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Trusts and LLCs are two financial entities that offer a range of different benefits to their owners and beneficiaries.
You might be wondering which one of these entities is best for you.
Answering the question of trust vs. LLC will depend primarily on the needs you have, and exploring those needs and the different benefits available will help you make the right call.
Perhaps you’re looking for some way to shield family assets from taxation, or looking to generate wealth through business.
Whatever the case, if you weigh up a trust against an LLC, there are a few things you should know first such as:
- What a trust or an LLC is, and how they work
- The best situations for a trust or an LLC
- How to set up a trust or an LLC.
If you’re pressed for time, we’ve put together some quick and easy key takeaways to teach you a solid basic understanding of trusts and LLCs and how they can benefit you:
- Trusts and LLCs are fundamentally different entities with completely distinct purposes, functions, and mechanisms.
- A trust has a trustee, assets, and beneficiaries, and is an entity built to manage assets on behalf of or for the beneficiaries.
- An LLC, or Limited Liability Company, is a business entity that confers limited liability protection on its members.
- The owners of an LLC are called members, and they each own a portion of the LLC equivalent to the capital they put into it. LLCs do not raise capital from share sales.
A trust is a financial entity designed to separate certain assets from their owners and allow them to be managed independently for the benefit of trust beneficiaries.
Trusts are often used to manage wealth or property. The settlor of the trust is the individual who sets it up.
They transfer ownership of selected assets to the trust, and then a trustee takes over running and managing those assets through the trust for the benefit of nominated beneficiaries.
Trusts are often subject to lower tax rates than businesses or individuals, so they are a popular choice for protecting the transfer of assets between individuals and generations of family.
Types of Trusts
Trusts come in many different forms, and each one can be used for different specific purposes.
Choosing a trust depends largely on the type of asset that needs to be managed.
- Land trust: A land trust is a trust that holds and manages land for the benefit of the trust’s beneficiaries. This might include holding it in trust to prevent or oversee land development, or to handle transfer of ownership or inheritance.
- Business trust: A business trust is one that manages a beneficiary’s stake or ownership in a business. It might be set up to manage the ownership stake of a minor.
- Real estate trust: As the name suggests, a real estate trust manages real estate holdings.
- Revocable trust: A revocable trust is a type of trust that can be altered or disestablished on the wishes of the settlor or trustee.
- Irrevocable Trust: An irrevocable trust is one that is completely set in stone and which cannot be altered, modified, or terminated without permission from the beneficiaries or a court order.
- Farm trust: A farm trust is one in which a farm and associated assets are managed by a farmer or owner through a trust, rather than as an individual.
Limited Liability Company (LLC)
An LLC is a separate legal entity in which the owners are referred to as “members”.
Members can be anyone from individuals and other businesses to other LLCs; anyone can be a member of an LLC.
In most cases, a sole owner can also have charge of an LLC as its only member.
An LLC is separate from its members, and as such provides limited liability protection.
That means that the individual members are not able to be pursued by the LLC’s creditors.
This is one of the significant features that separates an LLC from a sole proprietorship.
LLCs do not have shareholders. Instead, the members share in the profits generated by an LLC.
Since the owners of an LLC can be individuals or other businesses, it’s not uncommon to see businesses set up an LLC to trade in a specific market or location.
In this arrangement, the profits generated would funnel back to the owning member, whether that be an individual, a corporation, or another LLC.
What’s the difference between a trust and an LLC?
Trusts and LLCs are completely different entities for entirely different purposes, and with completely different ownership structures.
An LLC works for the benefit of its members and at their direction, conducting business in the market as a company.
Membership of an LLC can be transferred, and the purpose of the business is limitless.
On the other hand, a trust is designed specifically to manage assets for nominated individuals or groups.
A trust is permitted to turn a profit on its activities, but its primary purpose is to manage assets in order to benefit the nominated beneficiaries.
Pros & Cons
|Members pay personal taxes
|Fixed structure and processes
|Structure agreed upon by members
|Inflexible, heavily regulated
|Different structures for specific scenarios or assets
|LLCs can operate in any market performing any service or product
How to choose between a trust and an LLC
Choosing between a trust and an LLC will really depend on your situation and specific needs.
If you are looking for an entity that can operate as a business along with other owners (perhaps to operate within your state or expand beyond), an LLC will be the right choice for you!
It is fundamentally a business entity – best suited for someone looking to conduct business and make profits.
Instead, if you are looking to manage existing assets or wealth, protect them from certain taxes, or ensure a steady hand overseeing assets for nominated beneficiaries, then a trust will be the appropriate entity for you.
Trust vs. LLC: Which option is best for you?
That’s about all you need to know about trusts and LLCs on a basic level.
You should now have a solid understanding of how each one works and which form is best for you.
Choose a trust if you have assets (whether that’s money, land, or anything else) and you want an entity that can manage them for your nominated beneficiaries.
Choose an LLC if you are looking to run a business to generate wealth.
Should my rental property be in a trust or an LLC?
Strictly speaking, you don’t need either a trust or an LLC to own rental properties.
Trusts and LLCs have their own benefits for rental properties, and as such, you should consult local rules to determine the best course of action.
Can a living trust own an LLC?
Yes, a living trust can own an LLC – provided there is no trust law preventing it.
Can a trust or LLC help minimize estate taxes?
Yes. In both cases, a trust and an LLC can help reduce individual tax burdens and business taxation when it comes to estate planning and inheritance.