Business Trust
Advantages, Formation, and Operation
Dating back to Eighteenth Century England, a
business trust is a business organization or entity created and formed in a
written trust contract (agreement) that sets out the purposes, terms, and
conditions of the trust. The business trust is a legal entity and an
artificial individual, with rights almost equal to a natural person (a human
being), able to own property and conduct business like a natural person.
One strong legal underpinning of the business trust being organized
as a contract is the U.S. Constitution itself, which provides at ARTICLE 1,
SECTION 10: "No state shall pass any law impairing the obligation of
contracts." The United States Supreme Court has long held and recognized
that freedom to make contracts and have them enforced by the courts is a
part of the bundle of rights protected by the "due process" clauses of both
the Fifth and Fourteenth Amendments. Paterson v. Bank Eudora (1903)
190 US 169, 47 L Ed 1002, 23 S Ct 821; Muller v. Oregon, 208 US 412,
52 L Ed 551, 38 S Ct 324; 1908 v. U.S. 157 US 160, 39 L Ed 657, 15 S
Ct 586 (1895). "Any law or procedure materially affecting contract rights
necessarily impairs the obligation of the contract upon which the right is
founded and is, therefore, violative of the United States Constitution." -
Smith v. Morse, 2 CA 524
A business trust is created when one or more persons (creators or
transferors) transfer the legal title of property, capital, and/or a
business to trustees, with power vested in the trustees to manage and
control the property, capital, and/or business and to pay the profits of the
enterprise to the creators/transferors of the trust or their heirs, assigns,
and successors.
The business trust, in essence, is invested capital or a business
vested in trustees who manage the entity profitably for trust certificate
holders. The trustees accept such trustee responsibility as fiduciaries
acting on behalf of, and for the
benefit and profit of, persons who hold or may acquire transferable (or in
"bearer" form) trust certificates that are comparable to the stock
certificates of a corporation, Trust certificates from the business trust
provide individual holders evidence of ownership interest in the trust
estate (assets/income), and the certificates convey to the holder the
limited rights to receive their pro-rate share of any distributions of
income or assets that may be made by the trustees.
The trust certificates are personal property which convey neither
legal title to the trust property nor any voice in the management of the
business trust or the selection of trustees. "The owner of Beneficial
Certificates is not an owner as a stockholder is an owner; the Certificate
Holders have no ownership whatever in property held by the Contract Trust,
nor do they have any voice or control over the Trustees." - Becker v. St.
Louis Union Trust Co. (a U.S. Supreme Court case) 296 US 48, 50; 80L ED
35:56 S CT 78 "Certificate holders are devoid of legal rights, have no
officers, are and must remain forever mute as to the selection, approval or
disapproval of the trustees and their methods of conduct of business affairs
would make the trustee absolute owner," stated the court in the case
Bourchard v. First People's Trust, 253 Mas 351, 148 NE 895. "The
Contract Trust owns the property and is a distinct legal entity. Beneficial
Certificate Holders are not treated as co-owners of trust property." -
National City Finance v. Lewis (Cal App) 3P 2d 316 (Rehearing denied)
4P2d 163: Beilin v. Krenn & Dato 350 III 284, 183 NE 330: Hemphil
v. Orloff 238 Mich 508, 213 NW 867, 58 ALR 507, aid 277 US 537, 72 L Ed
978. 48 S Ct 577, Annotation 156 ALR 32; Goldwater v.Oltman, 210 Cal
408: 292 P 624
Two of the most famous early business trusts in England were Lloyds
of London (1811) and the London Stock Exchange (1802). An explanation of
their function, under the Common-law of England, can be found in Smith v.
Anderson, 15 Chancery Division 247 (1880).
The Business Trust made its debut in
the U.S.A. in Massachusetts in 1827. As a result, a U.S. Business Trust
today is often called a "Massachusetts Trust" in legal circles. The U.S.
Supreme Court defined the Massachusetts Trust as a form of business
organization, common in Massachusetts consisting essentially of an
arrangement whereby property is conveyed to trustees: in accordance with
terms of the Trust. The business is to be held and managed for the benefit
of persons who hold transferable certificates issued by the trustees showing
the shares into which the beneficial interest in the property is divided.
Morrissey v. Commissioner of Internal Revenue, 56 S. Ct. 289, 296 U.S.
344, 80 L.Ed. 263.
