A business trust is a commercial organization managed by appointed trustees (who hold the business assets and run the business) for the benefit of one or more beneficiaries. A business trust is treated as a legal entity by the tax authorities and must have (1) a business purpose, and (2) must function as a business. Also known as an unincorporated business organization.
A business trust will usually be established as an alternative to a standard business entity (LLC, partnership, corporation etc) because in a business trust, the interests of the partners are represented by a trustee. The beneficiaries actually have very limited liability in the profits of the business.
A business trust is set up when the assets and property of a business entity are entrusted to an appointed trustee. The trustee will manage the operation and assets of the business, not for their own profit, but for the profit of the beneficiaries. The person who creates the business is referred to as the Trustor. The beneficiaries may receive a certain amount of income throughout the duration of the business trust. At the time when the business trust is over, the ownership of the business will eventually be transferred to the beneficiaries.
People will engage in a business trust for a variety of reasons. It may be to solidify business management and succession. It may be to safeguard certain assets from a lawsuit, creditors, or taxation. The trust document specifies the duration of the agreement, outlines the responsibilities of the trustee, as well as the interests of the beneficiaries. The trustees will hold the actual title for the business, but the beneficiaries will receive certificates as proof of their interests in the trust.
Taxation of business trusts vary from state to state. Asset protection also varies state by state. Choosing the right state becomes essential to maximize the potential benefits of a business trust. We situs all our business trusts in the state of Wyoming. Wyoming has no state income tax and favorable asset protection statutes.
Significant income tax planning and asset protection opportunities can be obtained when a business trust is combined with a spendthrift trust. Normally, the spendthrift trust will own the business assets and lease them back to the business trust. The business trust provides all the operational expertise and cash flow management required to maintain the day-to-day business activities.