When deciding which business entity to choose for your business, there are many considerations that small business owners must take into account. These considerations include estate planning, tax benefits, and, of course, the asset protection that each entity will provide you. Each business entity provides different benefits.

Two entities that are commonly confused by business owners are the LLC and the business trust. In this article, we will discuss the differences between the two business structures, and when each can be best suited for your business goals.

Business Trust vs LLC: Why the Comparison Matters

While the business trust and the LLC may seem similar, there are important differences between the two entity types.

At its very basic level, a business trust is a type of trust that manages assets, while an LLC is a business entity that manages a business.

Choosing the right entity is key, as each offers different benefits with regards to asset protection, management flexibility, and tax benefits.

What is a Business Trust?

As previously mentioned, a business trust is a type of trust. And for those who are curious, here’s what a trust is.

A trust is an arrangement that involves three parties. The first party is the grantor, who is responsible for forming the trust. The second party is the trustee, who is responsible for managing the trust assets. This trustee can either be an individual, like a reputable financial advisor, or another business entity. And lastly, the third party is the beneficiary, who receives the benefit of the trust. Usually, this benefit is in the form of income.

There are two common types of trusts. The first type is the revocable trust, which is a type of trust that you can change at any time. The most common type of revocable trust is the living trust. 

The second type of trust is an irrevocable trust. Generally, irrevocable trusts cannot be changed after they are formed. A common type of irrevocable trust is an asset protection trust, which you can form to shield trust assets from creditors.

With all of this in mind, what’s the purpose of forming a business trust? These types of trusts are created for the purpose of both holding and managing assets for the beneficiaries. You can use business trusts when your goals involve estate planning, probate avoidance, holding assets, and investment management.

What is a Limited Liability Company (LLC)?

An LLC is short for limited liability company, and it is a legal entity that you form with the secretary of state. It is a flexible business structure that combines the elements of both a corporation and a partnership.

An LLC resembles a corporation because of the limited liability protection that it offers to its members. This means that when somebody sues the LLC, the LLC member’s liability is limited to the assets that are inside of it. In this situation, the claimant can only reach the business assets, and not the personal assets of each LLC owner. Here, the owners are not subject to any personal liability. This is unlike the sole proprietorship, where that claimant can reach both business assets and personal assets.

An LLC is also like a partnership because of the tax flexibility that it offers to its members. This is because both LLCs and partnerships are business structures that are “pass through” entities. Here, the profits and losses of the business pass directly onto each LLC owner’s individual tax returns. In turn, the LLC members only pay income tax once.

Meanwhile, corporations are usually subject to double taxation. This is where the corporation is first taxed at the entity level. And if any dividends are paid out to the corporation’s shareholders, those shareholders face a second tax on their individual tax returns. Because they are taxed twice, corporations generally have a greater tax liability than LLCs do.

Given that the LLC offers these two unique benefits, they are a popular choice for many, including young entrepreneurs, startups, and small businesses.

Key Differences Between a Business Trust and an LLC

What are the differences between a business trust and an LLC? There are several that you need to know about.

Ownership

The first difference relates to ownership interests. An LLC is only owned by its members. These members can be an individual, a trust, or even another business entity (like an LLC or a corporation). 

A business trust is different, as it has two different types of owners. Here, the trustee is a fiduciary who is the legal owner of the trust assets. This means that they are responsible for managing the trust assets for the beneficiaries. There is liability with this management function, which is why a trustee may want to consider operating through an LLC or corporation.

Meanwhile, the beneficiaries hold equitable title to the trust assets. This means that the beneficiaries have the right to receive the benefit of the trust assets, whether that be now or in the future.

Management

Another key difference is how business trusts and LLCs are managed. In a business trust, the trustee is usually the only one who has the power to manage the trust assets. These trustee powers are usually spelled out in the trust documents.

LLCs are much different, as they are managed by the LLC’s managers. And LLCs offer two different types of management structures. The first type is member-managed, which is where the LLC members are the only ones who can manage the LLC’s affairs. The second type is manger-managed. Here, the LLC can not only be managed by the LLC’s members, but it can also be managed by an outside manager with no LLC ownership interest.

Taxation

Business trusts and LLC are also taxed differently. The IRS permits business trusts to be taxed in many different ways. If the business trust is a revocable trust, the trust income usually passes onto the grantor’s individual tax return.

Irrevocable trusts are different, as they can be taxed as either grantor trusts or non-grantor trusts. A grantor trust is similar to the revocable trust, as all the trust income is paid by the grantor on their individual tax return. However, with a non-grantor trust, the trust itself pays its own income tax. When this happens, the assets held inside of a non-grantor trust may avoid any estate taxes.

And to add to all of this complexity, business trusts have their own set of tax rules. If the business trust carries out a business purpose, they can also be taxed as corporations or partnerships.

