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Business Trust Definition

Business trusts are unincorporated business organizations (UBOs) created for the benefit and profit of their shareholders, known as trustees. Managers of mutual funds frequently employ business trusts.

Business trusts are sometimes referred to as "common-law trusts" or "Massachusetts trusts," after the state in which they are most common.

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Key Takeaways

  • Business trusts are for-profit UBOs.
  • They are owned and managed by holders, also known as trustees.
  • The characteristics of a business trust are different from corporations.
  • Still, business trusts are taxed similarly to corporations.
  • Business trusts are created when trustees sign and file a document called a "declaration of trust," also known as a "trust instrument."

Understanding Business Trusts

Suppose a group of shareholders pooled their money together and invested it in various holdings. These shareholders have created a mutual fund, but how do they organize it in the eyes of the law? The managers need a legal business structure to provide flexibility in the fund's management. Organizing as a business trust is a valuable way to achieve this goal.

Common characteristics of a business trust include:

  • For-profit organization
  • Beneficial shares
  • Protection of personal assets from debts or obligations (sometimes referred to as "limited liability")
  • A centralized management structure

Still, the business trust is not without drawbacks. While trustees are attracted to the flexibility that business trusts offer in organizing and operating (particularly in Massachusetts, Maryland, and Delaware), the law still leaves many grey areas on this subject. That is because minimal legal precedent exists on business trusts. This can lead to a lack of clarity when owners seek answers to complex questions.

For this reason, it is highly recommended for potential trustees to seek the legal advice of a local attorney experienced in this field.

Comparing Business Trusts to Corporations

Business trusts are fundamentally different from corporations because their structure is derived from the management decisions of the trustees. That is different from corporations, which are more regulated as to formation and management by the state in which they are organized.

The laws that govern business trusts can differ significantly from state to state. This is why trusts have gained prominence in states with more flexible regulations, such as Massachusetts, Maryland, and Delaware.

Despite these differences, the Internal Revenue Service (IRS) treats business trusts as corporations for tax purposes.

Creating a Business Trust

The first step in creating a business trust occurs when all trustees sign a declaration of trust, also known as a trust instrument. Next, the document is filed with the designated official (usually a secretary of state) in the state where the trust was first organized.

Seeking Assistance

Establishing a business trust can be a complicated, time-consuming endeavor. Reaching out to a local small business attorney is always a good first step with matters as necessary and intricate as these.

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