Define Business Trust: Everything You Need to Know
The define business trust is an entity that has a business purpose, functions as a business and is treated as a legal entity by the tax authorities.3 min read
The define business trust is an entity that has a business purpose, functions as a business and is treated as a legal entity by the tax authorities. Basically, a business trust is a commercial organization that is managed by appointed trustees for the benefit of its beneficiaries. These trustees hold the title to the trust's business property.
Business Trusts: A Legal Business Format
The law defines a business as an investment of property or capital by an individual with the purpose of generating a profit. There are different legal formats recognized by every state for business operations. One of the most common is the sole proprietorship. Other business structures include LLCs, partnerships, S corps, and C-corps.
However, another business format is recognized in two states — business trusts. The states of Florida and Massachusetts have codified this arrangement. Put simply, a business trust has some of the attributes of a trust and is a hybrid of an LLC and corporation.
Definition of Trusts in Massachusetts
The statutes governing the creation of a common-law trust is covered by Chapter 182 of Massachusetts' General Laws.
A "Massachusetts Business Trust" is a type of entity that consists of a business arrangement in which property is handed over to trustees in line with the provisions of the terms of the instrument of trust, to be managed and held for the benefit of individuals who are or may become future holders of transferable certificates issued by the appointed trustees, showing how the beneficial interest in the property is divided.
Definition of Trusts in Florida
Under the state's Chapter 609, business trusts are defined as unincorporated business organizations that are created by an investment of property, the said investment property to be managed and held by appointed trustees for the profit and benefit of the individuals who may become or are holders of the trust's transferable certificates, which evidence a beneficial interest in the trust estate.
Transferable Certificates of a Business Trust
The transferable certificates resemble a corporation's share certificates and are issued/transferred in a like manner. The certificates entitle holders to a share in the income of the trust's property and in the event of the trust's dissolution/termination, its proceeds.
Differences between Pure and Partnership Trusts
In the state of Massachusetts, a trust instrument is held to create trust partnerships or pure trusts according to the mandates by which the appointed trustees must conduct the affairs under their charge.
If the trustees are principles and free from the influence of the certificate holders as regards management of the trust's property, a pure trust is created. However, if the certificate holders are involved in the property's management/control as principles and the role of the trustees is to act as managing agents, a trust partnership is created.
The states of Florida and Massachusetts refer to business trusts as “associations” that have perceived and documented obligations as well as corresponding liabilities. Both states require copies of the trust document to be filed with their respective Secretary of State.
In Massachusetts, copies of the trust document must be filed with the court in all towns and cities where the trust intends to transact business.
Core Attributes of a Business Trust
Business trusts have six core attributes which differentiate them from other business entities who may have some but not all of these attributes. This means that an entity that possesses these attributes can only be a business trust.
These attributes are as follows
- Business Purpose
- Centralized Management
- Limited Liability
Business trusts are designed to resolve a single-asset joint venture, which makes it easy for family members to manage a family estate. The most common asset of a business estate is real estate.
The property is re-titled with the name of the business trust and handed over to a management company which handles renting and submission of reports to the trustees.
Once the property earns net profits, the proceeds are shared among family members in line with the proportion of their individual shares. Such a trust reports its tax filings either as a trust via Form 1041 or as an association (i.e. as a limited partnership or association).
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