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Looking to learn more about business trusts?
In this article, you’ll learn about:
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A business trust operates as a legal entity that holds and manages assets for the benefit of its beneficiaries.
It’s created through a trust agreement or declaration.
The trust is managed by a trustee who must act in the best interests of the beneficiaries.
Beneficiaries are the individuals or entities that benefit from the trust’s assets.
The trustee has a fiduciary duty to manage the trust prudently and honestly.
The trust’s purpose and rules are defined in the trust agreement.
The trust can own property, investments, and other assets.
Income generated by the trust is distributed to beneficiaries based on the agreement.
A trust can be revocable or irrevocable, and it helps with estate planning, asset protection, and avoiding probate.
A business trust, often called a “Common Law Trust,” is a unique type of business organization.
It’s formed when assets are transferred to a trustee, who then manages those assets for the benefit of individuals known as beneficiaries.
In essence, it’s like an agreement where the trustee runs the business, but the beneficiaries reap the profits.
A business trust operates much like any corporation or partnership but with a different legal structure.
Trust Code governs the formation, operation, and dissolution of business trusts.
Business trusts can conduct a range of business activities, from real estate investments to more traditional business operations.
The trust structure provides potential benefits such as:
However, just like any business entity, it requires careful planning and management to ensure legal compliance and financial success.
Yes, you can put a business in a trust.
A trust is a legal arrangement that allows you to transfer assets, like a business, to be managed by a trustee.
The trustee holds the assets on behalf of the beneficiaries you name.
This method helps protect the business, can offer tax advantages, and ensure a smooth transition of control if something happens to you.
However, the process is complex and varies based on the type of trust and business structure.
Therefore, it’s important to carefully plan and consider all aspects before moving your business into a trust.
Here’s an example of a business trust:
Let’s say we have a company, Peach Properties LLC, that owns several commercial real estate properties in Atlanta.
The company wants to protect these assets and manage them efficiently.
To do this, Peach Properties decides to form a business trust.
This example simplifies the process, but it illustrates how a business trust operates.
Each step of setting up the trust, from creating the declaration to naming beneficiaries, would be governed by state-specific laws and regulations.
The Peach Properties Trust, once established, operates as a separate legal entity and provides several benefits to the original owners.
Let’s look at the different types of business trusts.
Real Estate Investment Trusts (REITs) are a type of business trust.
They let individuals invest in large-scale, income-producing real estate.
The idea is similar to a mutual fund for real estate.
A REIT can invest in various types of properties.
These include offices, apartments, warehouses, shopping centers, and even hospitals.
To start a REIT, a business must comply with certain rules.
First, it needs to be structured as a corporation, trust, or association.
Second, it must be managed by trustees or directors.
Third, its shares need to be transferable.
Fourth, it must have at least 100 shareholders.
Also, at least 75% of a REIT’s income must come from real estate.
And it should invest at least 75% of its total assets in real estate, cash, or treasuries.
Most importantly, a REIT must distribute at least 90% of its taxable income to shareholders annually.
By meeting these criteria, a REIT can avoid paying corporate income tax.
The tax burden is passed onto the shareholders instead.
Read More: How To Put A House In A Trust
A Delaware Statutory Trust (DST) is a legally recognized trust created for business purposes.
It’s a flexible structure used mainly for holding, managing, and investing in business assets.
In a DST, the investors are beneficiaries who own a “beneficial interest”.
This interest represents their claim on the income or profits of the trust.
The trustee manages the DST and has the power to make decisions about the trust’s assets.
DSTs are primarily used in real estate investments, but they can also be used for other business assets.
For example, they can hold securities, cash, or even artwork.
However, DSTs are under the jurisdiction of Delaware law, even if the assets or beneficiaries are located in other states.
Investors can still take advantage of DSTs for their investment needs, but the DST itself is governed by Delaware law.
This is because Delaware’s business laws are generally more flexible and favorable for business trusts.
For businesses, DSTs offer several benefits.
They provide liability protection, as the beneficiaries are not personally responsible for the trust’s debts or obligations.
DSTs also allow for a large number of investors, and they are exempt from corporate income tax in Delaware.
DSTs can be a useful tool for investors looking for a flexible and tax-efficient investment structure.
However, they must comply with Delaware’s laws and regulations.
And any business activities conducted may still be subject to state-level business regulations and taxes.
Read More: How Much Do Trusts Cost?
Business and Industrial Development Corporations, often known as BIDCOs, are a type of investment company.
They’re designed to provide capital to and stimulate the growth of businesses in a particular region.
