When you start a business, the first thing you’re told is to form a LLC or S Corporation.
It’s the conventional wisdom, and we take it for granted as the right choice. It’s an automatic reaction: “I have a business; I need to have a Corporation.” That’s not the only choice, nor is it even the best choice.
There are disadvantages to having a corporation, which we’ve not been told about. We explain them below.
However, there is an alternative with many advantages.
This article is about the Business Trust. It will explain what it is, its benefits and advantages, its structure, and how to set one up. This is not legal advice. The information has been taken from the book The Uncorporation: Unleashing the Power of the Business Trust for Your Protect and Privacy by James Billings. The book provides more explanation.
Disadvantages of a corporation
A corporation does not offer the protection that we think it does. Here are the drawbacks.
1-Red tape, paperwork, and filling
A corporation, LLC, or S-corp requires paperwork. Initially, to set up a corporation, you need to pick a name that’s not already in use. You then have to file incorporation paperwork with the Secretary of State where the business is to exist.
You’ll need the Articles of Organization, which include the business name and address, business purpose, Company officers and Directors, and Registered agent. To keep the corporation in existence, you must pay taxes for filing and a franchise fee with the state every year. You must also hold regular shareholders’ meetings and keep minutes.
2-Lose of privacy and public information
Once your corporation is accepted by the state, it is included in a business data base and is easily searchable online.
This makes all your information, the owners, and assets visible to anyone who looks. It’s easy to get information about you and the corporate assets, which makes it available to anyone who wants to start a lawsuit against you and your business.
Corporate veil being lost
The idea of a corporate veil provides legal protection for the corporate structure—that is one of its selling points. However, if the corporate veil is “pierced,” you and your assets can be personally attacked. Piercing the veil can occur if you don’t hold stockholder’s meetings, keep minutes, keep the registered agent, and pay registration and fees.
If this happens, your legal and tax exposure can be challenged.
Benefits and Advantages of a Business Trust
There are many different types of trusts. Here, we are only looking at the Common Law Business Trust, which has several main benefits.
- Less visibility and more privacy
- No Corporate veil risk
- Minimal paperwork and filing
- Tax flexibility
Less visibility and more privacy
A Common Law Business Trust is exempt from registration with the government, so it offers privacy and asset protection. There is no easy way to look up information about a business trust, which gives you invisibility and deters people who are looking for an easy target. A Business Trust does not pay fees or franchise taxes because it is not registered as a corporation. There is no database for unlisted business trusts.
This is probably the most crucial benefit: acting in private without all your information available to be seen, used, and sold and your assets in plain view. It is a true gift. No one can search for your trust online and cause trouble.
No Corporate Veil Risk
There is no risk of piercing the corporate veil because the trust is not registered. It is not regulated by the government, and you don’t have to follow their rules and regulations. Therefore, if you don’t choose to have shareholder meetings or keep minutes, that will not impact your trust.
Minimal paperwork
There is minimal required paperwork. No registration forms, annual director and shareholder meeting minutes, or resolutions exist.
Instead, once you create a business trust declaration among the trust participants, have it signed and notarized, get an EIN number from the IRS, and set up a business bank account, you are finished with the trust formation.
Tax flexibility
The Business Trust is taxed by the number of beneficiaries. If there is only one beneficiary, you are taxed as an individual. Two or more beneficiaries are taxed as a partnership. You have the option to be taxed as a corporation for any amount of beneficiaries.
Parties of a Trust
There are three primary trust participants: a trustor, a trustee, and beneficiaries.
The trustor or grantor initiates the trust for the benefit of someone else. The trustee holds the title to trust assets. The beneficiaries receive the profits from the trust without being the legal owners. The beneficiaries have limited liability for business and personal events. Trustees and beneficiaries are isolated from each other.
Are Business Trusts popular?
Business trusts are in operation today with trillions of US dollars in assets.
“Many wealthy people use Business trusts as part of their wealth management strategies. Because of the legal and financial protections unlisted commercial trusts offer can’t be obtained with a statutory business trust nor with a traditional corporate structure,” The Uncorporation: Unleasing the Power of the Business Trust for Your Protect and Privacy by James Billings.
Setting up a Business Trust
There are no forms online to set up a business trust. A business trust is designed for your specific needs. You need to decide on what you want to create and protect. You need to establish the name, trustees, beneficiaries, the assets that go into the trust, apply for an EIN, and open a bank account.
If you want to learn more, there is a masterclass on Business Trusts at trustarte.com. (No affiliate link)
Conclusion
When you start a business, before you follow everybody else’s example and set up a corporate structure, research a Business Trust. You’ll enjoy more privacy and legal liability protection, more flexibility, and less bureaucracy.
It will help you accomplish what you started a business to have: more control, freedom, and independence.
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