Trust vs. LLC: Asset Protection For a Business Owner

A limited liability company (LLC) and a trust both can provide asset protection for a business owner. But LLCs and trusts are very different legal structures that serve distinct goals and are suitable for different circumstances. Understanding the differences between an LLC and a trust is an important first step for a business owner evaluating asset protection options.

Asset Protection With a Georgia Limited Liability Company / LLC

The Georgia Limited Liability Company Act, Title 14, Chapter 11 of the Code of Georgia, addresses all aspects of LLCs in the state, from the process for formation to legal liability and other matters. Forming an LLC provides multiple benefits for a business owner, including the limited liability that is apparent from the title itself. As such, LLCs are a popular legal structure for many businesses, especially smaller companies.

The owner of a properly formed and maintained LLC is insulated from personal liability for business obligations, lawsuits, and debts. Only the assets of the business are at risk. The personal assets of the business owner (such as a residence, bank and brokerage accounts, and vehicles) are generally protected, so that a creditor or claimant can only pursue the assets of the LLC itself.

For the limited liability protection to attach, the business owner must properly form and maintain the LLC status as required by the Act, on an ongoing basis. Even for a properly maintained LLC, the liability protection has limits. If the business owner personally guarantees an obligation or debt or commingles business and personal assets, personal liability can arise. In addition, the limited liability protection does not include personal wrongdoing by the business owner, such as negligence, fraud, or intentional misrepresentation. For example, if a business owner is driving a company vehicle within the course and scope of his business and gets in a wreck and kills someone, he remains personally liable for his actions. An LLC does not protect him. Similarly, if a business owner commits professional negligence (such as a CPA committing malpractice), an LLC does not protect the professional's negligent acts even though they are performing duties for the very business that has been formed as an LLC.

Asset Protection With a Trust in Georgia

A trust is a legal fiduciary arrangement created in a written legal document drafted by a lawyer and executed by the grantor (creator) of the trust. The trust document (or simply the trust) establishes the terms that govern how the designated trustee operates and administers the trust. The document also names the beneficiaries who receive the benefits described in the trust document. The contents of the trust document are extremely important, especially since there are many different types of trusts. In the State of Georgia, all trusts are governed by the Georgia Revised Trust Code, O.C.G.A. Title 53, Chapter 12.

Trusts are often used in estate planning to accomplish specific goals. Those goals may include avoiding probate, controlling distribution of a legacy, and other identified objectives. Trusts are also used to protect assets in a wide range of circumstances.

For a business owner, a trust can be used to protect both business and personal assets, shielding those assets from the legal claims of creditors and other claimants. Even if a business is an LLC, a trust can provide an additional layer of security, especially for a company in a high-risk business, like construction or healthcare. It is even possible to transfer an LLC into a trust.

Before deciding to use a trust for asset protection, a business owner or individual should understand all the advantages and disadvantages of doing so. For that reason, the decision to use a trust for asset protection should not be made without consulting with a knowledgeable trust attorney.

Revocable vs. Irrevocable Trusts

All trusts are either revocable or irrevocable. A revocable trust (one that can be changed or terminated at any time) may offer significant benefits in estate planning, but a revocable trust does not provide any asset protection against claims of creditors and others. For a trust to provide asset protection, it must be properly structured as an irrevocable trust (one that can only be changed in a controlled manner as specified in the trust, or by a court under certain conditions). For asset protection, an irrevocable trust also must be created and funded before legal claims arise and cannot be established to defraud creditors.

While a properly structured irrevocable trust can provide asset protection for business and personal assets, achieving that protection requires the owner of the property to give up some aspects of control over the assets by transferring them into the irrevocable trust.

LLC vs. Trust

For a business owner evaluating asset protection strategies, talking with both a business law attorney and an estate planning and trust lawyer is advisable. LLCs and irrevocable trusts can both provide asset protection, if proper processes are followed to put the legal structures in place. Both types of structures have additional benefits and potential disadvantages that should be fully understood before making a decision about how to proceed.

A business owner may decide to use both an LLC and a trust to provide maximum asset protection, depending on their specific circumstances and needs. Professional guidance is always essential in determining the best way to protect business and personal assets.

Get Help From an Experienced Georgia Estate Planning Attorney

Our Cartersville estate planning practice at Asset Protection & Elder Law of Georgia focuses on helping clients identify and accomplish their estate planning goals by determining the right approach for their personal, business, and financial circumstances. We serve clients throughout the communities northwest of Atlanta, including in Bartow County, Cobb County, Cherokee County, Gordon County, Floyd County and Paulding County. To schedule a consultation, call us at (770) 382-0984 or contact us through our online form.