The History of Business Trusts – Rome, England & USA
Trusts are viewed by many as one of the most innovative legal instruments ever devised. They historically expanded property rights and circumvented onerous prohibitions and confiscations by the state.
Here I will describe three different eras of a trust designed exclusively for business transactions starting with the Romans, then moving on to England, and finally the USA.
Rome
There were two different forms of trusts in ancient Rome – one called Fideicommissum for inheritances and the Pactum Fiduciac for commercial purposes.
The earliest version of Pactum was known as the fiducia cum amico contract. This is where one person conveyed property to another for safekeeping. This occurred when the settlor might take a long journey and wanted the fiduciary to have full powers as the ‘owner’ in defence of the assets. Eventually the settlor or a third party would take over. Although built on confidence between the two parties, there were instances of fiduciary abuse or theft of property. There were no legal protections at that time for illicit activities.
The fiducia cum creditore was a more formal commercial structure. A property owner exchanged ownership to a creditor as a security guarantee for an obligation. When the debt was repaid the creditor was obligated to return the secured property. If the creditor sold the property to a third party the debtor had little recourse. A legal mechanism called the actio fiduciae could force restitution whereby the creditor returns the property. If a debtor failed to pay any excess value beyond the credit amount was forfeited. As a result of the deficiencies in both forms of the Pactum Fiduciac emerged better solutions.
The contract of pignus (pledge) whereby a debtor would exchange property to a creditor. Both immovable (real) and movable (personal) property were acceptable. And the creditor was legally obligated to return the property once the debt was extinguished. These relationships were overseen by the praetor.
The contract of hypotheca (mortgage) is where a debtor would securitize real property in exchange for an obligation. The borrower retains possession of the land. This was safer for the debtor against creditors. We see this concept used in real estate lending today.
Eventually fiducia became obsolete and eventually abolished by the Emperor Justinian. But it gives us an early insight into the commercial uses of a ‘trust’ structure.
England
Centuries ago businessmen were seeking a way to protect themselves personally from their business ventures. You’re heard of the East India Company. It was hardly an inexpensive Wyoming corporation purchased online. It required a Royal Charter by the British Crown or Act of Parliament to create a “chartered company” (corporation).
Only the most powerful and politically connected businesspeople could obtain these charters. If they wanted to own land, they needed separate permission from the Crown.
Meanwhile the “trust” concept is working its way through society and the English court system. The original purpose of a trust was for passing land to heirs while circumventing various feudal laws.
But the trust structure gave the business guys an idea. They needed a safe way to joint venture with limited liability protection. But early laws did not exist for these provisions.
A few smart businessmen realized they could use a trust for commercial purposes. They were known as unincorporated associations. Early adopters include Edward Lloyd. He was the founder of the famous insurance exchange on Church Street in London.
By the late 1680’s England adopted the unincorporated joint stock company (business trust company) as an alternative to government issued corporate charters. They enjoyed tradable shares, strong entity shielding, liquidation rights, protections for trustees and Insurance syndicates, trade unions and large public utilities uses this organizational format. As this form of business organization grew in popularity there was an effort by the government to suppress their usage.
The Bubble Act of 1720 forbade unincorporated companies from selling shares. But many companies ignored this act and continued operations. One example is the London Stock Exchange. The Act was repealed in 1825 as this form of business structure proved extremely popular. Only once in a hundred years did the government try to enforce the Bubble Act. By the early 19th Century there were over 1,000 of these unincorporated companies in business.
Possibly sensing a loss of control or fee revenue to the government, requirements were eased to obtain a corporate charter. The first corporate registrar was passed into law 1844.
By 1873 the Supreme Court merged the separate common law & equity courts into single system. Equitable principles would prevail over common law in case of conflict. What’s fair over what’s legal.
Meanwhile, investors formed new businesses to exploit opportunities in America. The heavyweight Massachusetts Bay Colony Ltd. was seeing profits reduced from competitors due to land disputes. This led to legislative restrictions on corporations holding property. Isn’t it great to have friends in government?
Competitors counter-attacked by forming even more Business Trusts. We see innovation, adoption, testing and case law evolution of this new trust device applied to real property and business ventures. It spread like wildfire.
USA
Corporations and Business Trusts migrated to the United States.
In 1787 the Trust concept was embodied in the United States Constitution. At the dawn of the industrial revolution, the U.S. Supreme Court confirmed that businesses could formally organize as trusts. They offered unique advantages.
The Massachusetts Bay Corporation was real estate monopoly sanctioned by the government to form a Colony. A law was passed that prevented other corporations from owning real estate and engaging in business. Without the protection of a corporation investors were unwilling to risk debtors’ prison and their wealth on a single venture.
