Can I Start a New Business to Open a Solo 401(k)?

The Solo 401(k) has become one of the most powerful retirement plans available to entrepreneurs and self-employed individuals. It offers high contribution limits, flexible investment options, and the ability to invest in alternative assets. It is not surprising that many business owners look for ways to qualify for one.

One of the most common questions I hear is this: can I simply start a new side business, separate from my existing company, and use that entity to open a Solo 401(k)? On the surface, the idea seems straightforward. In practice, it is rarely that simple.

Many business owners assume that forming a new LLC automatically creates eligibility. What they often overlook are the IRS controlled group rules, which can significantly limit this strategy. If you do not understand how those rules apply to your structure, you may think you have a clean solution when in fact you have created a compliance problem.

Understanding these rules is not optional. Attempting to isolate a new business solely to avoid offering retirement benefits to existing employees can trigger serious issues.

What Is a Solo 401(k) and Who Can Establish One?

A Solo 401(k) is designed for self-employed individuals and owner-only businesses. To qualify, the adopting employer must meet two core requirements.

First, the business must have legitimate self-employment activity.

Second, the business cannot have any full-time non-owner employees who work more than 1,000 hours annually or two consecutive years of 500 hours or more.

On paper, that seems simple. Form a new entity with no employees and you are done. But eligibility is determined at the controlled group level, not by looking at one entity in isolation. That distinction is where most planning mistakes occur.

Why Controlled Group Rules Matter

Let me be clear. You absolutely can start a new business for the purpose of establishing a Solo 401(k). Doing so does not automatically create a controlled group issue if both the existing business and the new business have no full-time common-law employees. Even if the entities are treated as a single employer under controlled group or affiliated service group rules, a Solo 401(k) can still be maintained as long as the aggregated businesses consist only of the owner and, if applicable, the spouse, and no employees who meet the plan’s eligibility requirements.

The creation of a new entity is not the problem. The real issue is whether any business within the controlled group employs full-time workers who would need to be offered retirement plan participation.

Under Internal Revenue Code Section 414, retirement plans must consider all businesses under common ownership when determining eligibility. The IRS applies controlled group rules to prevent business owners from splitting companies into separate entities solely to avoid providing retirement benefits to employees.

In practical terms, if multiple businesses are considered a controlled group, they are treated as a single employer for retirement plan purposes. That means employees of one company may need to be offered participation in the plan adopted by another company within the group.

Many business owners are surprised to learn that even if a new entity has no employees, it may still be required to include employees from a related company.

Before assuming a new business qualifies for a Solo 401(k), you need to understand the three primary aggregation tests the IRS generally applies: the 80 percent common ownership test, the brother-sister controlled group rules, and the affiliated service group rules. Each must be carefully analyzed to determine whether businesses are treated as a single employer for retirement plan purposes.

The 80 Percent Ownership Test, A Key Threshold

One of the most common controlled group tests is the 80 percent ownership rule. If an individual or group owns at least 80 percent of two or more businesses, those businesses may be considered part of a controlled group.

For example, if a business owner owns 100 percent of Company A, which has employees, and 100 percent of Company B, a new entity created to open a Solo 401(k), the IRS may treat both entities as one employer. In that case, Company B cannot maintain a Solo 401(k) unless employees from Company A are also eligible to participate.

This rule exists for a reason. It prevents employers from creating shell entities solely to access owner-only retirement plans while excluding employees who are effectively part of the same economic enterprise.

Brother-Sister Controlled Groups, Understanding the 80 Percent and 50 Percent Tests

Another common scenario involves brother-sister controlled groups, where the same individuals own significant interests in multiple businesses. Under Internal Revenue Code Section 414(c), businesses may be aggregated and treated as a single employer if two ownership tests are satisfied: the 80 percent ownership test and the 50 percent identical ownership, or effective control, test.

The first step is the 80 percent test. This asks whether five or fewer individuals, estates, or trusts own at least 80 percent of each entity. Ownership can include direct ownership as well as constructive ownership under the tax code. If that threshold is met, the analysis moves to the second step.

The second step is the 50 percent identical ownership test. Here, the IRS looks at whether the same five or fewer individuals own more than 50 percent of each business when only identical ownership percentages are counted. In other words, the focus is on overlapping ownership, not total ownership.

