What Are Business Trusts And Can I Put My Business in One?

When business owners decide on an entity for their business, they usually choose between a limited liability company (LLC) or a corporation. Both are good choices because they shield the business owner from liability, at least to an extent and if certain conditions are met.

However, many business owners are not aware that they have another option that can offer a similar kind of protection, while also offering additional advantages. And that is the business trust. If business trusts are new to you, you may well wonder: What are business trusts, and can I put my business in one? You may also wonder if you should.

What Is a Business Trust?

You are probably familiar with trusts for the purpose of passing assets on to your beneficiaries either during your lifetime or after death. They are fiduciary instruments into which you place your assets in order to transfer them. By placing assets in trusts it is possible to avoid probate. However, there are also restrictions.

Each trust must have four elements:

• A grantor
• A trustee
• Assets
• Beneficiaries

While these four elements apply to the regular estate planning trusts, the same elements are also part of business trusts. You may wonder just what is a business trust? The only real difference is that the asset inside the trust is the business. In other words, the trust is being or has been established for the purpose of operating the business, just like an LLC or a corporation is established for that very purpose.

What Are the Advantages of a Business Trust?

A business trust offers several advantages over an LLC or a corporation. Of course it shares the limited liability feature with the other entities. But there’s more:

A business trust offers much more privacy than an LLC or a corporation. That’s because they are not subject to the same state disclosure requirements as LLCs and corporations.

A business trust also saves its owner or owners a lot of extra work and potential expenses because it is not subject to the kind of filing and reporting requirements that LLCs and corporations must meet. It won’t have any annual fees, such as report fees.

On the other hand, you will need an experienced business trust attorney to guide you as you set up your business trust. You’ll also want them at your side on an ongoing basis to make sure everything is done properly. That can come with a significant price tag as well.

In addition, a business trust is a great estate planning tool that will make it much easier to pass the business on to heirs or sell it after the original owner dies.

When first setting up a business trust, several steps have to be taken. These include creating a declaration of trust. Inside that document, you name the trustee or the trustees, specify their powers and responsibilities, the terms of the trust, the interests of the beneficiaries, as well as the trust’s duration.

In Florida, you need to register your business trust with the Secretary of State and possibly with the Office of Financial Regulation.

You must also acquire an employer tax identification number (EIN), which you will get from the IRS. And, of course, you will need a business bank account for your trust, which will be owned by the trust, along with any contracts as well as the actual business or company.

Three Types of Business Trusts

There are three types of business trusts: grantor trusts, simple trusts, and complex trusts. All of them are set up by the grantor. However, they differ in terms of who has control over the trust and its distributions.

In a grantor trust, it is the grantor who stays in control and receives all distributions.

In a simple trust, the trustee must distribute any earnings produced by trust assets. However, the principal cannot be touched. Moreover, the trust is not allowed to make charitable distributions.

Complex trusts are almost the exact opposite of the simple trust. Such a trust must perform a number of activities each year. Where a simple trust cannot make charitable contributions, a complex trust can do so. It can also give portions of the principal, in whole or in part, to beneficiaries. However, a complex trust must always maintain a source of income, such as interest, a remaining portion of the principal, or business proceeds.

Uses of Business Trusts

A typical use of business trusts is to provide the grantor with protection from taxes, creditors, and lawsuits.

Business trusts can also be used for various other purposes. A grantor trust, for example, will let the grantor manage their business and also provide for their heirs after their passing.

A business trust can also provide continuity in a situation where you are either incapacitated or die and can no longer manage your business. In fact, what can happen after a business owner’s death can be a big reason to consider setting up a business trust.

Without a trust, heirs often have to sell the business just to pay their taxes, and they may not even be able to get a fair price for it. With a business trust, however, they would be able to take over the business and continue running it.

Next Steps

If you’re wondering whether a business trust is right for you, talk to a business trust lawyer about your situation. They will be able to help you figure out which type of trust is right for you and how best to achieve your goals. Call us for a free consultation and case evaluation. We will be happy to help you.

By:Melody Lankford
After graduating from Davidson College, Melody Lankford earned her J.D. from Florida State University’s College of Law in 2004 and was admitted to the Florida Bar that same year. Ms. Lankford joined Raydon Corporation as in-house counsel in 2004. She worked there until 2012, when she founded the Lankford Law Firm. She is an experienced Daytona Beach small business attorney who offers sound legal counsel and experience-based insights to her business clients.