In 1795 competitors counter-attacked by forming the first Massachusetts Business Trust. They could own real estate, operate electric railways and gas utility companies.
Real estate developers could circumvent corporate rules enacted by individual state legislatures. Industrial barons and major landowners structured as a business trust could own multiple businesses with anonymity. They also became known as commercial trusts.
The State Supreme Judicial Court in 1890 recognized the business trust as a legal entity. In this era the world’s largest companies were organized as business trusts.
Rather than corporations, the shrewd financial and industrial magnates of America chose trusts to create their empires. They used the specialized Delaware Chancery Court to advocate for the equitable rights of trust beneficiaries. It was a clever setup.
The business trust continues to offer a flexibility unlike corporation restrictions. A declaration of trust may provide –
• issuance of share certificates optional
• trustees terminate the trust without shareholder approval
• trustees reverse split outstanding shares
• shareholders meeting notices are optional
• shareholder vote to approve actions or amendments is optional
• trustees may change the trust name
Standard Oil Monopoly
Trusts were formed by corporations needing a strategy to avoid laws which forbid cartels and other restrictive practices. So what these pioneers did tactically was exchange corporate stock into trust shares. Now the business trust trustees could dominate industries. It was a clever design.
Samuel Dodd was an attorney for Standard Oil. He imagined a new, powerful way to use a trust.
An independent board of nine trustees was created. Standard Oil stock was exchanged for trust shares. The board then controlled the corporations. Profits from the individual corporations shifted to the trust. Trustees set dividend policy. Standard Oil was now a perfectly legal, vertical monopoly.
Famous Business Trust Companies:
• AT&T
• Standard Oil Company
• United States Steel
• American Tobacco Company
• International Mercantile Marine
• General Electric
• DeBeers Diamonds
• American Sugar Refining
• Banker’s Trust Company
• International Match Company
• Early 21st Century
Anti-Trust Legislation
The name of this legislation is misleading because it’s really about competition and free markets. Since the big robber barons that stifled competition and conspired to fix prices were often organized as trusts, the name stuck.
The “Sherman Antitrust Act” of 1890 is a misleading title. More accurately it should read ‘Anti-Competition Act’ because it attacked monopoly and cartel behavior such as Rockefeller’s Standard Oil. The objective was to promote free competition. It’s biggest success was the 1982 breakup of AT&T.
The “Clayton Antitrust Act” of 1914 is also misleading. This legislation sought to prevent anti-competitive practices such as predatory price fixing and anti-competitive mergers.
These two Acts had nothing to do with how a business was organized – trust or corporation. History shows the focus was to end abusive monopoly business practices of early industrial magnates. Both Acts are often considered an attack on the Business Trust structure. The problem was unlawful behavior (‘said the politicians’) by the owners.
Populist mythology is that business trusts are inherently “untrustworthy.” They’re tax gimmicks, etc. And politicians further this narrative to the uninformed public while gaining more tax revenue and control for corporation and LLC filings.
Yet Business Trusts remain a practical, safe, effective, and highly flexible way to legally organize a business enterprise in the United States. Here are a few examples…
• Pension Funds
• Mutual Funds
• Bankruptcy Proceedings
• Oil & Gas Royalties
• Music Royalties
Secretary of State Restrictions – Corporations
Just like in the UK corporate charters were a function of a state legislative body. Over time individual states passed laws that allowed incorporation without an act of the legislature. But most were very restrictive along with special taxes for out-of-state corporations. This is why we see the smartest, biggest companies organized as business trusts. They circumvented state laws and taxes.
Incorporation Statute:
• prohibited dealing in real estate
• established minimum and maximum capital amounts
• must file detailed annual statements of assets and liabilities
The prohibition against a corporation’s dealing (owning) in real estate is generally considered the major reason for the growth of business trusts because they bypassed this restrictive statute.
To establish a corporation in early America required a bill passed by legislators just like in the UK. It consumed tremendous time and energy. Meanwhile the colonies are busy organizing a new country. As a result corporations were very uncommon and rare.
In the 1830’s there was an effort to shift incorporation process to the federal government. But populists were suspicious of Washington DC. While Congress occasionally sought more control over the process after the Civil War various state politicians didn’t want federal government oversight.
Massachusetts was a pioneer in America’s industrial development, yet it was one of the last to permit incorporation without special legislative act. So in 1851 they passed a general incorporation statute. Yet business trusts remained a reasonable option by railway and utility companies.
Through the remainder of the 19th century those difficult requirements for setting up an American corporation faded. Individual states realized the potential for revenue and control.