If both tests are satisfied, the entities are treated as a controlled group and must be aggregated for retirement plan purposes. That means employees across the group may need to be offered plan participation.

Example 1, Brother-Sister Controlled Group Exists

Assume three owners, Alex, Jamie, and Taylor, own two companies.

Company A
Alex owns 40 percent
Jamie owns 30 percent
Taylor owns 30 percent

Company B
Alex owns 40 percent
Jamie owns 30 percent
Taylor owns 30 percent

The 80 percent test is satisfied because the same three individuals own 100 percent of each company.

Next, apply the 50 percent identical ownership test. The identical ownership percentages are 40 percent for Alex, 30 percent for Jamie, and 30 percent for Taylor. When added together, identical ownership equals 100 percent, which exceeds 50 percent. Both tests are met, so Companies A and B form a brother-sister controlled group. If Company A has employees, Company B generally cannot maintain a Solo 401(k) that excludes those employees.

Example 2, Brother-Sister Controlled Group Does Not Exist

Now consider a different structure.

Company A
Alex owns 80 percent
Jordan owns 20 percent

Company B
Casey owns 80 percent
Jordan owns 20 percent

The 80 percent test may appear satisfied because someone owns 80 percent of each company. However, the 50 percent identical ownership test focuses only on overlapping ownership. The only identical owner across both entities is Jordan at 20 percent. Because 20 percent does not exceed the 50 percent threshold, a brother-sister controlled group may not exist in this scenario.

This distinction is critical. Many business owners assume they can create a new entity to open a Solo 401(k) without affecting another business that has employees. In reality, if both the 80 percent and 50 percent tests are met, the IRS may treat the businesses as a single employer.

Affiliated Service Group Rules, Often Overlooked

Even when ownership percentages fall below traditional controlled group thresholds, businesses may still be aggregated under affiliated service group rules. These rules apply when businesses work together to provide services and share common ownership or management relationships.

Take the example of a physician who owns a medical practice with employees and then creates a separate management company to receive consulting fees. Even if ownership structures differ slightly, the IRS may treat the entities as an affiliated service group if they operate together to deliver services. In that case, employees of the main operating business could still be required to receive retirement plan benefits, making a Solo 401(k) inappropriate.

Affiliated service group rules focus less on strict ownership percentages and more on the functional relationship between entities. If businesses share management, provide services to one another, or rely on each other economically, aggregation may apply even when ownership is well below 50 percent.

A Detailed Example, when a Solo 401(k) Is Not Allowed

Imagine a business owner who operates Company A, a marketing agency with ten full-time employees. The owner wants to maximize retirement contributions but does not want to offer a full 401(k) plan to employees because of administrative costs.

The owner forms Company B, a new consulting LLC with no employees, and opens a Solo 401(k) through that entity.

At first glance, it looks compliant. Company B has no staff and is a legitimate business. However, because the owner holds more than 80 percent ownership in both entities, the IRS controlled group rules treat Company A and Company B as one employer.

Since Company A has full-time employees, the Solo 401(k) would likely violate eligibility rules unless those employees are allowed to participate. If the owner ignores this issue, the plan could face compliance challenges and potential penalties.

Simply forming a new entity is not enough.

When Starting a New Business May Still Work

There are legitimate situations where starting a new business and opening a Solo 401(k) is allowed. For example, the new business may not be part of a controlled group. Ownership thresholds may not meet aggregation rules. No affiliated service relationships may exist.

Every situation depends on the specific ownership structure and operational relationships between entities. These rules are fact-specific, and in my experience, business owners benefit from reviewing their corporate structure before adopting a plan rather than trying to fix it after the fact.

Why Understanding These Rules Is So Important

Controlled group and affiliated service group rules exist to ensure fairness in retirement plan coverage. The IRS does not want business owners to receive enhanced retirement benefits while excluding employees who effectively work for the same employer.

As alternative investments and self-directed retirement strategies have grown in popularity, the IRS has increased its focus on plan eligibility and compliance. A Solo 401(k) should be approached as a long-term planning tool, not as a workaround.

