When starting a business, two of the biggest considerations are often the tax consequences and limiting the liability of the owners. While an explanation of the tax pros and cons of selecting a specific entity can be complex, explaining how to limit one’s liability is fairly straightforward.
The most common way to achieve this limitation of liability is to incorporate the business. Once incorporated, your business becomes a separate entity from you as an individual. If the business gets sued or does something that gives rise to a liability, any collection would be limited to the assets of the business and not your personal assets.
So it seems simple enough, make sure to incorporate your business, but what about setting up a trust? A living trust is not a form of asset protection, meaning it will not safeguard your assets from lawsuits or creditors. So what can a living trust do for a business?
For a basic overview of the benefits of putting your assets in a living trust, you can check out my post on the basics of estate planning, but from a business perspective, a living trust can be a form of succession planning or safeguarding against incapacity. This will be extremely important when you look to sell your business or have it transition to the next generation.
To sum up the explanation of a trust vs. an LLC (or corporation), think of it as follows: the LLC will protect your personal assets while a living trust will make sure your business (or the proceeds from a sale) passes to your beneficiaries. As you can see from that short description, both a trust and LLC can be necessary for a small business owner.
This post is provided for informational purposes only and does not constitute legal advice. It is intended, but not promised or guaranteed to be current, complete, or up-to-date and should in no way be taken as an indication of future results. It is not intended to create an attorney-client relationship and is offered only for general informational and educational purposes. You should not act or rely on any information contained in this website without first seeking the advice of an attorney.