There are many different ways to own and operate a business. Some people keep company or organizations as simple as possible. They start a sole proprietorship or simple partnership. Others want a degree of protection from personal liability. They may start a limited liability company or a corporation.
Occasionally, those who own or operate businesses may choose to create a business trust. A business trust is a trust established to own and help operate an organization. Business trusts offer a variety of benefits for those in certain circumstances.
What are some of the most common reasons that entrepreneurs and business owners decide to create a business trust?
Establishing a degree of separation
Every business concept comes with a degree of risk. If the company fails, takes on too much debt or faces legal action, entrepreneurs and owners are sometimes at risk. Lawsuits against a business can sometimes result in liability for those who started, ran or owned the company.
Their personal resources or even their future income could be vulnerable in a scenario involving debt or judgments against the company. A business trust helps establish a clear legal separation between the person who formed or operates a business and the company itself. That separation can protect individuals from personal liability when the business faces challenges in the future.
Intergenerational protection
Those who start businesses often want to see them continuing to thrive for years to come. They may intend to have their children or grandchildren take over company operations when they die or retire. However, directly transferring ownership to the next generation of leadership can be a mistake.
Sometimes, short-sighted individuals can choose to sell off their business interests instead of working to maintain and develop the company. The creation of a business trust helps protect against the liquidation of the company by beneficiaries who should continue operating the company after assuming ownership.
Outside operational assistance
The trustee tasked with managing a business trust might be an attorney or an individual with a professional history in business management. Their support can take some of the risk out of transitioning to new leadership or ownership at an organization. The right trustee can help guide the company and facilitate beneficial decisions regarding the expansion and maintenance of the company. The trustee appointed to help run the business trust can be a crucial form of support.
A business trust can be a smart move for business owners creating estate plans and those thinking about succession matters at a company. Establishing a business trust can offer a host of different benefits for those who want their company to thrive even after they leave the organization.
