The vast majority of business owners use either a corporation or limited liability company (LLC) as the vehicle to operate their business. Because both corporations and LLC extend limited liability and are separate from their owners, they are good business choices. However, business trusts, although a lesser-known option, are an equally good choice.
Business trusts fill some unique needs and might be a good choice, especially for real estate-owning businesses.Trevor Brewer, Business Attorney
While business trusts offer the same limited liability and operate as separate entities to conduct business, they also differ significantly in three ways: they bring a higher level of privacy, require less compliance, and provide a good estate planning tool. In this guide, we will discuss what is a business trust and how to use it.
We are all passingly familiar with trusts, but more than likely only in the estate planning sense. Nonetheless, these “estate trusts” share core similarities with business trusts that help us better understand business trusts. Trusts are composed of four things:
- A grantor,
- A trustee,
- Property, and
These four elements interact in a trust agreement or “declaration of trust,” which is a written document that outlines a trustee’s duties and responsibilities regarding trust property and the beneficiaries. The declaration of trust also controls the management, investment, and distribution of trust property, as well as providing for the termination of the trust and the final distribution of assets. These same things occur in a business trust. However, a business trust exists for the sole purpose of operating a business. On the other hand, even though estate trusts hold various forms of assets that generate income (e.g., stock, real estate, bonds, etc.) they are not solely established for business purposes. Therefore, let’s look at how to set up a business trust.
Like corporations or LLCs, and unlike estate trusts, business trusts are established to operate a business. Further, while a business trust can own interests in another business, that in and of itself should not be the purpose of a business trust.
Business Trust Advantages
Aside from limited liability, there are a few other business trust advantages. First, they offer a greater level of privacy over a corporation or LLC. Business trusts do not have the same state disclosure requirements as corporations and LLCs. Second, unlike corporations and LLCs, business trusts do not have ongoing state compliance and filing requirements. Third, there are no ongoing annual fees (e.g., an annual report fee or a franchise/privilege fee).
How to Set up a Business Trust
Florida law provides for the creation of business trusts and sets forth the minimum requirements in its business organizations statutes. To establish a business trust in Florida, you need to take these steps:
- Have two different people involved who come together for the purpose of conducting business (they do not need to be Florida residents);
- Make a declaration of trust (it is in the declaration of trust that you name the trustee);
- Register the business trust with the Florida Secretary of State;
- If the trust plans to offer ownership units, shares, or certificates, register it with the Office of Financial Regulation;
- Obtain an employer tax identification number from the IRS; and
- Open a bank account for the business trust.
Under Florida law, before you begin to operate any business under a business trust, you need to set up the business trust through the above steps.
Operation of a Business Trust
What does it mean to establish a business trust to run your business? Let’s start with what a business trust should consider owning. At a basic level, the business trust should own its operating bank account and all its commercial contracts (i.e., the business trust signs the contracts). After that, it’s up to you what else your business trust should own. However, you may want to consider keeping vehicles and equipment out of the business trust’s name. As an alternative, the business trust can own the company that owns these assets. The important point is this decision is solely based on how you want to manage trust risk.
The trustee is the one who will run the day-to-day affairs of the business. They can delegate some of these duties to officers or employees of the business trust. However, the trustee essentially runs the business in much the same way as a president of a corporation or a manager of an LLC would.
Business Trust Income
The terms of the declaration of trust dictate how to distribute the business trust income. Below, we briefly discuss three types of business trusts. However, you should consult a professional about the differences before you make a decision. The three general types are:
- Grantor trust—established by the grantor who is also the beneficiary, and all income is distributed to the grantor each year;
- Simple trust—established by the grantor for the benefit of others, and all income is distributed to the beneficiaries each year; and
- Complex trust—established by the grantor for the benefit of others, and the income may or may not be distributed to the beneficiaries each year depending on the terms of the declaration of trust.
Again, the above are very simplified explanations. You should have a longer and more detailed discussion with a trust instrument professional before you commit to one model.
Business Trusts In The Long Term
A final benefit to business trusts is estate planning. More often than not, a single person owns a small business. When that business owner dies, the sale of his ownership interest in a business can be difficult because there is no viable market for the sale of closely held business ownership interests. As a consequence, the sale of ownership interests is often below value or otherwise unsellable.
In a business trust, the beneficiary is the indirect business owner, so their death should not impact the business. The declaration of trust will dictate what to do with the deceased beneficiary’s interest. Since no pressure to sell exists, it preserves the value of the asset and the business continues uninterrupted.
Business Trust Taxes
How a trust is taxed depends on its structure. For example, the grantor/beneficiary tax rate applies to grantor trusts, and the trust tax rate applies to held back income in a complex trust. Thus, when considering how to set up a business trust, we urge you to consult a tax professional who can help structure the business trust in the most beneficial way for tax purposes.
BrewerLong Knows Business Trusts
At BrewerLong, our attorneys have a keen understanding of business structures and will advise you on what is a business trust and business trust advantages. We do not take the road most traveled, but the road that is most prosperous for you. Give us a call so we can help you along the path to ongoing success.
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