Legal Insights: Navigating the Regulatory Landscape for Combined LLCs and Business Trusts

To ensure the longevity of your business, you'll eventually need to take advantage of legal structures, which can both safeguard your assets and mediate risk. Two such structures are the business trust and the Limited Liability Company, or LLC.

Both business trusts and LLCs can be employed to protect the interests of your business. Critically, these two structures work a little differently, offering different advantages and vulnerabilities. And, they have different regulatory requirements.

Before you establish an LLC or a business trust, it's important to have a clear idea of how both function, and of their relationship to one another.

LLC Overview

Let's start with the LLC.

An LLC is a business structure that unites the limited liability protections of a corporation to the pass-through taxation of a partnership or sole proprietorship. The LLC is one of the most popular legal structures for small and mid-sized businesses.

Some additional points about an LLC:

• Registering your business as an LLC establishes it as a unique legal entity, meaning the business is separate and distinct from its owners. This allows you to keep your personal and business interests in two separate categories.
• LLCs offer limited liability protection, meaning that the personal assets of members are typically protected from business debts and as well as from lawsuits.
• An LLC may be managed by one or more members (partners) who have a stake in the business, or by an outsourced third-party management team. The terms of LLC governance are set forward in a document known as the Operating Agreement.

How to Start an LLC

The process of registering an LLC can vary from state to state, and you'll always want to double-check the guidelines in your locality. For example, if you're in Pennsylvania, it may be useful to learn how to start an LLC in PA.

Some general guidelines:

• Make sure you have a name for your LLC that isn't already claimed by another LLC in the same state.
• Select someone to serve as your Registered Agent, receiving official correspondence on your behalf.
• Create an Operating Agreement that outlines the structure and administration of your business.
• File Articles of Organization with your state, also paying the state-specific filing fee.
• Ensure you have an Employer Identification Number, as well as a business bank account, distinct from personal checking or savings accounts.

Business Trust Overview

Now let's turn to the business trust.

A business trust, sometimes called a common-law trust, is a legal entity created to hold assets and conduct business activities for the benefit of stated beneficiaries. The trust itself holds legal title to the assets, while the beneficiaries hold the equitable title. To put all of this a little differently, a business trust is a legal arrangement that allows an appointed trustee to actively manage a business, on behalf of named beneficiaries.

Unlike LLCs, business trusts are not typically formed under statutes but rather are created based on common law principles.

A business trust offers some of the same benefits that you would expect from an LLC. For example, business trusts offer pass-through taxation, along with limited liability provisions.

How to Start a Business Trust

There are a few steps involved with the creation of a business trust, including:

• Determine the purpose and structure of the trust.
• Choose individuals, or an organization, to serve as the trustees, ensuring they fully understand their fiduciary duties.
• Draft a trust agreement that outlines the specifics of the trust arrangement.
• Work with an attorney to execute the terms of the trust, officially establishing its terms and conditions.

Can You Combine an LLC and a Business Trust?

In some situations, it might be possible to combine the LLC structure with a business trust. Doing so will require careful planning, but in select instances may prove to be highly effective. A few ways to combine an LLC and a business trust include:

• You can establish an LLC to serve as the trustee for a business trust.
• You can use the business trust to hold the assets/interests of an LLC's members.
• You can use an LLC to operate a business while holding ownership within a business trust.

A final option is to hybridize the two structures. For example, you might create a structure where an LLC is formed with provisions that resemble those of a trust, like having beneficiaries and trustees. This approach can combine the operational flexibility of an LLC with the asset protection and management features you would get from a business trust.

What are the Regulatory Concerns for a Combined LLC and Business Trust?

As you consider different options for establishing an LLC, and potentially for combining it with a business trust, it's important to be mindful of regulatory concerns.

The business trust itself must be administered according to its own stated terms, and the trustee must uphold their fiduciary responsibility; that is to say, the trustee must make business decisions that are in the best interest of the beneficiaries, even if that's not what's in the best interest for the trustee.

LLCs have a few regulatory requirements, the most significant of which is maintaining a line of separation between business assets/liabilities and personal assets/liabilities. It's imperative that LLC members never use business funds to pay off personal debts, or vice versa. Note that any kind of fraudulent activity can jeopardize the personal liability protections that the LLC offers.

A business attorney can provide more guidelines about the regulatory intersection of the LLC and the business trust.

Use the Right Legal Tools to Establish Business Success

As you think about securing your business interests, ensure that you're using all the right legal resources at your disposal. This may mean an LLC, a business trust, or in some bases both of these structures combined.

Author Bio

Amanda E. Clark is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about content and social media marketing.