Three elements business owners want in a business organization

Limited Liability
Asset Protection
Income Tax Options

Types of business organizations in the US for these benefits

Corporations
Limited Liability Companies (LLC)
Business Trusts

But why haven’t you heard about business trusts?

I’ll explain that later but let’s begin with the origins. How did they come into being and what was their purpose? Then we fast forward with understanding to why. It’s easier. You’ll want one too.

VIDEO – What Is a Business Trust – 2015

Business Trust History – England

Centuries ago businessmen were seeking a way to protect themselves personally from their business ventures. You’re heard of the East India Company. It was hardly an inexpensive Wyoming corporation purchased online. It required a Royal Charter by the British Crown or Act of Parliament to create a “chartered company” (corporation).

Only the most powerful and politically connected businesspeople could obtain these charters. If they wanted to own land, they needed separate permission from the Crown.

Meanwhile the “trust” concept is working its way through society and the English court system. The original purpose of a trust was for passing land to heirs while circumventing various feudal laws.

A trust has legal title holders (trustees) and equity interest holders (beneficiaries). Over time the personal obligations of the trustees and beneficiaries were unaffected by events directly related to the trust property itself.

This was also the beginning of the equity concept because common law was too rigid. So there were two courts, common law and equity law. Later on they were merged into single system where equitable principles would prevail over common in case of conflict.

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).

It was an alternative solution to government issued corporate charters. They enjoyed tradable shares, strong entity shielding, liquidation rights, trustee and beneficiary protections. 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 1720 Bubble Act. But it failed and was later repealed. The business trust guys just kept on going.

Business Trust History – USA

Corporations and Business Trusts later came to the United States.

In 1787 the Trust concept was embodied in the United States Constitution. At the dawn of the industrial revolution, the U.S. Supreme Court confirmed that businesses could formally organize as trusts.

The Massachusetts Bay Corporation was real estate monopoly sanctioned by the government to form a Colony. 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.

In 1795 competitors counter-attacked by forming the first Massachusetts Business Trust. They could own real estate, operate electric railways and gas utility companies.

The State Supreme Judicial Court in 1890 recognized the business trust as a legal entity. In this era the world’s largest companies such as Rockefeller’s infamous Standard Oil, AT&T, American Tobacco, General Electric, Banker’s Trust Company, etc. were organized as business trusts.

Rather than corporations, the shrewd financial and industrial magnates of America chose trusts to create their empires. They used the specialized Delaware Chancery Court to advocate for the equitable rights of trust beneficiaries. It was a clever setup.

Secretary of State Restrictions

Just like in the UK corporate charters were a function of a state legislative body. Over time individual states passed laws that allowed incorporation without an act of the legislature. But most were very restrictive along with special taxes for out-of-state corporations. This is why we see the smartest, biggest companies organized as business trusts. They circumvented state laws and taxes.

Incorporation Statutes:

(1)          prohibited dealing in real estate
(2)          established minimum and maximum capital amounts
(3)          must file detailed annual statements of assets and liabilities

The prohibition against a corporation’s dealing (owning) in real estate is generally considered the major reason for the growth of business trusts because they were exempt from this restrictive statute.

Anti-Trust Legislation

The “Sherman Antitrust Act” of 1890 is a misleading title. More accurately it should read ‘Anti-Competition Act’ because it attacked monopoly and cartel behavior.

The “Clayton Antitrust Act” of 1914 is also misleading. This legislation sought to prevent anti-competitive practices such as price fixing.

Both Acts are often considered an attack on the Business Trust structure. Nope. The problem was unlawful (per the politicians) behavior by the owners.

Modern Business Trusts

Since the 1940’s publicly traded Mutual Funds such as Vanguard have organized as Business Trusts for tax reasons. In the 1960’s real estate investment trusts (REIT) became popular and remain so today. Even in 2024 this industry holds trillions of dollars of assets. You can find Walmart Business Trust is in the news too. It appears they’re strategically used to reduce property taxes.

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.

Limited Liability

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.

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.

VIDEO – Business Organization History – Bank Street London

Business Trusts – Statutory

Eastern US states including Massachusetts and Virginia have offered Business Trusts since 1795. Delaware recognized them and passed the Statutory Trust Act in 1988.

The original purpose was for large financial companies such as Mutual Funds and REITS that preferred 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, losses and dividends managed by the trust trustees are passed directly to the shareholder beneficiaries.

So why did they need statutory provisions? This is because these organizations along with legislators wanted transparency and clarity better aligned with their mission as a public company. Shareholders rights and bankruptcy provisions are two of the statutory trust enhancements along with special tax treatments. Statutory trusts and corporations are both artificial persons created by government permission.

Western states such as Nevada and Utah also have statutory business trusts for smaller, private operators. But compared to Corporations and LLCs they have minimal reporting despite public registration.

Others include Massachusetts, Virginia, Nevada, Minnesota, etc.

Business Trusts – Common

More flexible are common law business trusts. They’ve existed since the late 17^th century in England which clearly predates the US statutory version.

Those who desire privacy or anonymity from the internet may prefer to use the common law format. If setup correctly there is no state registration, yet they still offer asset protection, limited liability and income tax options. A non-statutory business trust is a natural person, with all the rights of an individual.

The Main Differences

Statutory Business Trusts register with the Secretary of State.

Common Law Business Trusts have no registration obligation.

The other difference is the declaration instrument itself. There are different powers and responsibilities for both trustees and beneficiaries.

Investors

Any business organization can have investors. Corporations have stockholders. LLCs have members. Business Trusts have shareholders.

If you choose to have investors securities laws may apply. It doesn’t matter what type of organization. Securities vs organization are two separate issues.

Information Vacuum

99% of discussions in the US are regarding ‘personal’ trusts. These are living trusts. The lawyers and online platforms focus on them for estate planning. The federal tax code for trusts is 99% about living trusts. These personal trusts are straightforward in nature.

A tiny percentage is about ‘commercial’ trusts, also known as business trusts. Very few people and professionals know of their existence let alone how to use them. Even lawyer websites get their basic facts about business trusts wrong. They also assume living trust tax code rules apply. These commercial trusts can result in a heady matrix.

Popular terms such as spendthrift, revocable, irrevocable, discretionary, self-settled, grantor, non-grantor, common law, constitutional law, pure, etc. have absolutely nothing to do with a business trust. If anyone tries to impress you with these $12 words, run the opposite direction.

Lawyer Handicaps

In America many lawyers are familiar with personal (living) trusts for estate planning. But only a sliver of them are knowledgeable about commercial (business) trusts.

As a law school curriculum course, “Trusts” were eliminated 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 it doesn’t work that way.

If asked, lawyers will always steer you toward statutory business trusts with secretary of state registration. Just like corporations and LLCs this is their default domain. Common law business trusts which rely upon Equity Court jurisdiction are rarely, if ever recommended.

Applications – How Many Ways Can I Use a Business Trust?

To see how we advocate using business trusts click on any of the links below. It will take you to another page on the Trustarte website. What a business trust is, is only the beginning. Success is ‘how’ you use it!

Business Trust Company – What is it?