A trust refers to a legal setup where the business owner gives the asset control powers to the trustee (usually a registered company). This happens when the business owner is still alive or may come into effect upon death.
So, setting up a trust for your business is a great move if you want to protect your business, especially if it’s family-run. Giving the trustee the control powers enable your beneficiaries to continue benefiting from your business when you are not there for whatever reason.
Before you set up a trust for your business, however, it’s important to understand a few things. Here are 5 tips that you may find important.
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Understand What Makes a Business Trust
A business trust is not an independent entity. Thus, it’s supported by the earnings of your business. The major player in the trust is the trustee. And it is the trustee who is allowed to run the business for the interests of the trust members. So, the trustee can make major decisions such as:
- Distribute income to the relevant beneficiaries
- Obtaining a loan or selling part of the assets.
A trust also has an appointer. This is someone with the legal power to appoint a new trustee.
Choose the Right Type of Business Trust
Essentially, there are two types of business trust: discretion trust and combining unit. In a discretion trust, only the trustee knows the amount of income that the beneficiaries should receive. In combining unit trust, the beneficiaries hold specific share units which dictate the amount of income they should receive.
You Can Plan for Succession
As aforementioned, a business trust allows you to plan how the business will be managed in your absence. For example, if you are running a special needs trust, you can plan how the dependents will continue receiving the financial help when you are not there.
You Can Avoid Risks with a Trust
Often, business profits are used to pay creditors and the operating expenses. In the event that you are not able to run the business and there are outstanding debts, the business may collapse totally since the creditors will push for their dues. However, a trust can help settle the debts and keep the business operating.
Prepare for the Setup Costs
It’s not cheap to set up a business trust. It may cost you up to $20,000 to set up due to the complicated legal requirements. In addition, there are taxes involved and you have to prepare for them too.
A trust can help your business significantly when you are no longer in control. In other words, it ensures that your business continues and doesn’t come to a grinding halt in your absence. It is that simple. However, like any other business aspect, trust is not for everyone.
It is, therefore, critical to weigh up the pros and cons before you decide whether to go ahead or not. In a nutshell, the setup process requires expert help. A trust professional will help you understand your position as the founder of the business.