If you’re wondering why savvy investors are discarding Corps & LLCs for a Business Trust Company, then read on and discover the latest advantages.
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What You Want:
- Limited Liability
- Asset Protection
- EIN
- Business Banking
- Income Tax Options
Get all 5 with a Corporation, LLC or Business Trust Company
Inc/LLC
Corps & LLCs require – secretary of state registrations, filing fees, franchise taxes, corporate veil compliance, resident agents, managers, and public disclosure.
Nevada and Wyoming claim ‘laws’ for secrecy and privacy of the shareholders. But guess what – most other states offer shareholder privacy without specific laws.
But in every state – you MUST register that Corporation or LLC. You might call it a public breadcrumb trail. But who says you even need one at all?
Business Trust Company
Business Trusts are recognized in all states as a valid and legal form of business organization – with the right to do business, hold title and convey real estate, contract with others, and enforce rights in court.
They are substitutes for standard organizations. Property is conveyed to the trustees to be held, managed, or invested for the benefits of one or more beneficiaries. These beneficiaries often hold freely transferable shares unless restricted by the trust declaration.
Trustees are not ‘agents’ of the beneficiaries. They have a fiduciary duty to them.
Unlike standard organizations, there is no Secretary of State registration, fees, or franchise taxes for a private business trust. This means your business details are “unlisted” online.
Privacy Benefits for You
If you want to find any standard business organization try the Bizapedia website. You’ll find every Corporation and LLC registered in the US. Isn’t that great having your business details online for the whole world to see?
Now try looking up a private business trust on Bizapedia. We might know one that exists (“Western States Company”) but it’s unlisted. Nothing found. Nada. Now you know one important reason why savvy investors use Business Trusts.
Does it own real estate? Does it have a bank account? Does it own a consulting contract?
You’ll never know.
Digital versus Analog
When you form a corporation or LLC there is the Secretary of State’s database. Your business is forever connected to the public domain – digital world.
However, when you form a private business trust there is no public database. Your affairs can remain private – the analog world.
Corporations & LLC’s
They’re a great solution and ideal for large public companies with stockholders. They provide financial transparency and SEC filing reports. It’s exactly what you’d want in these investments. But this government oversight is unnecessary for your private business affairs.
Worldwide Acceptance
Read the Wall Street Journal, Financial Times, Bloomberg, or Reuters financial news and you’ll see Business Trusts used extensively in Singapore, the United Kingdom, Australia, South Africa, and India.
In the United States we often seem them as registered public investment companies such as REITs or Mutual Funds. Walmart uses them too.
Personal versus Commercial Trusts
Living Trusts are designed for estate planning. They fit within the category of “Personal Trusts” whose purpose is to conserve and distribute wealth. Business Trusts are designed for doing business. They fit within the category of “Commercial Trusts” whose purpose is to operate a for profit business.
To get the Business Trust Company e-Seminar click here.
Business Trust History – England
Centuries ago when business organizations were evolving a Royal Charter by the Crown was required to create a “chartered company” (corporation). This was often to grant trade monopolies.
Until the 19th Century only an Act of Parliament could “Incorporate” a company. But only the most powerful and politically connected businesspeople could obtain these charters. In addition, they needed permission from the Crown to own land.
Meanwhile the trust instrument is working its way through society and the English court system. It’s original purpose was for passing land in an estate.
But the trust structure gave the business guys an idea. They modified it for commercial enterprises. It was conventionally known as an unincorporated joint stock association (business trust). Insurance syndicates, trade unions and large public utilities uses this organizational format.
The English government tried to ban these unincorporated organizations and force them to incorporate with the Bubble Act. But it failed. The business trust guys kept on going. The Bubble Act was later repealed.
Business Trust Company History – USA
Corporations and Business Trusts later came to the United States.
The Massachusetts Bay Colony Corporation was a government monopoly. A law was passed that prevented other corporations from owning real estate and engaging in business. Without the protection of a corporation investors were unwilling to risk debtors’ prison and their wealth on a single venture.
We then see Massachusetts as the beginning of business trusts in the United States. Originally it was used by electric railway operators as well as gas utility companies.
The State Supreme Judicial Court in 1890 recognized the business trust as a legal entity. In this era the worlds largest companies were organized as business trusts. Rockefeller’s infamous Standard Oil was a maze of business trusts. AT&T, American Tobacco, General Electric, Banker’s Trust Company, etc.
The “Sherman Antitrust Act” of 1890 has a misleading title. More accurately it should read ‘Anti-Competition Act’ because it attacked monopolies, cartels and trusts.