BIDCOs can play a crucial role in supporting local industry and economic growth.
A BIDCO is formed as a corporation or a business trust.
It’s typically privately held, and its primary function is to invest in or offer loans to small and medium enterprises (SMEs).
The main goal is to foster business growth and development, especially in sectors vital to the state’s economy.
BIDCOs are regulated by the state.
This means they follow specific regulations to ensure their operations align with state economic development goals.
For instance, they may be required to invest a certain percentage of their assets within the state.
In terms of applicability, if you’re an SME seeking capital, you might consider partnering with a BIDCO.
Similarly, if you’re an investor looking to stimulate local economic growth while potentially earning returns, investing in a BIDCO could be a viable option.
Lastly, BIDCOs can be an important part of a state’s strategy to attract more businesses.
This is by providing accessible funding and supporting the growth of existing enterprises.
This makes them a significant aspect of the business trust landscape.
Read More: Tax Implications Of Transferring Property Into A Trust
Here’s a simplified guide on setting up a business trust:
Read More: What Assets Cannot Be Placed In A Trust?
Here is how to put a business into a trust:
Let’s look at the pros and cons of business trusts.
In this section, we’re comparing business trusts to:
A business trust is a legal arrangement designed for the operation of a business.
Here’s how it works:
A family trust, on the other hand, is typically used for personal asset management and estate planning:
Key differences between these two types of trusts:
Overall, the choice between a business trust and a family trust depends on your goals – running a business efficiently or planning your estate.
A business trust and an LLC are two distinct types of business structures.
In a business trust, assets are managed by a trustee on behalf of beneficiaries.
Trustees have legal ownership and control of the assets.
But beneficiaries have the financial benefit.
Business trusts can offer:
In an LLC, members own and manage the business.
They also share in the profits.
An LLC offers liability protection, meaning personal assets are typically protected if the business has debts or legal issues.
Unlike an LLC, a business trust isn’t recognized as a separate legal entity.
This could influence how it’s treated for tax and legal purposes.
In terms of taxation, LLCs are subject to pass-through taxation.
The LLC itself doesn’t pay taxes, but income passes through to the members who report it on their personal tax returns.
A business trust might be taxed differently, depending on the type and structure of the trust.
A business trust is a special legal entity.
In this structure, a trustee manages the business assets for the beneficiaries benefit.
On the other hand, an S Corporation is a standard business setup.
Shareholders own the company, and directors oversee operations.
The trust owns assets in a business trust.
This structure can protect assets better than other forms.
It’s because the trust’s assets usually stay safe from the beneficiaries’ personal creditors.
Conversely, S Corporations offer less asset protection.
Shareholders’ company shares are at risk if they have personal financial issues.
Business trusts and S Corporations differ significantly in tax matters.
A business trust operates as a pass-through entity.
This means the trust distributes income to beneficiaries, and they pay taxes at their individual rates.
An S Corporation is also a pass-through entity.
But it can distribute income as both salary and dividends.
This flexibility can yield tax savings.
In terms of management, business trusts are more flexible.
The trust agreement contains operation rules and can be customized to meet specific needs.
S Corporations must follow strict structures, including a board of directors and yearly shareholder meetings.
Establishing a business trust or an S Corporation needs different processes and paperwork.
To set up a business trust, you draft a trust agreement and sometimes file a Certificate of Trust.
For an S Corporation, you file Articles of Incorporation with the state.
You also need to follow other rules, such as making bylaws and issuing stock.
A Business Trust and a C Corporation are both business structures but have different characteristics.
In a Business Trust, the assets of the business are held by a trustee for the benefit of beneficiaries.
The trustee has control over the assets and day-to-day operations.
This structure allows for great flexibility in terms of business management and profit distribution.
It also offers a layer of privacy as trust arrangements are typically not public record.
On the other hand, a C Corporation is a legal entity separate from its owners, who are shareholders.
It’s managed by a board of directors elected by the shareholders.
C Corporations have to pay corporate tax on their income, and when profits are distributed to shareholders as dividends, they are taxed again.
This is known as double taxation.
In terms of liability, both structures offer protection to owners.
Business Trust beneficiaries and C Corporation shareholders are typically not personally liable for the business’s debts and obligations.
Business Trusts may have some tax advantages over C Corporations, including avoidance of double taxation.
However, the specifics depend on the individual circumstances of the business.
Lastly, C Corporations may be more recognizable and therefore preferable for businesses seeking external investment.
Business Trusts offer a more flexible and private alternative.
If you want to set up a business trust, fill out the form below.
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