP IRA, a defined benefit plan, or a 401(k) with a profit-sharing component. The complicating factor is coverage: any plan must offer comparable benefits to all partners. A cash balance plan still works, but the design has to account for every partner's age and compensation.
All three entity types share one truth: maxing the 401(k) isn't the ceiling. It's the floor. The 60% tax trap that catches high earners in retirement is driven partly by the assumption that taxable income in retirement will be lower than during working years. That assumption holds when you only saved through a 401(k). It doesn't hold when you used a defined benefit plan to build a material retirement balance inside a tax-deferred structure.
The question isn't whether you can save more. It's whether your entity structure has been designed to let you.
FAQ
What is the best retirement plan for small business owners?
The best plan depends on your entity type, profit level, age, and whether you have employees. A solo 401(k) is the strongest option for most sole proprietors and single-member LLC owners. A cash balance plan adds significant capacity for S corp owners who max out the solo 401(k). A SEP IRA is the easiest to set up but creates employee coverage costs.
What are the best retirement plans for LLC owners?
A single-member LLC taxed as a sole proprietorship can use a solo 401(k) or a SEP IRA. A multi-member LLC taxed as a partnership must use a plan that covers all partners equally. A cash balance plan works for either structure if profit supports the required annual contribution.
What are the best retirement plans for S-Corp owners?
An S corp owner can use a solo 401(k) but faces a lower contribution ceiling because the profit share is limited to 25% of W-2 wages. A cash balance plan is the best supplement, with annual contributions that can exceed $150,000 depending on age and compensation.
How do you retire if you own your own business?
Retiring as a business owner requires coordinating the sale or transition of the business with personal retirement savings. Entity structure affects both. A defined benefit plan can accelerate retirement savings in the final working years, and the business sale itself can be structured through an installment sale to spread the tax burden.
What is the $1000 a month rule for retirement planning?
The $1,000 a month rule estimates that every $1,000 of monthly retirement income requires roughly $240,000 in savings, based on a 5% withdrawal rate. For business owners, the number depends heavily on whether the entity structure and retirement plan choices have been optimized during the accumulation phase.
Ready to find out which retirement plan fits your entity structure? Book a free 15-minute discovery call with Roadmap Tax in San Diego. We'll look at your current setup and tell you which options you're leaving on the table. Call (619) 280-2700 or email info@RoadmapTax.com.