The famous
American Express Company was originally organized as a common law trust
(business trust). Currently, a number of U.S.A. money market investment
funds are organized as business trusts, especially under the favorable
business trust laws of Massachusetts, Delaware, New York (as to common law
trusts) and now Virginia with the adoption of the Virginia Business Trust
Act (the “VBTA”) which became effective on Oct. 1, 2003. The Virginia law
established a statutory framework for the formation and operation of
Virginia business trusts.
Virginia business trusts are unincorporated, perpetual, limited liability
legal entities that may be formed to conduct any lawful business. The VBTA
provides basic mechanisms for the formation of the business trust and its
internal governance. While the VBTA provides statutory certainty and
protection to business trusts and their trustees, it also maximizes the
flexibility of business trusts by deferring most of the details of
governance to the organizing documents. In fact, the VBTA expressly states
that “this chapter shall be construed in furtherance of the policies of
giving maximum effect to the principle of freedom of contract and of
enforcing governing instruments.” Because of the VBTA’s flexibility, parties
to a Virginia business trust can structure their particular transaction with
the equivalent of a blank slate. The VBTA offers businesspersons and finance
professionals an unincorporated, perpetual, limited liability Virginia
entity which may serve these and any number of other businesses with a great
degree of flexibility. (the VBTA explanation is by attorneys Randall S.
Parks and Santiago F. Alvarez in their summary of the VBTA law entitled
"A Summary of the Virginia Business Trust Act," In
addition, the Nevada Secretary of State office now permits and authorizes
Nevada business trusts to register with its office upon the
payment of a registration fee.
Even physicians
organize large medical clinics as a business trust. For example, the Welborn
Clinic Business Trust of Evansville, Indiana, is a physician group in
Indiana with more than 100 doctors and health care workers. Through its nine
locations, the clinic also operates the Welborn Health Plans HMO. Visit its
website:
http://www.welbornclinic.com
A number of U.S.A. court decisions and legal treatises have defined
and described what a business trust is----
●"A business or common-law trust, commonly known as a Massachusetts
trust, is a form of business organization consisting essentially of an
arrangement whereby property is conveyed to trustees, in accordance with the
terms of an instrument of trust, to be held and managed for the benefit of
such persons as may from time to time be holders of transferable
certificates issued by the trustees showing the shares into which the
beneficial interest is divided, which certificates entitle the holders to
share ratably in the income of the property, and on termination of the
trust, in the proceeds thereof." Corpus Juris Secondum, 12A 495.
●"The essential attribute of a business trust is that the property is
placed in the hands of trustees who manage and deal with it for the use and
benefit of the beneficiaries." Enochs & Plowers v. Roell, 154 So.
299, 170 Miss 44.
●"A business trust is a common law entity formed by contract, and
thus, is not subject to the same types of state regulation as a
corporation." - Elliott v. Freeman, 220 US 178; and Crocker v.
Malloy, 39 US 270.
●"The business trust also called common-law trusts, are created under
the common law of contracts and do not depend upon any statute." -
Schuman-Heink v. Folsom, 159 NE 250.
●"One of the objectives of business trusts is to obtain for the trust
associates, most of the advantages of corporations, without the authority of
any legislative act and with the freedom from the restrictions and
regulations generally imposed by law upon corporations." - 13 Am Jur 2d,
Page 379, Paragraph 51.
●"One of the main objectives of a trust contract is to obtain most of
the advantages of corporations, but with freedom from the burdens,
restrictions, and regulations generally imposed upon them." - Ashworth v.
Hagen Estates,
165 Va 151, 181 SE 381
●"A business trust may be organized to engage in any business in
which individuals or corporations may lawfully engage." Wagner Oil and
Gas Co. v. Marlow, 278 Pacific Reporter 294, 137 Oklahoma 116; Weber
Engine Co. v. Alter, 245 Pacific Reporter 143, 120 Kansas 557; and 46
American Law Reports 158.
●"Statutes may authorize limited liability of partnerships and
corporations, but those statutes do not by implication prohibit the creation
of Contract Trusts to enjoy similar immunity by virtue of the Common Law." -
Goldwater v. Oltman, 292 P 624. 71 ALR 871 Annotation
●"It is established by legal precedent that business pure trusts are
lawful, valid business organizations." - Baker v. Stern, 58 American
Law Reports, 462.
●"A pure trust is not subject to
legislative control. The U.S. Supreme Court holds that the trust is created
and its relationship comes under the realm of equity based upon the common
law and is not subject to legislative restrictions as are corporations and
other statutory entities or organizations created by legislative authority."
