Larry on Business: Business Growth: Establish a Trust

Tuesday, March 6, 2012

Business Growth: Establish a Trust

This continues our series on establishing the right legal entity for your business. I am not an attorney. Please consult with a legal expert to establish the legal structure of your business.

Establishing a legal structure protects you, protects your family, and protects your business. The right legal entity saves you money from taxes and other fees. The money you save with the right legal structure can pay for the professional fees required to legally establish your business.

Purposes of a Trust

The IRS states “In general, a trust is a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another.

A trust is formed under state law. You may wish to consult the law of the state in which the organization is organized. Note that for a trust to qualify under section 501(c)(3) of the Code, its organizing document must contain certain language.”

Advantages of a Trust

The Quinn Group discusses advantages of a trust:

1. Unit trusts have several similarities to companies in that the trust is separate from the unit holders; the unit holders subscribe equity on units and the principals may be employed by the trust.

2. A unit trust need not pay tax. Rather, the unit holders incur the tax on taxable profits derived by the unit trust.

3. The benefit of tax free capital gains and tax incentives may be passed through to the unit holders provided that appropriate structuring is undertaken.

4. Unit trusts offer different forms of income to different unit holders. This is achieved under modern forms of unit trust deeds by providing for different classes of units.

5. The 50% CGT discount is available to all trusts in relation to disposal of assets.

Disadvantages of a Trust

4 Financial Advice lists several disadvantages of a trust: