When forming your business, you may choose to structure it as a sole proprietorship, partnership, limited liability company (LLC), or corporation. Each type of structure offers different levels of asset protection and affects how much you pay in taxes. But owners can exert further control over their business—both while alive and after they pass away—by placing business interests in a trust.
Typically associated with estate planning, trusts can hold business interests. Except for a sole proprietorship, most types of business interests can be transferred to a trust if the transfer is permitted by the operating agreement. In the case of a sole proprietorship, which is not a separate legal entity, you may simply transfer the assets used for the business into the trust. Holding business interests in a trust can provide benefits for you and your heirs, but before creating a business trust, the consequences should be considered.
Reasons to Hold a Business in Trust
A trust is a legal entity that holds assets for and transfers them to beneficiaries. Although not a business entity, a trust can hold business assets, such as real estate and property. Ownership interests in a business, which are considered personal property, can be held in a trust, too.
Indeed, business ownership interests are often among an individual’s most valuable assets. Like other assets, they must be carefully managed and safeguarded. In addition, plans should be in place to avoid disruptions in the business’s operations when the current owner departs the business.
These goals—and more—can be achieved by placing a business in a trust. When a trust holds a business, it can provide the following advantages:
Placing a Company in a Trust
Transferring assets such as ownership interests to a trust is commonly known as funding a trust. Once an asset is transferred to a trust, that asset is the legal property of the trust, not of the person (i.e., the grantor or settlor) who creates and funds the trust.
The assets held in trust are managed by a trustee—an individual or company named by the grantor. They are managed for the benefit of the trust’s beneficiaries in accordance with the wishes of the grantor and any specific rules that apply to the type of trust created.
A business owner can act as the trustee of the trust and be its beneficiary, although state law may not allow the same person to be the sole trustee and sole beneficiary. This can be avoided by naming a co-trustee and co-beneficiary (or beneficiaries).
Putting business interests into a trust can be done at formation or after the company is an established entity by following these steps:
As mentioned, sole proprietorships do not involve ownership interests, because there is no legal separation between the owner and the business. While a sole proprietor cannot transfer business interests to a trust, they can transfer the assets that make up their business, such as bank accounts and office equipment.
Before Putting Business Interests in a Trust
Setting up a trust and funding it with business interests is not overly complicated. However, anyone who is considering putting business interests into a trust should keep these potential complications in mind:
Numerous trust options provide flexibility, but different types of trusts have unique implications and requirements that must be considered, not only for the current business owner, but also for their heirs down the road.
Transfer Your Business Interests with Help from an Attorney
Creating a trust to hold business interests can enable you to maintain control over the business and provide protection for the company you worked so hard to build, as well as increase your peace of mind about the business’s future. The consequences of transferring your business interests to a trust may vary depending on the type of trust, so some business trusts may be more beneficial to you and your heirs than others.
The pros and cons of a business trust should be discussed with an attorney along with the outcomes you want to achieve from a trust. During an initial strategy session, you can consult our attorneys about your situation and how a trust can be used to meet your business and estate planning goals. Call or contact us today to take the next steps.