Articles

BUSINESS TRUST

One type of entity to consider when forming a business or making an investment is the business trust. A business trust is an unincorporated, limited liability entity that may be formed to conduct any lawful business. A business trust is a separate legal entity which is distinct from its beneficial owners and trustees. Advantages associated with a business trust include limited liability of the beneficial owners, flexibility in drafting the instrument which governs the affairs of the business trust, and the privacy associated with the limited filing requirements imposed by law.  

In a business trust, property is conveyed to one or more trustees to be held, managed, and invested for the benefit of one or more beneficial owners.  Beneficial owners of a business trust hold transferable certificates evidencing beneficial ownership of the trust property.  Unless otherwise provided in the articles of trust or governing instrument, the beneficial interest of a beneficial owner is freely transferable. 

Trustees of a business trust are appointed to manage the business and affairs of the business trust in a manner similar to directors of a corporation.  A trustee may be a natural person or an entity, and may, but need not, be a beneficial owner.  Unless otherwise provided in the governing instrument, a trustee has the power to delegate management duties to others.  In addition, if the governing instrument permits, a business trust may be formed with a series of trustees which each have different duties and powers.

FORMATION

In the Commonwealth of Virginia, a business trust is formed by filing articles of trust with the State Corporation Commission.  The articles of trust are required to set forth the name and address of the business trust, the name and address of the initial registered agent, and specific information about the identity of the registered agent (such as whether the registered agent is a resident of the Commonwealth of Virginia and whether the registered agent is a trustee or officer of the business trust).

Although a business trust is required to pay an annual fee to the State Corporation Commission, a business trust is not required to file annual reports.  Therefore, the names of the trustees and beneficial owners of the business trust remain private.  The only additional documents that a business trust may be required to file are articles of amendment (to amend the articles of trust) and articles of cancellation (to wind up and dissolve the business trust).  

Conversion to a Business Trust

In the Commonwealth of Virginia, an existing domestic entity, such as a partnership, corporation, or limited liability company, may convert to a business trust by filing articles of entity conversion with the State Corporation Commission.  In addition to filing articles of entity conversion, conversion to a business trust requires an affirmative vote from all of the members of a limited liability company, from all of the partners of a partnership or limited partnership, or from more than two-thirds of all shares entitled to vote for a corporation, as applicable.  Mergers are also permitted among business trusts, Virginia and foreign limited liability companies, partnerships, and stock corporations.

GOVERNING INSTRUMENT

A business trust usually has a governing instrument which sets forth provisions relating to the business and affairs of the business trust, and the rights, duties, and obligations of the trustees and beneficial owners.  The Virginia Business Trust Act will govern the terms of the relationship between the beneficial owners and trustees if the governing instrument fails to address a particular issue.  A business trust is an extremely flexible business entity as the Virginia Business Trust Act provides broad discretion in drafting the provisions of the governing instrument.    

Unlike a corporation where the relationship between the directors and the shareholders is primarily governed by statutory law, the trustees and beneficial owners of a business trust have a contractual relationship which can be arranged as the parties see fit.  For example, the governing instrument of a business trust may provide for amendment of the articles of trust or governing instrument without the approval of any particular trustee or beneficial owner or series of trustees or beneficial owners.  A corporation, however, is required to obtain shareholder approval prior to amending its articles of incorporation (with limited exceptions).

LIMITED LIABILITY

A business trust is an entity separate and distinct from its beneficial owners.  Therefore, the beneficial owners generally have limited liability for the debts and obligations of the business trust, similar to corporate shareholders.  However, the protection of a beneficial owner from creditors of a business trust is more limited if the beneficial owner has agreed to guarantee an obligation of the business trust.

In addition, a business trust is protected from the creditors of the beneficial owners.  In the Commonwealth of Virginia, beneficial owners have an undivided interest in the property of the business trust and have no interest in specific property titled in the name of the business trust, unless otherwise provided in the governing instrument.  Therefore, the creditors of a beneficial owner are unable to seize assets of the business trust to enforce a claim against such beneficial owner.  However, this protection is limited if the beneficial owner has been provided in the governing instrument an interest in specific property owned by the business trust.  

Additional liability protection may be created if separate series of beneficial ownership are established.  In a business trust, separate series of beneficial ownership may be created which have different rights and responsibilities, similar to different classes of stock in a corporation.  Generally, the liability of one series of beneficial ownership may not be enforced against a different series of beneficial ownership.

TAXATION

For federal tax purposes, a business trust, which has two or more owners and is created for the purpose of carrying on a business for profit, will be a business entity taxed as either a partnership or a corporation and not as a trust.  A business trust is distinguished from an ordinary trust for federal tax purposes because the primary purpose of a business trust is to provide a vehicle for conducting business, whereas the primary purpose of an ordinary trust is to hold and conserve property.

A business trust with two or more beneficial owners will be taxed as a partnership unless the business trust elects to be taxed as a corporation.  If the business trust is taxed as a partnership, the profits and losses of the business trust will be included on the tax return of the beneficial owners.  Generally, a business trust with only one beneficial owner will be treated as a disregarded entity for purposes of federal taxation.  Therefore, the ownership of assets, receipt of income, and incurrence of expenses will be attributed directly to the sole beneficial owner.

TERMINATION

Generally, a business trust may not be terminated or revoked by a beneficial owner or other person except in accordance with the terms of the articles of trust or the governing instrument.  Moreover, a business trust shall not terminate or dissolve upon the death, incapacity, dissolution, termination, or bankruptcy of a beneficial owner, except as provided in the articles of trust or the governing instrument.  Should the articles of trust or the governing instrument fail to address the dissolution and termination of the business trust, a business trust is dissolved upon the first to occur among (i) the unanimous written consent of the beneficial owners, (ii) the entry of a decree of judicial dissolution, (iii) automatic cancellation of its existence, or (iv) involuntary cancellation of its existence.

© 2010 GANDERSON LAW, P.C.