The “Clayton Antitrust Act” of 1914 is also a misleading title. It sought to prevent anti-competitive practices such as price fixing.
Both Acts are often misunderstood as an attack on the Business Trust structure. NO. The problem was unlawful behavior.
Since 1940 Mutual Funds such as Vanguard organized as Business Trusts. Their industry holds trillions of dollars of assets. In the 1960’s real estate investment trusts (REIT) became popular and remain so today. You can find Walmart Business Trust is in the news too.
Secretary of State History
Early on corporate charters were a function of a state legislative body. Later individual states passed laws that allowed incorporation without an act of the legislature. But most were very restrictive, which is why we see the biggest companies organized as business trusts.
States were slow to open up but realized the benefits of jurisdiction over company formation and fees. New Jersey and Delaware were leading incorporation states. They could offer various incentives for businesses to base in their state. This meant revenue!
In the late 70’s limited liability companies were created in Wyoming – as a form of corporation ‘lite’ along with income tax options. Secretary of State revenues exploded.
In 1980 South Dakota lifted the cap on interest rates. Banks reincorporated there for credit card operations. Secretary of State revenues exploded. Capital and jobs flowed in. Asset Protection Trust legislation came later. More revenues. $2,500,000,000,000 of bank assets in their state.
In 2000 the state of Nevada was nearly broke. They decided to become Delaware west for business organizations. Since 2012 they have earned over $1,400,000,000 in annual filing fees.
Delaware is home to over 1,000,000 business organizations.
The states along with the legal community have done an excellent marketing job on Corporations and LLCs. They’ve earned billions in revenue – nonstop. But here’s an important question – they need you – but do you need them?
Statutory Business Trusts – Public
Eastern US states including Massachusetts and Virginia offer Statutory Business Trusts. Delaware passed their Statutory Trust Act in 1988. All require Secretary of State registration.
The original design was for large financial companies such as Mutual Funds and REITS that needed a trust format to operate. One primary driver of this format was income taxes. These organizations are for profit but unlike corporations do not pay tax at the organization level. Instead, profits and losses are passed directly to the shareholders.
So why didn’t they use a common law trust? This is because these organizations along with legislators wanted enhancements, transparency and clarity better aligned with their mission as a public company. Shareholders rights and bankruptcy provisions are two of the statutory trust enhancements.
Western states such as Nevada and Utah also have statutory business trusts. But they have minimal registrations compared to Corporations and LLCs.
In any of these states you may still choose to operate a common law business trust.
Common Law Business Trusts – Private
Smaller independent operators such as consultants or real estate investors may have no desire or incentive to register with the Secretary of State. They prefer to have their business “unlisted.”
They are also known as ‘Common Law’ business trusts. You could also technically call them “non-statutory.” They existed at least 200 years before statutory business trusts. They are the underlying foundation of statutory business trusts.
You can use them to create privacy and protection for any of these valuable assets:
- Consulting Contracts
- Real Property Holdings
- Banking or Brokerage
- Online Business
- Inheritances
- Financial Settlements
- Inventions & Patents
- Self-Directed IRA ROTH
- Cryptocurrencies
- Trust Deeds
- Prenup Substitute
The Main Differences
Statutory Business Trusts must register with the Secretary of State.
Common Law Business Trusts have no obligation to register with the Secretary of State.
The other difference is the declaration of trust itself. The statutory version includes broad powers for the beneficiaries to challenge trustees. It’s similar to how public company stockholders challenge the officers. The common law version may or may not have these powers.
Lawyer Handicaps
In America most legal professionals have zero business trust education or experience. This is because the subject matter was removed from law school’s curriculum by the mid-70’s.
None of the leading casebooks on business organizations or associations cover business trusts. There is no business trust question on the multi-state bar exam. A few lawyers have tried to reverse engineer a living trust into a business trust but honestly that’s sloppy and shallow.
Another reason is because there’s so little money with business trusts. Setup them up once. No maintenance. No veil. No minutes. No renewals. Minimal fees. Why bother?
Limited Liability – 3
In the conventional business structure, management and stockholders or shareholders have limited liability. This is also the case for business trust trustees and beneficiaries.
You get three types of limited liability safety. This includes protection for the company itself (trust), the persons who operate the business (trustees) and those that get the financial benefits (shareholders).
Consider how a REIT or Mutual Fund business trust operates. The trustees manage assets for the trust beneficiaries. No matter what happens to trust investments, liability risk falls upon the trust itself. Trustees and Beneficiaries have no personal liability.
Asset Protection
The personal assets of trustees and beneficiaries are protected. Only the business trust assets themselves are at risk.
