Can a Trust Own an LLC in California?

A trust can own a Limited Liability Company (LLC) in California, a structure used to merge business ownership with estate planning. This arrangement provides the liability protection of an LLC while using the trust to manage and transfer business assets, potentially avoiding probate. Holding LLC membership interests within a trust also helps ensure the business can continue operating without interruption if the owner becomes incapacitated or dies. The LLC isolates business risks, meaning a creditor of the LLC can only seek satisfaction from the LLC’s assets, not other assets held by the trust.

## Required Information and Governing Documents

To establish an LLC owned by a trust, you must gather information from the trust’s governing documents. Identify the official legal name of the trust as it is written in the trust agreement, along with the full legal names of all current trustees. The trust document must be reviewed to confirm the trustee is explicitly granted the power to invest in and manage business interests like an LLC. Without this specific authorization, the trustee may lack the legal capacity to hold the LLC membership interest on behalf of the trust.

You will also need to collect details for the LLC’s formation documents. This includes selecting a proposed name for the company, which must comply with California’s naming requirements by including an identifier such as “Limited Liability Company” or “LLC.” The name cannot contain prohibited words like “Bank” or “Trust.” You must also designate an Agent for Service of Process, a person or corporate agent with a physical California address who will accept legal documents for the LLC.

Two documents are foundational to this process. The first is the Articles of Organization (Form LLC-1), the official document filed with the California Secretary of State to create the LLC. This form requires the LLC’s name, its principal business address, the agent’s information, and whether the LLC will be member-managed or manager-managed.

The second document is the LLC Operating Agreement. While not filed with the state, this internal document governs the LLC’s operations. When a trust is the owner, the operating agreement must identify the trust as the member by its full legal name and date. It should also detail the trustee’s authority and establish procedures for trustee succession.

## Forming a New LLC with Trust Ownership

The completed Articles of Organization (Form LLC-1) must be submitted to the California Secretary of State. This can be accomplished online, by mail, or through in-person delivery. A filing fee, currently $70, must be paid at the time of submission.

After the Secretary of State processes the filing, you will receive a certified copy of the Articles of Organization, which serves as official proof of the LLC’s existence and contains its assigned 12-digit entity ID number. There are immediate post-filing actions required to maintain compliance.

Within 90 days of formation, the LLC must file an initial Statement of Information (Form LLC-12) with the Secretary of State. This form provides details about the LLC’s management and agent. You must also obtain a federal Employer Identification Number (EIN) from the Internal Revenue Service (IRS), which is required for tax purposes and to open a business bank account.

## Transferring an Existing LLC into a Trust

To move an existing LLC into a trust, the first step is to review the current LLC Operating Agreement. This document may contain specific clauses regarding the transferability of membership interests, including potential restrictions or requirements for obtaining consent from other members in a multi-member LLC.

The transfer is accomplished through a legal document called an “Assignment of Membership Interest.” This document formally records the transfer of ownership from the individual (the assignor) to the trust (the assignee). It must identify both parties, reference the specific LLC interest being transferred, and state the effective date of the transfer.

Following the assignment, the LLC’s governing documents must be updated. This involves formally amending the LLC Operating Agreement to remove the individual’s name as a member and list the full legal name of the trust as the new member.

Finally, the LLC must notify the California Secretary of State if the transfer changes its management structure or the identity of its members or managers by filing an updated Statement of Information. You must also update the LLC’s internal membership ledger and notify the IRS of any change in the “responsible party” for the LLC’s EIN.

## California Tax and Compliance Obligations

LLCs in California are subject to specific ongoing tax and reporting duties. Nearly every LLC registered in California is subject to an $800 annual franchise tax, payable to the Franchise Tax Board (FTB). This tax is due every year, regardless of revenue or business activity, with the first payment due by the 15th day of the fourth month after formation.

In addition to the franchise tax, California imposes an LLC fee based on the company’s total annual income sourced from within the state. This fee applies only to LLCs with annual incomes of $250,000 or more and is tiered, with the fee amount increasing as income rises. Both the franchise tax and any applicable LLC fee are paid with the LLC’s annual state return.

The way the LLC’s income is taxed at the federal and state levels depends on the type of trust that owns it. If the owner is a grantor trust, such as a revocable living trust, the LLC is considered a “disregarded entity.” This means the LLC’s income and losses are passed through and reported directly on the grantor’s personal income tax return (Form 1040). The trust itself does not file a separate income tax return.

If the LLC is owned by a non-grantor trust, like most irrevocable trusts, the trust is recognized as a separate taxable entity. It must file its own income tax return, IRS Form 1041 and California Form 541, to report the LLC’s income. Income that is retained by the trust is taxed at specific trust tax rates, while income distributed to beneficiaries is reported on their personal tax returns.

Every two years, the LLC must file a Statement of Information (Form LLC-12) with the California Secretary of State. This filing, which has a $20 fee, updates the state’s records with the LLC’s current agent for service of process and other details.