A limited liability company exists as a hybrid entity that combines the personal asset protection of a corporation with the operating simplicity of a partnership. Family trusts, also known as a revocable living trust, form with the intent of providing a benefit to members of a family. The beneficiaries in a family trust are family members, whereas members of an LLC may or may not be family members. Taxation and management are other areas that expose differences between an LLC and a family trust.
An LLC may form with a single person or any number of members. LLC members may be other LLCs, corporations, foreign individuals and businesses, partnerships and trusts. A family trust will be as large as the number of beneficiaries named in the trust deed. A trust deed exists as the document that indicates the process for managing and maintaining the family trust. LLCs must have a written operating agreement in place that describes the procedures and policies for running the business. An LLC must file articles of organization with the secretary or department of state before the company can begin its existence. A family trust does not begin by filing organization documents with the state.
A family trust consists of a settler, trustee and trust deed. A single person can serve as a settler or more than one person may act as a settler in a family trust. A settler must set up the trust and provide assets to the trustee according to the terms outlined in the trust deed. Settlers have little, if any, involvement in the family trust after the trust deed comes into existence, as explained by the Trust Makers website. An LLC may get managed by members of the business or by non-members. The company structure resembles that of a corporation when members decide not to manage the company's day-to-day affairs. The structure appears more like that of a partnership when members of the business assume the company's managerial duties.
LLCs are known as pass-through entities because members of the business get to pass their share of company profits and losses directly to their personal income tax return. An LLC does not have to file taxes as a business entity. A family trust does not have to pay taxes on income distributed to beneficiaries of the trust, according to the Trust Makers website. However, the family trust must pay taxes in the highest marginal tax rate on income that does not get distributed. Beneficiaries must pay taxes on income received from a family trust at their personal income tax rate.
In an LLC, members of the company must decide how to distribute profits and losses. Members of the business have the ability to distribute profits in any way, despite a member's ownership interest in the company. In a family trust, the trustee has the power to distribute assets to the trust's beneficiaries in any manner. A family trust may gain additional income by investing in stock and other business ventures, and through contributions made by the trust's settlers.