Florida business owners have several choices as to how to form their entity. Often, they will select a structure that allows them to limit their personal and tax liability, such as a limited liability company (LLC) or corporation. However, the business trust is an option that may offer similar benefits. If you have not heard of this legal device, you may be wondering—What is a business trust?
Your Florida Business Formation
Many Florida business owners prefer to operate their enterprises as separate legal entities rather than sole proprietorships. There are multiple reasons why owners prefer these formations. As mentioned above, the main benefit is that the LLC’s or corporation’s liability is restricted to the entity and, therefore, cannot be imputed to the business owner. These formations also provide a more organized way to manage, govern, and operate the business. Another limited liability option for a business is the business trust.
What is a Business Trust?
A business trust, or common law trust, is a legal device that a business owner can create to operate their enterprise. Business trusts give a designated trustee the authority to manage a named beneficiary’s business interest. The trust is its own legal entity that operates the business. An owner can use this instrument to manage their business while limiting liability.
How is a Business Trust Created?
Business trusts involve the same features as estate planning trusts. The business owner (the grantor) would transfer ownership of designated assets into the trust to create a business trust. At the point of transfer, the asset becomes the legal property of the trust. There will be an appointed trustee who will be responsible for administering and safeguarding the trust assets and making disbursements to named beneficiaries.
The purpose of this type of trust is to operate the business. When creating a business trust, the grantors will file a declaration of trust. The declaration of trust will establish the terms and rules by which the entity must operate.
Under Florida law, a business trust is created “when two or more people, whether residents of this state or not, organize and associate themselves together to transact business in this state under a declaration of trust.”
The individuals creating the business trust will file the declaration of trust and register their business with the state. If they plan to “offer for sale, barter or sell any unit, share, contract, note, bond, mortgage, oil or mineral lease or other security of an association doing business under what is known as a “declaration of trust,” they will have to obtain a permit from the Office of Financial Regulation of the Financial Services Commission.
The trust will have its own bank account and tax identification number like a separate business. The trustee will be responsible for operating the business trust according to the declaration of trust terms.
Type of Business Trusts
There are three types of business trusts: 1) grantor trusts, 2) simple trusts, and 3) complex trusts.
- Grantor Trusts— Grantor trusts are created by the grantor, who is also a beneficiary, and the grantor retains authority and control over the trust assets and disbursements.
- Simple Trusts—simple trusts are also created by the grantor and are used to pay trust income to beneficiaries.
- Complex Trust—Complex trusts are created by the grantor and are required to maintain some type of income. These trusts are also required to perform certain activities throughout the year.
Should I Establish a Business Trust?
Business trusts can be a beneficial means to limit liability. These devices are also privately established and are not beholden to the same structural and legal requirements as an LLC or corporation. Business trusts can also be useful for estate-planning purposes.
Business trust can also be complex, and they have their own legal requirements. Therefore, if you are considering creating a business trust, it’s essential to review their pros and cons with an experienced Florida business attorney. Your business lawyer can help you assess your goals and determine the best structure and devices to support your enterprise.
Contact an Experienced Florida Business Attorney
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with commercial leasing, business, and litigation matters. As always, Our Goal Is to Help You Succeed™. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. We represent clients throughout the State of Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, West Palm Beach, Jupiter, Deerfield Beach, Stuart, Port St. Lucie, Orlando, Naples, Fort Myers, Sarasota, Tampa, and surrounding communities.