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Trust vs. LLC – What’s the Difference?
Written by: Carolyn Young
Carolyn Young is a business writer who focuses on entrepreneurial concepts and the business formation. She has over 25 years of experience in business roles, and has authored several entrepreneurship textbooks.
Edited by: David Lepeska
David has been writing and learning about business, finance and globalization for a quarter-century, starting with a small New York consulting firm in the 1990s.
Updated on April 26, 2023
Trust vs. LLC – What’s the Difference?
Trusts and limited liability companies (LLCs) are both legal structures created at the state level, but they serve two very different purposes. They do have some similarities as well, as both are legal vehicles used to protect assets, gain tax advantages, and avoid probate.
This article examines the advantages and disadvantages of each.
What Is a Trust?
Trusts, which are not a form of business entity, are used as a vehicle to hold assets and transfer them to beneficiaries. A trust is formed through the creation of a document that names a trustee and at least one beneficiary. Your assets are then transferred to the trust, and the trustee is given instructions on how to manage those assets. You do not have to file any paperwork with the government when you form a trust.
Assets within a trust can be cash, real estate, securities, life insurance policies, ownership in an LLC or other type of business, and other real property.
The main benefit of a trust is that it is not a part of the trust owner’s estate, allowing heirs to avoid estate taxes and ensuring assets are passed to the designated heirs without going through probate.
Probate is the legal process that an estate goes through when its owner passes away. It can be time-consuming and complicated. A trust offers a simpler and more efficient way for assets to be distributed to heirs. The assets are simply distributed exactly as stated in the trust document. The trustee is responsible for making decisions for the trust during that process.
Trusts, however, do not provide asset protection in the case of lawsuits, while LLCs do. They also do not provide the income tax benefits of an LLC. Trusts can be either revocable or irrevocable. A revocable trust can be modified or dissolved at any time. An irrevocable trust cannot be modified or dissolved without a court order.
What Is an LLC and How Does it work?
An LLC is an increasingly popular business structure for startups, offering liability protection for ownership and greater flexibility than a corporation, particularly in terms of taxes. The LLC itself does not pay taxes. As a “pass-through” entity, income passes through the business to the owner or owners, who report it on their personal tax returns. An LLC is created by filing paperwork with your state, and nominal fees are involved.
An LLC offers its owner or owners, who are called members, considerable flexibility in terms of management. You can choose your management and operational structure and decide how you want to be taxed. Your LLC can have a single member or multiple members, all of whom have personal liability protection, meaning your personal assets are not at risk if you cannot pay business debts or are involved in a lawsuit.
To form an LLC, you need to file articles of organization with your state. These forms vary by state but can generally be filed online. You’ll need to fill out the LLC name, the name and address of the registered agent, the names of the LLC members, and in some states, the way the LLC will be managed. Fees are generally around $100.
A registered agent is the person or company that sends and receives legal documents on behalf of your LLC. The registered agent can be a member of the LLC, or you can choose a third party such as an attorney or a company that offers registered agent services. Most states require you to have a registered agent who is a state resident or a corporation authorized to do business in that state.
In many states, an LLC’s assets can be transferred to heirs when an LLC owner dies without having to go through probate. An LLC owner can also place assets other than business assets into the LLC so those assets can also avoid probate. Thus, an LLC can be a useful tool in estate planning, and in some cases, a trust and an LLC are used together.
Which is the Better Option?
When choosing the best way to protect your assets, it’s a good idea to ensure these tools are beneficial for you. All the options offer some benefit, but their main purposes differ. It’s highly recommended that you speak with an attorney about the option that provides you and your heirs with the most protection when deciding on your estate planning.
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