When To Use A Trust For Your Businesses
Business owners can use trusts to ensure their businesses continue running even in their absence. While it’s this simple, many business owners still have no plan in place that protects their business. A trust essentially makes sure your business won’t come to a grinding halt in your absence. However, putting your business assets into a trust of course has its own drawbacks.
What’s a Trust?
A business trust is not a separate legal entity, unlike in a company. In essence, it’s a business structure where a trustee, usually a registered company, performs certain business operations that serve the best interest of the trust’s members.
The responsibilities of the trust include distributing the income of the trust to the beneficiaries, and looking after the overall financial health of the business; which can extend to major decisions like borrowing money and selling assets. A business trust also has an appointee, whose power allows him/her to remove the trustee, and even appoint another person in their place.
What Types of Trusts are Available?
For businesses, the company serves as the trustee, and each of the beneficiaries holds a certain number of units in the trust. The units are what determines how much income a beneficiary receives. It’s also possible to set up a discretionary trust, which will be a family trust that gives the trustee full discretion over any funds distributed to the beneficiaries. Similarly, a hybrid trust can also be set up, ideally combining unit and discretionary trusts.
Are there any Disadvantages?
A trust can be relatively expensive to set up and maintain, especially when compared to the sole trader and partnership agreements. The set-up fee could be lowered by using a proforma trust deed, but in such a scenario, you need to seek professional help first. Additionally, the legal and compliance requirements of a trust are usually more complex and stricter, since they are more private than a company. A business trust also has a limited lifetime, which is mostly capped at 99 years.
When Should You Use a Trust for your Business?
A business trust is a very good option for businesses that are run by a family, as it offers flexibility and tax advantages especially with the way profits are divided among the beneficiaries. When properly executed, a business trust will allow you to minimize taxes and avoid some of the pitfalls associated with the absence of such a plan in place.
Family-run business can also benefit from a trust in that it creates a succession plan for the business. It provides a system where every employee is aware of what they must do even in your absence. This creates a clear chain of command so that someone can succeed you, and normal business operation continues uninterrupted without you.
But, just as with any major financial decisions, professional help is crucial in deciding whether a trust will be right for your business. The most important thing is to understand exactly what you need – whether you choose to go with a trust, sole trader, partnership, or company agreement – before you sign the document.