Trustees are the legal owners of assets. They are not agents of the shareholders. They have a fiduciary responsibility to the shareholders. Provided that trustees manage the business without interference, the shareholders liability is little to none. This single fact alone is important to many investors.
If you own a share of a mutual fund and had a personal tax lien or civil judgement does that affect the other fund shareholders? No.
If the trustee of a mutual fund has a personal civil judgement does that affect the trust or the beneficiaries? No.
Providing you operate correctly – personal creditors, civil judgments or tax liens of any Trustee or any Beneficiary never attach to assets owned by the Business Trust.
Corporate Veil Risks
In exchange for compliance with state rules and regulations of the corporation and LLC models, companies are granted certain statutory protections. Should it fail to follow any of the state government requirements, the “corporate veil” (liability protection for the entity) is pierced. This can render management and owners personally liable for debts of the organization.
More painful is a tax audit. If the IRS or your State tax authorities request records and discover you failed to maintain the veil, they can disallow all business deductions and recast income to personal tax rates – years back to inception. This could be devasting.
Insurance claims are subject to denial if your Corporation or LLC fails to respect the veil. Imagine settling that big lawsuit out of your own pocket.
Your private Business Trust has no corporate veil or paperwork requirements from the state. Yet the participants – trustees and beneficiaries should keep prudent business records in accord with the original trust agreement.
Resident Agents
All states require Corporations and LLCs to maintain a “resident agent” for legal service. The agent physically resides in the state where the company is chartered and is required by law to accept legal papers served on behalf of a corporation or LLC.
Statutory Business Trusts registered with the Secretary of State will have a resident agent.
Private Business Trusts have no resident agent obligation. Nor do they have address requirements. Attorneys contemplating suing have an uphill battle. They must first identify the current trustees. Then locate the trustee(s) for service of process. It’s difficult, expensive, and time-consuming.
Federal Taxes
Federal and state authorities retain the power to tax the income of any business in your chosen domicile. However, a Business Trust has flexibility in how its classified and where.
Business Trusts have no special distinction in the Internal Revenue Code. Just like LLCs, you’re taxed as – an individual, partnership, or corporation.
Depending upon the number of beneficiaries, your default classification is disregarded or partnership.
You can elect corporation classification – either Subchapter “C” or “S” as desired.
C – ideal for investors seeking fringe benefits and long-term capital gains. (21%)
S – for those seeking maximum cash flow. (37%)
Double taxation chatter can be misleading. It really depends upon your objective – capital gains or cash flow. What is best depends upon your planning calendar.
If you’re applying for a loan with “S” classification, the underwriter will request both your personal 1040 and 1120S returns. If you use Subchapter C, they only need your personal return.
Franchise Taxes
Statutory business trusts are non-existent in California and many other states. Yet common law business trusts are ok. As a result, they’re exempt from paying the annual $800 franchise tax plus gross receipts to the Franchise Tax Board.
More Economical
Corporations and LLCs are cumulatively, paperwork intensive. They can take weeks to fully execute and document. Veil compliance adds to the document load. Naming conflicts occur. You must naturalize in every state you wish to operate.
Your Business Trust avoids all these state regulatory hassles and expenses. No name conflicts. No naturalization. No paperwork headaches. It’s a triple combination. They’re simple.
Set it up once and forget it. Change it when you want. You don’t need permission. Instead of regulatory compliance demands use your valuable time to make money and do business.
Dissolution
A corporation or LLC requires another public filing document with the Secretary of State to dissolve. And it’s the only way to terminate franchise taxes.
A business trust is easy to dissolve. Simply liquidate assets and distribute proceeds to beneficiaries.
Investors
Any business organization can have investors. Corporations have stockholders. LLCs have members. Business Trusts have shareholders. Various types of shares can have different benefits.
If you choose to have investors know that securities laws may apply. It doesn’t matter what type of business organization. The important question is, are the shares you’re offering technically a “security?”
Business Credit
Any type of business organization can obtain and built a credit profile. Corporations, LLCs and Business Trusts. Each organization has its own legal and financial identity.
When trustees of a new organization apply for credit, the lender will typically ask for a personal guarantee. Once the business has an established borrowing and payment history then it may obtain credit by itself.
Credit 101 fundamentals applies for any borrower – whether personal or business.
In the event of serious financial default, a Business Trust may file Chapter 7 or 11 BK in Federal Court.
In Conclusion
If you want all the benefits of a Corporation or LLC without the Corporation or LLC hassles then do a Business Trust Company.
And if you like the idea of having your business ‘unlisted’ online then definitely do a business trust.
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