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.
If you have concerns regarding a business trust, please reach out and speak with one of our business lawyers in Orlando today!
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:
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.
In business, ‘trust’ refers to the confidence and reliability established between entities in commercial relationships. It’s foundational for successful partnerships, customer loyalty, and ethical business practices. Unlike the legal trust structure, which operates without traditional owners for the benefit of beneficiaries, trust in a business context is about building and maintaining strong, dependable connections.
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.
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).
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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:
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.
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.
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:
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.
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.
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.
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 or contact us online so we can help you along the path to ongoing success.
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Michael Long, a distinguished Business and Litigation Attorney at BrewerLong, brings a unique blend of tenacity and insight to his practice, honed from his time as a decorated combat veteran in the Marines. Specializing in complex litigation, Michael adeptly navigates the intricacies of business break-ups, professional liability, and a wide array of disputes encompassing tax, trust, real estate, contract, intellectual property, and loan issues. His expertise extends to business counseling, where he skillfully handles commercial contracts, company creation, intellectual property challenges, and more. Michael’s approach is holistic; he leverages his transactional and litigation experience to foresee and tactically address both immediate and long-term client needs, ensuring practical, cost-effective solutions that maximize benefits while minimizing risks. His commitment to excellence is evident in his affiliations with prestigious organizations like the American Legion, Central Florida Christian Chamber of Commerce, and the Orange County Bar Association, among others. He’s a committed advocate, driven by a passion to deliver results and justice for his clients.