LLCs offer a different set of tax rules, which are usually spelled out in your LLC’s operating agreement. Both LLCs and business trusts can be taxed as corporations and partnerships. However, LLCs can also be taxed as disregarded entities. This applies in a Single Member LLC, where there is only one business owner. Here, the entity is “disregarded” for federal tax purposes, and all the business income and losses flow onto the single member’s individual tax return. LLCs also differ from business trusts, as they are not subject to trust-specific tax rates.

Purpose

LLCs and business trusts also serve different purposes. Business trusts are mainly used for estate planning purposes. When people form a trust, they form them to hold their family assets, avoid paying estate taxes, and avoid the probate process. 

What is probate? Probate occurs when someone dies, and their descendants have to go into court to determine how the deceased’s assets are to be divided. This process can not only be stressful and time-consuming, but it is also on the public record. 

So how do you avoid the probate process? You can do so by forming a trust, and using that trust to privately pass the trust assets onto your named beneficiaries.

LLCs are much different, as they are primarily used to operate a business. And there are many types of businesses that an LLC can operate.

This business can be an active trade or business, where you sell goods and perform services for people. When your LLC is an active trade or business, you may employ yourself, as well as other employees.

LLCs can also be used to hold title to assets, like real estate rental properties. This is why they are a popular legal entity choice for real estate investors and other property owners. 

Here, your legal liability is limited when you hold title to your investment property in your LLC. This is because if the tenant sues for anything related on the property, they can only reach what’s inside the LLC (which is usually only be the equity in the property). In this situation, they won’t be able to reach any of your personal assets.

Flexibility

Another big difference is the flexibility that the LLC offers. They can be used for many different business purposes. In addition, they also offer flexibility with how they are owned, managed, and taxed.

Business trusts are much more rigid. They are mainly used to hold trust assets in order to pass them onto the beneficiaries. And, unlike an LLC manager, the only person that can manage the trust assets is the named trustee.

Liability Protection

Lastly, and perhaps the most crucial, difference between the two is the liability protection that each entity type offers.

Business trusts, on their own, do not provide any asset protection. That is, unless the business trust is organized as an irrevocable asset protection trust. However, these types of trusts are far more complex, and far more costly to form and maintain.

LLCs are more advantageous when it comes to liability protection. This is because they provide a personal liability shield for their business owners. When a claimant sues your LLC, they can only reach the business assets held inside of it. They cannot reach any of your personal assets. 

However, you must make sure that you are using a separate bank account for your business. If you use one bank account for both your business and your personal affairs, that claimant will be able to levy upon that one bank account. The best way to limit your liability is by using two separate bank accounts.

When to Choose a Business Trust

A business trust is very useful for estate planning purposes. This is because you can use a trustee to pass title of your assets along to your named beneficiaries. But before you do, it is highly recommended to find a good estate planning attorney who can form a business trust for you. Fortunately, there are many law firms that specialize in estate planning.

When to Choose an LLC

It is best practice to choose an LLC when you want to run a business. This is because of all the flexibility that the LLC has to offer, including their ownership flexibility, management flexibility, and tax flexibility. And most importantly, it is the best entity to protect your business assets. When deciding between a business trust and an LLC for asset protection, the LLC is the clear winner of the two.

Can You Combine a Business Trust and an LLC?

What if you want to combine a business trust and an LLC? If you want to take advantage of the LLC’s asset protection benefits, and the business trust’s estate planning benefits, you can have your business trust own your LLC. 

Here, the business trust can use its trust assets to invest in the LLC. And the trustee of that business trust can manage the LLC’s affairs. With this business trust in place, it can pass your LLC interests onto your beneficiaries after your death.

Comparison Chart: Business Trust vs LLC

Here is a quick comparison chart on business trusts and LLCs.

Business Trust	LLC
Key Features An arrangement that’s created by a trust document Involves three parties: Grantor, Trustee, and Beneficiary	Key Features A legal entity that you form with the secretary of state Owned by LLC members Managed by LLC managers
Benefits Used to avoid probate Used to pass title of your assets onto your beneficiaries Provides you with extra privacy Can offer asset protection if it’s irrevocable No annual filing fees to be paid to the Secretary of State	Benefits Used to run a business Offers flexibility in ownership, management, and taxation Provides asset protection and limited liability for its members and mangers Offers perpetual duration, even after your death
Challenges Expensive to form and maintain Involves a specialized structure You may need an expensive professional to fill the role of trustee Limited lifespans, usually can’t run longer than 99 years	Challenges Must pay an annual filing fee with the secretary of state

Choosing the Best Business Structure for You

LLCs and business trusts are designed for different purposes. Business trusts are a great vehicle for passing assets onto their beneficiaries. On the other hand, LLCs are a great entity choice for efficiently running a business. And before you form one, you should reach out to financial advisors and legal experts.

If you need help forming an LLC, our business, Corporate Direct, would be happy to assist. Our website corporatedirect.com has information on LLC formation, as well as knowledgeable incorporating specialists who can answer any important LLC questions that you may have.

If you are still unsure on what business entity you should choose, check out Nav’s resources on doing business as a separate entity and LLC’s vs. sole proprietorships.

If you use both resources accordingly, you will end up making decisions that align with your long-term goals.