Business Trusts

BUSINESS ENTITIES:

What form is your business?

Limited Partnership?
Corporation?
Limited Liability Company?
Business Trust?
Sole Proprietorship?

The Business Trust, an irrevocable, inter vivos trust.

Specific Purpose: A trust may be used to build and run a business in the same manner as natural person, partnership, corporation or limited liability company by performing all the acts and performances necessary to establish a business. A business trust is a "corporate entity" which does not receive any 1099 forms just as a corporation does not receive 1099 forms. It invoices any other business through its accounts receivable and is paid through the accounts payable of the other business. Just as a corporation or a partnership it pays its employees a salary, if it has employees, withholds any required funds just as any other business does, sends in quarterly taxes where required and files either a 1041 or 1120 tax return form depending on its activity or inactivity. The tax consultant may make that decision. Business expenses are itemized on the same Schedule C as is used with a 1040 (personal) tax form.

Origin: The business trust concept is based on the original Massachusetts Trust which was created to buy and sell real estate because, at the time it was created, corporations were not allowed to be used for selling real estate in the state of Massachusetts.

Structure: Business trusts differ from other irrevocable inter vivos trusts in that there is no separation of legal and equitable title. Both legal and equitable title are held by the Trust itself. The business trust operates as a business entity separate and apart from any unit holders or trusees and is the sole creation of the creator which appoints trustees to develop the chosen business.

Audit: A business trust is subject to audit just as is any natural person or any other business entity such as a corporation, partnership or limited liability company. Trusts are audited much less frequently than any other entity.

Special Provisions: The creator of this trust drafts a "contract" which becomes the "governing instrument" of the trust. This "governing instrument" is otherwise known as the indenture or the contract agreement. If the specific provisions are written in the "governing instrument" then those provisions override statutory law. If there is no provision covering a certain circumstance then the statutes apply.

The Board of Trustees in a business trust should consist of at least three (3) members and five (5) or seven (7) might be better. The signing power for purposes of banking transactions may be operable with one signature, but Lord & Carter recommends either two or three signatories which should be stipulated in the "governing instrument." The trustee may appoint a manager to fulfill certain accounting duties; however, the trustees are the final fiduciaries and ultimately responsible. In order to maintain the trust as irrevocable there must be an unrelated trustee; an adverse trustee (one who has a small financial interest in the trust estate) and a third trustee who is not a beneficiary, but may be related. One of several beneficiaries, may serve as one of several trustees. The sole beneficiary may not be the sole trustee.

Beneficiaries: In FDIC insured banks, accounts are insured up to $100,000; however, trust accounts are insured up to $100,000 per beneficiary as long as the beneficiaries are registered with the trustee.

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