- Croker v. MacCloy, 649 US Supp 39; and Elliott v. Freeman, 220 US
178.
●"A
Pure Trust is a contractual relationship in trust form." - Berry v.
McCourt, 204 North Eastern Reporter 2d 235.
Top Ten Advantages of Business Trusts
1. In sharp contrast to a corporation that is created by the state as a
privilege (and therefore subject to having its corporate benefits
diminished, limited, eliminated, or heavily taxed by the state government},
the existence and operation of a business trust are controlled by its
contract, not by ever-changing state corporation laws, regulations, and
court decisions.
2. A business trust is a powerful entity by which individuals may
combine their resources to operate a business for profit without the
inherent liabilities of a partnership or the double taxation of
corporations.
3. Like the initial funding of a new corporation, there is no income or
transfer (gift) tax to put initial assets into a business trust (structured
to be like a corporation in the initial funding process) because the
transferor of the assets receives back a proportionate share of the trust
certificates. "A trust certificate, while valuable, has 'no determinable
value' when exchanged for assets, and thus there is no taxable event because
of this exchange, as determined by the U.S. Supreme Court." Burenett v.
Logan 283 U.S. 404), also (Stern v. C.I.R., 747 F. 2d 555 (1984) "The
Unites States Circuit Court of Appeals for the First Circuit has long held
that full and adequate consideration is met by issuance of trust certificate
units in exchange for real and personal property invested in a "pure" trust
organization." Carpenter v. White, CIR, 80 F 2d 145
4. If so established in the trust agreement, the trust certificates
become void upon the death of the holder and, thus, have no value to be
subject to inheritance tax, estate tax, or probate administration and
expenses. Interests which terminate 'on' or 'before' death are not a proper
subject of the Federal Estate Tax." - Knowlton v.
Moore,
178 US 41, 20 S Ct 747, 44 L Ed 969 (1900): YMCA V. Davis, 264 US 47
(1924), 44 S Ct 291, 68 LED 564: Goodman v. Grander, 243 F 2d 264
(1957): Babb v. US 349 F Supp 792 (1972)
5. Because the business trust assets do not go through the probate
nightmare at the death of trust certificate holder,
a business trust and the decedent's trust certificates cannot be challenged
by persons falsely claiming to be heirs or by creditors of the deceased
person.
6. Whereas corporate officers and directors (and sometimes shareholder
names) and financial dealings are a matter of public record and detailed
annual reports, business trust affairs are private and not a matter of
public record.
7. Business trust property cannot be seized by creditors' attachment nor
sold upon creditors' execution for the trustees' personal debts. Personal
liability of a trustee cannot be enforced against the trust property. "Trust
property cannot be held under attachment nor sold upon execution, for the
trustees' personal debts. Personal liability of a trustee cannot be enforced
against the trust property." - Mayo v. Moritz, 24 N. E. 1083 (1890)
But if a trustee personally owned any trust certificates registered in his
or her personal name (in contrast to the wise use of "bearer" certificates
that are unregistered and are owned by whoever possesses the physical trust
certificate papers), these trust certificates can be attached and executed
upon (sold) by the trust certificate holder's creditors. "If the Trustee
owned personally any amounts of beneficial interest, these Certificate Units
can be attached." - Hussey v.
Arnold,
70 N.E. 87 (1904)
8. Trust certificate holders cannot be held liable for debts incurred by
the trust itself. The certificate holders are not personally liable for any
obligations incurred by the trustees or by managing agents appointed by the
trustees.
9. Business trusts can provide needed flexibility in arranging lender
financing. "In a financing, counsel has a number of alternatives to the
corporate form to use when choosing a special purpose entity. These
alternative entities have certain advantages over the traditional
corporation. The limited liability company and limited partnership forms
offer greater contractual flexibility and require less observance of
formalities than the corporation. The business trust has these advantages,
plus the possible advantage of establishing a favorable tax situs." - Ellisa
Opstbaum Habbart and Andrew G. Kerber, attorneys at law, in their article
"Getting the right fit: Some suggestions on finding the best way to
structure a financing transaction," Business Law Today,
American Bar Association, Volume 11, Number 2 - November/December 2001.
10. A business trust can be formed by utilizing the basic
contract laws of most states, provinces, and nations.
Whether you need an offshore business trust for your Internet Business
Company or a domestic business trust for use inside your nation of
residence, you can get expert help in the formation and operation of your
business trust from the
I.B.C. Management
Services Company. |
