LLCs and common law trusts solve related but distinct problems, and the most common mistake is treating them as competing options when they're often complementary. An LLC's protection comes from statute — every state recognizes it, every bank understands it, and its liability shield is backed by decades of settled case law. A trust's characteristics come from contract and equity law rather than a state's business code, which changes what it can and can't offer.
On liability protection: an LLC's charging-order protection and limited-liability shield are well-tested and universally recognized — a creditor, a bank, or a court in any state knows exactly how to treat an LLC. A common law trust's protections are structural and contractual, and recognition can vary more by context.
On privacy: some states (Wyoming, for example) don't require LLC member names on public formation documents, closing much of the privacy gap trusts are often assumed to uniquely offer. On tax treatment: both are subject to federal tax law — an LLC is typically a disregarded entity or partnership by default, while a trust's tax treatment depends on its structure under IRC §§ 641 and 671–679. Neither structure is a way to avoid tax obligations.
What is the difference between an LLC and a common law trust?
- LLC protection
- Statutory. Universally recognised, backed by decades of settled case law.
- Trust protection
- Contractual and equitable, grounded in trust law rather than a business-entity code.
- Privacy
- Some states (Wyoming) keep LLC members off the public record, narrowing the gap trusts are assumed to own.
- Tax treatment
- Both are subject to federal tax. Neither avoids a tax obligation.
- Used together
- A trust holding an LLC is common — statutory and contractual layers combined.
How do you choose between an LLC and a trust?
- Write down what you are actually protecting against: creditors, probate, or public disclosure.
- Pick the structure that addresses that specific risk.
- Confirm your bank will work with the structure before you form it.
- Review the tax treatment with a CPA before funding.
What the full article covers
- A feature-by-feature comparison of cost, privacy, liability, banking friction, and filing complexity
- When the layered trust-holding-LLC structure is worth the added cost — and when it is not
The full comparison includes a feature-by-feature table (cost to maintain, privacy, liability, banking friction, tax filing complexity) and covers the layered structure many members actually use — a trust holding an LLC — and when that combination makes sense versus when it adds unnecessary cost.
3 more sections for members