The Power of the Solo 401(k), Why Entrepreneurs Go to Great Lengths to Qualify

There is a reason business owners explore these strategies. Few retirement plans offer the same combination of contribution power, flexibility, and control. Even individuals who already participate in a traditional employer 401(k) often look to establish a Solo 401(k) through self-employment income because of the strategic advantages it can provide.

Over the last decade, the Solo 401(k) has evolved from a niche retirement tool into one of the most powerful wealth-building vehicles available to entrepreneurs, consultants, and side-hustle earners.

1. High Annual Contribution Limits, One of the Largest Retirement Buckets Available

The most obvious advantage is the amount that can be contributed each year. Unlike IRAs, which have relatively small annual limits, the Solo 401(k) combines employee deferrals and employer profit-sharing contributions into one structure.

For 2026, the employee elective deferral limit is 24,500 dollars. Individuals age 50 or older can add an 8,000 dollar catch-up, bringing total deferrals to 32,500 dollars. Those aged 60 to 63 can contribute a special super catch-up of 11,250 dollars, allowing total deferrals up to 35,750 dollars.

When combined with employer profit-sharing contributions, total annual additions can reach 72,000 dollars if under age 50, approximately 80,000 dollars with standard catch-up contributions, and up to 83,250 dollars depending on age and income levels.

These limits are dramatically higher than IRA contribution limits. That is one of the primary reasons entrepreneurs look for ways to qualify, even if they already have access to a workplace retirement plan.

2. Investment Flexibility and Checkbook Control

Another powerful feature is investment flexibility. Unlike many traditional brokerage plans that limit investments to mutual funds or publicly traded securities, a properly structured Self-Directed Solo 401(k) can allow access to a wide range of alternative assets.

Entrepreneurs frequently use Solo 401(k)s to invest in real estate, private equity or venture capital, private credit or promissory notes, cryptocurrency, and precious metals.

Because the plan participant often serves as trustee, the Solo 401(k) can offer a form of checkbook control, allowing faster execution of investments compared to traditional custodial structures. That level of control is a major differentiator compared to many corporate 401(k) plans.

3. The Solo 401(k) Loan Feature, Access to Liquidity Without a Taxable Distribution

Another significant advantage, one that does not exist with IRAs, is the participant loan feature.

Under IRS rules, a Solo 401(k) may allow loans of up to 50 percent of the vested account balance or 50,000 dollars, whichever is less.

For entrepreneurs, this can be extremely valuable. The loan option may provide temporary liquidity for business opportunities, real estate transactions, or unexpected expenses without triggering early distribution penalties or immediate income tax. Loans must be repaid with interest and follow specific rules, but the flexibility is a major draw.

4. Mega Backdoor Roth, Supercharging Tax-Free Growth

One of the most sophisticated features available within a properly designed Solo 401(k) is the ability to implement a Mega Backdoor Roth strategy.

This approach allows participants to make after-tax contributions beyond standard deferral limits and then convert those amounts into Roth funds inside the plan. Because total contributions can reach the overall annual addition limit, entrepreneurs may be able to move significantly larger amounts into a Roth environment than a traditional Roth IRA would allow.

Unlike Roth IRAs, which have income phase-outs, the Mega Backdoor Roth strategy can be especially attractive for high-earning entrepreneurs who want to build a large pool of tax-free retirement assets.

Why Entrepreneurs Still Pursue the Solo 401(k) Despite Owning Another 401(k)

Many business owners already participate in a corporate 401(k) through a full-time job and still try to establish a Solo 401(k) through side income. The goal is not to bypass rules. It is to unlock planning opportunities that may not exist in traditional plans.

Employer plans may restrict alternative investments. Corporate plans rarely allow Mega Backdoor Roth contributions. Many workplace plans do not offer participant loans or flexible plan design.

That said, controlled group and affiliated service rules can limit whether a Solo 401(k) is allowed, especially if the individual owns another business with employees. Understanding these rules before creating a separate entity for retirement planning purposes is critical.

Final Thoughts

Starting a new business can be a legitimate way to open a Solo 401(k), but only if controlled group and affiliated service rules are carefully considered. Ownership structures, operational relationships, and employee status must all be evaluated before adopting an owner-only plan.

For many entrepreneurs, the Solo 401(k) remains one of the most powerful retirement tools available. However, the real power comes not just from high contribution limits or investment flexibility, but from using the plan correctly.