How to set up an LLC for investments like Series I bonds

It can be surprisingly easy to set up a limited liability company, or LLC, if you’re looking to use the legal structure to make investments. And that’s what a few enterprising individuals are doing to invest in one of the market’s safest, inflation-protected investments right now, the Series I bond.

Here are some key things to know about how to set up an LLC, what it can do and how it can help you when it comes to investing and even obtaining lower-cost healthcare.

What is an LLC and how does it work?

While a limited liability company may often be a big company, it may also simply be an individual who’s set up a single-member LLC to take advantage of various legal benefits. That range of options is part of the benefit of organizing an LLC. Here’s how an LLC works.

An LLC can offer a lot of flexibility to those who set one up, and this type of company can engage in any business permitted by its operating agreement.

“An LLC combines the principles of a partnership with the liability and protection of a corporation,” says Paul Ouweneel, partner, valuation, forensic and litigation services, Wipfli, a corporate financial advisor in the Milwaukee area.

The LLC minimizes the personal liability of owners, but unlike a corporation, it also allows profits or losses to “pass through” the organization. Because of this structure, there’s only “one layer of tax that is picked up on the member’s tax return,” says Ouweneel, and there’s not a second level of taxation when moving those profits from the firm to the individual, as with a corporation.

But an LLC can also be a single-member LLC, organized by one individual. If that’s the case, the IRS treats the LLC as a “disregarded entity” unless it chooses to be treated as a corporation. If it’s a disregarded entity, the LLC’s gains and losses are reported on the individual’s tax return, as if it were just any other kind of income. For example, if the LLC generated profits in a trade or business, it would be subject to self-employment tax as well as other income taxes.

While the legal issues surrounding an LLC get much more complex, for those looking to create an LLC to take advantage of the structure to invest in Series I bonds, it can actually be simple. Those bonds offer an inflation-protected yield of 4.28 percent at the moment, and have the backing of the U.S. federal government, making them a safe investment, too.

How to set up an LLC for investment

It can be easy to set up an LLC if you’re looking to maximize your opportunity with Series I bonds or even other investments, says Don Parker, a former chief risk officer and chief information officer at BOK Financial. In fact, he says he can do it in just a few minutes.

Once you set up an LLC, you can then use it to invest additional money into Series I bonds.

Here are the steps to get started:

1. Look for a low-cost state to set up the LLC

Each state has its own process for setting up an LLC, and you should look at each state’s costs, since they differ substantially. Investors should check how much it costs to set up the LLC as well as whether the state requires any ongoing annual fees to maintain the LLC.

While one state may charge hundreds of dollars to set up an LLC, others may charge as little as $25, says Parker. He points to Michigan and New Mexico as particularly low-cost states.

With one LLC as good as another for this purpose, there’s no reason to pay more than you need to. In any case, the cost of forming the LLC is tax-deductible, so it’s worth noting your expenses.

2. Check your eligibility

Once you’ve found a low-cost state to establish the LLC, you’ll want to double-check your eligibility. You can find details on each state’s department of state website.

“The states I’m familiar with need physical presence of some sort, not just a mailbox,” says Parker. But he says that doesn’t necessarily mean you have to be “on the ground” in that state. If you have an agent who can work on your behalf there, that could suffice, he says. That agent could be a family member who maintains a physical presence in the state of incorporation.

3. Create the LLC

Once you’ve found where you want to set up the LLC and you’re eligible, it’s time to file the articles of incorporation with the state’s department of state. You’ll need to provide information on the LLC’s business and the people associated with it, including the organizer and agent.

You’ll be asked to give the name and purpose of the company, and Parker says to give the business a name with “LLC” after it. For example, you might name your company “John Smith, LLC.” You can simply state the purpose of the LLC is “to hold investment assets,” if that’s what you’re trying to do. The entity’s address can be the same as your own.

The organizer’s name and address can be that of whoever is establishing the LLC. Then you’ll need to provide the agent’s name and address located in the state of incorporation, if required. If being physically located is a requirement and you meet it, then you can also be the agent.

Submit the form and you’ll typically receive your articles of incorporation for the LLC within a day, says Parker.

If you set up a single-member LLC, the IRS will consider it a “disregarded entity,” meaning that you’ll pay taxes as if it were your own income, making taxes about as easy as they ever get.

LLCs and healthcare

Besides the benefits of being able to invest on behalf of the LLC, you may also be able to take advantage of lower healthcare premiums if you’re buying through the healthcare exchanges. That’s because businesses may be offered preferred pricing on health insurance plans.

“You can set up an LLC, which I did in Oklahoma, with just myself and my wife – no business or building,” says Parker. “Then I went to Blue Cross Blue Shield, but it could have been any number of providers, to buy a business policy that is about half the cost of individual plans.”

So the LLC can even help if you’re investing in your own health, and this move may be especially helpful if you’re looking to bridge the gap to Medicare or even if you’re part of the FIRE movement looking to make the leap to financial independence and retire early.

Bottom line

An LLC can be useful for a variety of reasons, but especially if you’re looking to invest in Series I bonds or enjoy the privileges offered by a legal structure that provides protection and less risk. If you go this route, be sure that you clearly understand the rules for your state of incorporation. That said, Series I bonds may not be the top alternative now, given higher rates in the best CDs and potentially stronger returns at the best long-term investments.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.