In the last issue, we gave consideration to Companies as forms of business enterprise. In this issue, attention will be given to the Business Trust.
The Trust is a versatile legal concept, which may be utilized for a variety of purposes, including for carrying on a business. A Business Trust is a Trust where the Trustee does not simply protect and manage the assets on behalf of another, but primarily utilize such assets for conducting a business for profit in order to benefit the Beneficiaries of the Trust.
The parties to a Business Trust are known to each other and may sometimes even be related. The founders create a Trust and appoint themselves as Trustees and Beneficiaries, whereafter they manage the business jointly and often distribute the benefits to themselves. Thus, the Business Trust often resembles a partnership and also share characteristics with Private Companies and Close Corporations. In contrast to partnerships, the Business Trust’s assets may be attached to satisfy debt, whilst the assets of the Trustees and Beneficiaries are not available for attachment.
Often sound business or tax reasons exist why a Trust would be preferred to a Company with its orderly set-up and settles legal environment. Beneficiaries of Business Trusts are often expected to make a financial or some other contribution in return for the expected benefits to be had from the Business Trust. The Trust Deed regulates the relationships between the Trustees and Beneficiaries, whilst the Trustees are subject to the fiduciary duties normally associated with the Office of Trustee. Where a Beneficiary is not a Trustee, the benefits of a Business Trust must be weighed up against the uncertainty relating to the accrual of benefits to the Beneficiary.
Section 40 of the Companies Act places an important restriction on Business Trusts, in that the number of Trustees are limited to twenty.
As the common law powers of Trustees are somewhat inadequate for the conduct of business activities, care must be taken with drafting of the contents of the Trust Deed, as this document confers the powers of the Trustees to them.
Although the Business Trust is a well-known form of business enterprise, it is utilized less frequently than Close Corporations or Companies, as the formation of a Business Trust is normally driven by specific factors which makes this form of enterprise preferable.
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