When choosing a structure for your business, you might have considered sole proprietorship, LLC, and other common business types. However, creating a trust for a business causes confusion for many people since they typically associate this term with retirement plans and estates. What is a business trust?
Top Hat Business Brokers helps new and veteran business owners make profitable choices for their business interests. We use our experience and expertise to help each client navigate the best route to protect commercial and personal assets. Below, we’ll answer your questions regarding business trusts and help you determine whether it is the best structure for you.
What Is a Business Trust?
Unlike sole proprietorships and LLCs, business trusts separate your business from you. In other words, you turn your business into a separate entity. You treat it like you would your personal estate.
Like traditional trusts, you will name trustees and beneficiaries. A business trust allows you to act as both trustee and beneficiary. However, you cannot serve as a trustee and the sole beneficiary of your business.
Many business owners add shareholders or investors as beneficiaries alongside themselves. If you own a family business, you can choose family members as beneficiaries instead. As you will see below, you can also vary how you structure your trust.
The Structure of a Trust
First, you, the business owner, discuss the terms of the agreement for establishing the business trust. You’ll hire a mediator or a trust lawyer to ensure you, other trustees, and the beneficiaries craft a balanced agreement. This document includes:
- The trustees’ directives and responsibilities: The agreement outlines your power, how you can use your power, and your influence over specific assets.
- What the beneficiaries can gain from their positions: You’ll determine whether they earn a portion of the business’s profits, shares, property, and other assets.
- The trustees’ commitment to act in the interests of their beneficiaries: When you agree to the terms of a trust, you must honor the agreement by using your power and access to assets in the interest of any named beneficiaries.
- When the trust expires: Finally, you’ll determine how long the trust will last. Once the trust expires, the beneficiaries can inherit the business’s interests.
You can choose business partners and other involved individuals to serve as trustees when planning a business trust. While most business owners choose people as beneficiaries, some may also add other businesses they own to benefit from the profits of another brand.
Different Types of Trusts
Business trusts fall under one of two subsets: irrevocable and revocable trust. When you establish an irrevocable trust, you identify terms of agreement that you and other involved parties cannot easily change. By contrast, a revocable trust allows you to make changes as needed or abolish the previous terms and seize full control of trust assets.
After choosing your preferred subset, you’ll select the type of trust you want to instate:
- Grantor trust: These trusts involve three parties, including the grantor, the trustee, and the beneficiary. The grantor controls how the business moves money, including the portion beneficiaries receive and taxes owed.
- Simple trust: The IRS verifies and recognizes the presence of this type of trust. The trustee delegates business profits directly to the named beneficiaries. They cannot manipulate or handle simple assets such as money, property, or inventory.
- Complex trust: This trust has an identifiable income source. The trustee distributes a portion of business funds to the beneficiaries. They can also donate profits to other named organizations.
Although business trusts seem complicated at first glance, they can help you distribute various assets to pertinent parties within your business model. An experienced broker will examine your current plans and guide you toward the trust type that best fits your brand.
Perks of a Business Trust
When business owners opt for business trusts, they understand the numerous benefits they and their chosen beneficiaries can reap. What do those benefits look like? How do they affect the way you operate your business? Explore some perks below.
When you establish a business trust, you transfer business ownership to the trust. Therefore, you don’t directly own the business. Transference prevents involvement from a probate court should you pass away.
A trust handled by multiple trustees ensures that the business remains under the same management regardless of the circumstances. Whether you encounter an emergency or an untimely death, you can rest assured that your operation remains largely untouched beyond the previously assigned trustees.
Estate Tax Reduction
If you own your business, you’ll pay estate taxes for the property and assets connected to it. Placing the business under a trust’s ownership can reduce the estate costs associated with straightforward ownership. Therefore, you could significantly reduce your annual owed taxes by entering your business under a well-formed trust.
Streamlined Business Succession
What is a business trust, and how does it influence your succession plan? The business trust does not simply influence the succession plan. It can serve as your succession plan.
When you choose your trustees, you can also select the order in which they will own the business. For example, you started a thriving business five years earlier. Your trustees include your spouse, 27-year-old nephew, and 20-year-old daughter. If an emergency demands your attention, you can choose your wife as the next trustee in your succession plan.
If you and your wife retire, you can leave the business under your nephew’s management. Once your nephew chooses a new career or lifestyle, he can transfer business management to your daughter. A business trust ensures smooth transitions between leadership in the form of trustees.
Many business owners struggle to separate their business expenses and assets from their personal ones. One can easily entangle themselves in an unending web of connected accounts, deposits, expenditures, and other financial elements. A trust completely eliminates these issues.
Since you don’t directly own your business, you can only make business-related purchases, withdrawals, and other financial actions under the trust. You’ll add another layer of financial security to your business management experience.
Speaking of extra security, a trust protects your privacy and identity. Any property or assets owned by the trust won’t appear under your name.
For example, say a disgruntled customer wants to know to whom your business property belongs. You have no way of knowing their intentions or why your service or product didn’t satisfy them. Rather than leave a review, they want to learn more personal information about the people who own the company. However, the customer only finds the name of the trust connected to the business property and name.
The trust could protect your identity, financial information, and property records related to your business. Your indirect ownership can also prevent cybercriminals from taking advantage of any data insecurities connecting you to your business.
Easy To Implement
Structuring and launching a business is often an arduous process. While creating a trust might sound complicated at first glance, you can instate it as an integral structural element with ease. If you use other structures, you must handle the following essentials separately:
- Establishing a line of succession
- Protection of your identity
- Separation of personal and business assets and financial actions
- Estate tax management
However, a business trust keeps each point neatly packaged within its agreement.
Downsides of a Business Trust
Although a trust has many benefits, it comes with a few unappealing aspects. While the pros far outweigh the cons for many business owners, you should still understand how a trust could impact how you manage and operate your business. Learn how a trust might negatively influence your business ownership below.
The neat, structural packaging afforded by business trusts comes at a steep cost. Since such an agreement keeps pertinent elements contained, it comes with an extensive amount of paperwork. You’ll need experienced administrators to tackle consistent documentation, recordkeeping, and account balancing to maintain transparency, organization, and access to pertinent information.
The IRS doesn’t define trust as a business entity. However, it will still subject you to various regulations and descriptive terms. You’ll need a knowledgeable accountant to ensure the trust and its connected business entities adhere to state and federal tax requirements.
Your beneficiaries will always come first per the trust agreement. Your chosen beneficiaries may include investors, family members, and others. As mentioned in the beginning, you can act as a trustee and beneficiary, too. However, you cannot be the sole beneficiary when you act as a trustee. Therefore, you have a fiduciary responsibility to all individuals you list in your trust agreement.
Who Should Consider a Business Trust?
Will a trust serve your business well? Or should you consider a different organizational structure? Competent advisors typically recommend business trusts to clients who:
- Own a business they want to continue after they pass away
- Want to keep their business and its assets in the family
- Need a structure that simplifies their managerial duties
- Want to ensure the profits and assets directly benefit specific parties
- Prefer extra security rather than a direct and public connection with their business
Do these descriptors fit your preferences? If so, a business trust might offer an optimal solution. Its positives vastly outweigh the negatives for most business owners.
Orchestrate Your Business Trust With Guidance From Top Hat Business Brokers
What is a business trust? Could it streamline your business ownership experience? Top Hat Business Brokers can offer professional guidance. Discover what excellence looks like in business transactions. Contact us online or call (916) 545-6220 to inquire about business consultation and related services in the Sacramento area. Let us assist you today.