What Is a Business Trust and How Does It Work?

There are several different types of trusts. You’re probably familiar with individual trusts, family trusts or trust funds, which are designed to manage personal or family assets. However, another type of trust exists specifically for businesses, known as a business trust or common law trust. This legal structure allows trustees to manage a beneficiary’s stake in a business or even operate the business itself. Business trusts come in various forms, each functioning differently based on its purpose and structure.

If you’re considering using a business trust, consulting a financial advisor can help you determine the best approach for your specific needs.

What Is a Business Trust?

A business trust is a legal arrangement in which a trustee manages business assets or operations on behalf of one or more beneficiaries. Instead of being owned directly by shareholders or members, the business assets are held in a trust, and the trustee is responsible for managing them according to the terms outlined in the trust agreement. Beneficiaries receive the economic benefits of the trust, such as income or distributions, but generally do not manage its day-to-day operations.

Business trusts can be used for a variety of purposes, including holding real estate, operating investment portfolios or managing certain types of commercial enterprises. Depending on how the trust is structured and the laws of the applicable jurisdiction, a business trust may offer advantages related to asset management, continuity of ownership, privacy or estate planning.

Unlike corporations or limited liability companies (LLCs), business trusts are governed primarily by trust law rather than corporate law. The trust agreement establishes how the business will be managed, the trustee’s powers and duties, how beneficiaries receive distributions and what happens if the trustee or beneficiaries change over time.

Although business trusts can provide flexibility in certain situations, they are not appropriate for every business owner. Tax treatment, liability protections and regulatory requirements can vary depending on the trust’s structure and state law. Before establishing a business trust, it’s important to understand how it compares with other business entities and whether it aligns with your legal, financial and operational objectives.

Types of Business Trusts

Two business partners and a trust lawyer work together to define the terms of the agreement for a business trust.

Business trusts can be structured in different ways depending on their purpose, the assets they hold and how they generate income. While the legal rules governing business trusts vary by jurisdiction, several common types are used for investment, asset management and commercial activities.

Grantor Trust: The first type is called a grantor trust. Grantor trusts consist of a grantor, a trustee and a beneficiary. This type of trust is very self-contained. The grantor pays taxes on the income that comes from the trust and has complete control over it. This includes control over business distributions to the beneficiaries.
Simple Trust: Next is a simple trust. For a trust to fall into this category, its status must be verified by the IRS. With a simple trust, the trustee must distribute business profits directly to the beneficiaries. It’s also prohibited from doing things like touching any principal assets.
Complex Trust: A complex trust is in some ways the opposite of a simple trust, though it still isn’t managed by the beneficiaries of the trust. Business profits and other funds may be distributed only in part to beneficiaries and may even be contributed to other organizations, such as charities. In order to maintain status as a complex trust, the trust needs to have at least some form of income.

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The Pros and Cons of Business Trusts

A business trust offers unique advantages, making it an appealing structure for certain business owners. For example:

Liability Protection: Beneficiaries are shielded from personal liability, similar to an LLC or corporation.
Privacy Benefits: Trusts offer an additional layer of confidentiality compared to traditional business structures.
Flexible Distribution Terms: The trust can specify how and when beneficiaries receive distributions, making it an effective estate planning tool.

While business trusts have notable benefits, they also come with challenges that may make them less practical for some business owners, such as:

High Costs and Complexity: Establishing and maintaining a business trust typically requires legal assistance, which can be expensive.
Ongoing Legal Compliance: Business trusts may face regulatory hurdles that require continuous oversight.
Limited Lifespan: Most business trusts cannot extend beyond 99 years, making them unsuitable for multi-generational business planning.

How to Set Up a Business Trust

Establishing a business trust begins with determining whether a trust is the right legal structure for your business or investment objectives. Because business trusts can have unique legal, tax and regulatory implications, many business owners work with an attorney and tax professional before moving forward.

The next step is drafting a trust agreement, which serves as the governing document for the trust. This agreement identifies the trustee, beneficiaries, the trust’s purpose and the trustee’s authority to manage assets, distribute income and make business decisions. It also outlines procedures for adding or removing trustees and beneficiaries, resolving disputes and terminating the trust.

Once the trust agreement is finalized, the trust must be funded by transferring ownership of the designated business assets into the trust. Depending on the type of business trust and applicable state law, additional steps, such as registering the trust, obtaining tax identification numbers or complying with licensing and regulatory requirements, may also be necessary.

After the trust is established, the trustee is responsible for administering it according to the trust agreement and applicable law. This includes maintaining records, managing assets, making distributions to beneficiaries when appropriate and ensuring the trust remains compliant with tax reporting and other legal obligations over time.

Bottom Line

If you’re interested in setting up a business trust, the first step is to talk to an attorney who can help.

A business trust can be an effective way to hold and manage business assets while providing flexibility in ownership, succession and asset management. However, because business trusts differ from corporations and LLCs in their legal structure, tax treatment and governance, they are best suited for specific situations rather than every business. Before creating a business trust, it’s important to evaluate your goals and work with legal and financial professionals to determine whether this structure is the right fit for your business or investment strategy.

Tips for Business Planning

Deciding how to structure your business isn’t always an easy task. It can help to have a financial advisor in your corner, guiding you through some of the toughest decisions. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When deciding on a business plan, it’s important to cover all the necessary details, from future income projections to leadership hierarchies. Check out SmartAsset’s guide to writing a financial plan for a business.