What is the difference between an LLC and a trust ?

While the former is a limited liability company, the latter is a trust; hence, although both are basically structures for asset and business management, they differ fundamentally in purpose and form. A comparison between the two is given below:

1. Purpose and Structure

• LLC:
  • An LLC is a private company structure designed to provide limited liability protection to its owners, called members. It combines the liability protection of a corporation with the tax efficiencies and operational flexibility of a partnership.
  • The ownership of LLCs belongs to one or more members, who may manage the company by themselves or appoint managers for this purpose.
• Trust:
  • A trust is a fiduciary relationship whereby a third-party trustee holds assets on behalf of a beneficiary or beneficiaries.
  • Trusts are usually established to provide legal protection of the trust's assets, to ensure those assets are distributed according to the wishes of the settlor, and can be used for purposes such as tax minimization, asset protection, and management of how assets are received by beneficiaries.

2. Formation

• LLC: Articles of organization are filed with the state's business entity registration office, and the LLC operates under state law. Then, to a very large extent, it also requires an operating agreement to spell out the management structure and who the members are.
• Trust: A trust is normally created through some trust agreement or declaration spelling out the purpose, terms, and parties concerned of the trust. It doesn't need to be filed with the state, which gives added privacy to the same.

3. Legal Entity Status

• LLC: The LLC itself is a juridical person separate from its members. It may, in its own name, acquire property, sue, or be sued, and enter into contracts.
• Trust: Since it is not a juridical entity per se, the trust is not different from the parties thereto who are the trustor and the trustee. All the title to the assets of the trust is held by the trustee, who also enters into contracts in his capacity as trustee and not in the name of the trust.

4. Tax Treatment

• By default, it is considered a pass-through entity for taxation purposes: the business itself will not pay taxes on its profits, but rather the profits or losses pass through to members and get reported on the individual owner's tax return. An LLC may also elect to be taxed as a corporation.
• Trust: Varies with type of trust, such as irrevocable or revocable. Generally, trust is subject to tax on any income not distributed to beneficiaries and beneficiaries are taxed on distributions.

5. Management and Control

• LLC: An LLC is managed by members or appointed managers. Members have great deal of flexibility in specifying how the business is to be conducted.
• Trust: This is operated by a trustee who has the obligation to act according to the terms of the trust and in the best interest of the beneficiaries, usually with less flexibility in its operation in comparison with an LLC.

Basically, the choice of an LLC or a trust depends on your needs as regards the kind of assets involved, the desired control and management structure, tax, and concerns of liability. One Pacific Trust promises the best service in respect of assessing those factors and providing customized advice to you for making a proper decision so that your trust or any other entity you use is set up correctly with regard to your needs.