Setting up a limited liability company (LLC) can be surprisingly straightforward if you’re interested in using this legal structure for investments. Many savvy investors are currently leveraging LLCs to invest in Series I bonds, which are known for their safety and protection against inflation.

Here’s what you need to know about establishing an LLC, including its benefits for investing and potentially accessing lower-cost healthcare.

What is an LLC and how does it work?

A limited liability company (LLC) can range from a large enterprise to a single-member setup, where an individual establishes an LLC to enjoy various legal benefits. This flexibility is one of the key advantages of an LLC. Here’s an overview of how an LLC functions:

An LLC provides considerable flexibility and can engage in any business activities allowed by its operating agreement.

“An LLC combines the features of a partnership with the liability protection of a corporation,” explains Paul Ouweneel, partner at Wipfli, a corporate financial advisory firm in Milwaukee.

While an LLC limits the personal liability of its owners, it differs from a corporation by allowing profits and losses to “pass through” to the members’ personal tax returns. This means there’s only “one layer of tax on the member’s return,” avoiding the double taxation seen with corporations.

A single-member LLC, established by one individual, is treated as a “disregarded entity” by the IRS unless it elects to be treated as a corporation. If it remains a disregarded entity, its income and losses are reported on the individual’s tax return, similar to any other personal income. For instance, if the LLC earns profits from business activities, these are subject to self-employment tax in addition to regular income taxes.

Despite the complex legal considerations surrounding LLCs, setting up one to invest in Series I bonds can be straightforward. These bonds currently offer a 4.28 percent inflation-protected yield and are backed by the U.S. federal government, making them a secure investment option.

How to set up an LLC for investment

Setting up an LLC can be a straightforward process if you want to optimize your investment opportunities with Series I bonds or other assets, according to Don Parker, former chief risk officer and chief information officer at BOK Financial. He notes that it can often be done in just a few minutes.

Once your LLC is established, you can use it to invest in Series I bonds and other investments.

Here’s how to get started:

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

Each state has its own procedure and costs for setting up an LLC, which can vary significantly. Investors should review both the initial setup fees and any ongoing annual fees required to maintain the LLC.

For example, while some states may charge several hundred dollars to establish an LLC, others may have fees as low as $25, according to Don Parker. He highlights Michigan and New Mexico as examples of states with particularly low setup costs.

Since any LLC will serve your investment needs equally well, there’s no advantage in paying more than necessary. Additionally, the cost of forming an LLC is tax-deductible, so it’s important to keep track of these expenses.

2. Check your eligibility

After choosing a low-cost state for your LLC, it’s important to verify your eligibility requirements. Check the details on the department of state website for the state you’re interested in.

“Most states require a physical presence, not just a mailbox,” notes Don Parker. However, this doesn’t always mean you need to be physically present in the state. Instead, you can appoint an agent who resides there and can act on your behalf. This agent could be a family member or another individual with a physical presence in the state of incorporation.

3. Create the LLC

Once you’ve selected the state and confirmed your eligibility, the next step is to file the Articles of Organization with the state’s department of state. This document will include details about the LLC’s business and its key personnel, including the organizer and any required agent.

You will need to provide the name and purpose of the LLC. Parker recommends including “LLC” in the business name, such as “John Smith, LLC.” For the purpose, you can state something like “to hold investment assets” if that’s your goal. The LLC’s address can be the same as your own.

The organizer’s name and address will be that of the person establishing the LLC. If required, you’ll also need to provide the name and address of an agent located in the state of incorporation. If physical presence is a requirement and you meet it, you can act as the agent yourself.

After submitting the form, you’ll typically receive your Articles of Organization within a day, according to Parker.

For a single-member LLC, the IRS will treat it as a “disregarded entity,” meaning you’ll report the LLC’s income on your personal tax return, simplifying the tax process.

LLCs and healthcare

In addition to enabling investments through the LLC, you might also benefit from lower healthcare premiums if you purchase insurance through healthcare exchanges. Businesses often receive preferential pricing on health insurance plans.

“You can set up an LLC, as I did in Oklahoma, with just myself and my wife—no actual business or physical office required,” says Parker. “I then approached Blue Cross Blue Shield, though any provider would work, to secure a business policy that costs about half of what individual plans would.”

So, an LLC can also be advantageous for managing your health expenses. This could be particularly beneficial if you’re bridging the gap to Medicare or if you’re part of the FIRE movement and aiming for early retirement.

In Conclusion

An LLC can offer numerous advantages, especially if you’re interested in investing in Series I bonds or benefiting from the protection and reduced risk of this legal structure. If you choose this route, make sure you thoroughly understand the regulations for your state of incorporation. However, considering the current higher rates on top CDs and potentially better returns from long-term investments, Series I bonds might not be the most attractive option right now.