Although MOST businesses are organized as corporations, partnerships or sole proprietorships, one even better way to organize a business is as an Unincorporated Business Organization Trust.
“A business or common-law trust, commonly known as a Massachusetts trust, is a form of business organization consisting essentially of an arrangement whereby property is conveyed to trustees, in accordance with the terms of an instrument of trust, to be held and managed for the benefit of such persons as may from time to time beholders of transferable certificates issued by the trustees showing the shares into which the beneficial interest is divided, which certificates entitle the holders to share ratably in the income of the property, and on termination of the trust, in the proceeds thereof.”[Corpus Juris Secondum 12A 495.]
“The essential attribute of a business trust is that the property is placed in the hands of trustees who manage and deal with it for the use and benefit of the beneficiaries.” Enochs & Plowers v. Roell, 154 So. 299, 170 Miss 44.
The U.S. Supreme Court recognized the existence of business trusts and explained their advantages in the case Morrissey v. Commissioner of Internal Revenue, 56 S. Ct. 289, 296 U.S. 344, 80 L.Ed.263.
Common law trusts are not new. Some major US businesses that were originally organized as common law trusts include: American Express, Pepperell Manufacturing, Massachusetts Electric, Chicago Elevated Railroad and Associated Simmons Hardware.
The common law trust is created by a private, written contract. A trust contract is basically created by two or more individuals: trustor or grantor – investor and trustee. The trustor or grantor – investor (the owner of the assets being transferred into the trust), makes an offer to the trustee to manage the trust. The trustor exchanges his or her assets (such as business interests, real estate, stocks and bonds) to the trustee for Units of Beneficial Interest (Trust Certificates) that are personal property similar to shares of stock in a corporation.
The advantages of a business trust far exceed the benefits of a corporation.
ADVANTAGE No. 1. Because the corporation is created by the state as a privilege, corporate benefits may be diminished, limited or eliminated by the state government, whereas business trusts, or unincorporated business organization’s (Business Trust) existence and operation are controlled by its contract, not by state corporation law.
ADVANTAGE No. 2. The state charges incorporation fees and ongoing annual fees. The Business Trust, as a privately created entity, does not have these expenses.
ADVANTAGE No. 3. A corporation (expect for a Subchapter S corporation that is taxed as a partnership) can be subject to double taxation (income taxes on corporate profits (unless zeroed out), then income taxes on dividends paid now or in the future from those profits to shareholders). In contrast, a Business Trust does not pay income taxes on its profits if it must distribute all of its net income to its beneficiaries – thereby escaping taxation as a simple trust.
ADVANTAGE No. 4. Likewise, capital gains taxes may be entirely avoided by a Business Trust that sells assets at a profit if the trust contract specifies that all net trust income is to be distributed annually to the certificate holders (beneficiaries) who will be the ones to report the capital gains as taxable income and pay any due taxes.
ADVANTAGE No. 5. Corporate officers and directors (and sometimes shareholder names) and financial dealings are a matter of public record and detailed annual reports. Business Trust affairs are private and not a matter of public record.
ADVANTAGE No. 6. The avoidance of probate administration is one major advantage of a Business Trust. If one’s assets are all owned by one or more trusts, at one’s death, there are no assets in the deceased person’s name to go through probate. The trustees and successor beneficiaries continue the uninterrupted administration and benefit of the trust assets and income.
ADVANTAGE No. 7. Because the Business Trust assets do not go through probate, a Business Trust cannot be challenged by persons falsely claiming to be heirs or creditors of the deceased person.
ADVANTAGE No. 8. Assets can often be protected against creditors while beneficiaries are alive because the Business Trust holds legal title to the trust assets with the result that beneficiaries cannot have their shares of capital units attached by creditors if the trust has valid spendthrift clauses.
ADVANTAGE No. 9. Like the initial funding of a new corporation, there is no income or transfer (gift) tax to put initial assets into a business trust (structured to be like a corporation in the initial funding process) because the transferor of the assets receives back a proportionate share of the Units of Beneficial Interest (Trust Certificates).
ADVANTAGE No. 10. Whereas corporate stock owned by a stockholder is liable for death taxes (to the extent the value exceeds exemptions and deductions), the assets to a properly structured, funded and administered asset preservation trust will not be part of the grantor’s estate who originally funded the trust when the trustor/grantor dies.