1870 – New Jersey loosened corporation formation restrictions, fees and reduced taxes. It worked. Within a few years revenue was so great property taxes were abolished. The ‘Garden State’ found a gold mine. Other states were jealous.
1899 – Delaware used pro-corporate laws and zero taxes to attract companies. It also enacted the Chancery Court which had expertise to quickly resolve Corp issues. Later it offered anonymity. By the year 2020 the state was earning $1.5B in fees for nearly 1,500,000 corporations.
1977 -Wyoming enacted legislation for create LLCs after Frank Burke pitched the original idea to Alaska. It was basically a corporation ‘lite’ with tax flexibility. Very popular. Secretary of State revenues exploded.
1980 – South Dakota former Governor Janklow – eliminated usury rates. Citibank jumped first and moved credit card operations to Sioux Falls. Other banks followed. Huge revenues for state politicians. $2,500,000,000,000 of bank assets in state.
1991 – Nevada’s state budget $130m deficit. Carson City wanted in on the corporation game. Let’s become “Delaware of the West.” An ideal fit for the state who perfected ‘divorce mills in the early 20th century. It was truly a bonanza. Since 2012 they have earned over $1,400,000,000 in filing fees.
Isn’t it easy to see why politicians and lawyers like Corporations and LLCs?
But as rules were loosened to form a corporation, states and lawyers saw revenues explode. Control, Power and
Money. The states along with the legal community have done an excellent marketing job with Corporations and LLCs. They’ve earned billions in revenue.
Personal versus Commercial Trusts
Living Trusts are designed for estate planning. They fit within the category of “Personal Trusts” whose purpose is to conserve and distribute wealth. Business Trusts are designed for doing business. They fit within the category of “Commercial Trusts” whose purpose is to operate a for profit business.
Lawyer Handicaps
In America most lawyers are familiar with personal (living) trusts for estate planning. But very few of them are aware of or knowledgeable about commercial (business) trusts. This is despite the existence of multi-trillion dollar mutual funds and REITS.
As a law school curriculum course, “trust law” was eliminated by the mid-70’s about the time LLCs became popular. None of the leading casebooks on business organizations or associations cover business trusts. There is no business trust question on the multi-state bar exam. The focus is personal trusts and estates for wealth transfer.
“…whereas in the United States, most practitioners consider trusts as an institution in the field of gratuitous transfers.” – John H Langbein
A few lawyers attempt reverse engineering a living trust into a business trust, but it doesn’t work that way. They also erroneously assume IRS trust tax code rules apply.
When asked, they’ll always steer you toward secretary of state registrations with corporations and LLCs. This is because they generate recurring fee income.
In contrast there is little money for them with business trusts. Setup once. No maintenance. No minutes. No renewals. Minimal fees.
As states liberalized incorporation statutes and lawyers standardized charters, corporations and LLCs became easier and cheaper to form. Revenue incentives for states and professional familiarity pushed commercial trusts to the margins for general operating businesses, while personal trusts remained central to estate planning and family wealth transfers.
Modern Commercial Trusts
Since 1940 in the United States, mutual funds such as Vanguard organized as Business Trusts. Their industry holds trillions of dollars of assets. Rockefeller’s infamous Standard Oil was a maze of business trusts.
In the 1960’s real estate investment trusts (REIT) became popular and remain so today. You can find WalMart Business Trust is in the news too. Commercial trusts hold trillions of dollars of assets.
“…It will be seen that over 90% of the money held in trust in the United States is in commercial trusts as opposed to personal trusts.” – John H. Langbein
Modern wealth has evolved far beyond industrial activity to financial services and products. For example, stocks, bonds, mutual funds, insurance and annuity contracts, REITs, pension plans and bank deposits.
Mutual Funds hold a portfolio of complex financial assets. REITs are pooled real estate investment funds with special tax treatment. Contemporary SPACs are blank check entities. All commercial trusts.
Institutional trustees earn fees for administration or investment advice about financial products. These include registered investment advisers, insurance brokers, and other financial professionals. They are entrusted fiduciary agents responsible to act on your behalf, the client beneficiary.
Today’s “business trusts” most visibly appear in financial markets:
• Mutual funds (investment companies) pool securities under trust arrangements.
• REITs hold income-producing real estate with specialized tax treatment.
• SPACs (blank-check companies) often utilize trust accounts for proceeds.
• Pension plans, insurance and annuity contracts, bank deposits, and custodial products frequently rely on institutional trustees and fiduciaries.
You can find these business trusts registered in various states, with the SEC and regulatory agencies. They are financial instruments of commercial commerce.
Worldwide Acceptance
Read the European or Asian WSJ, FT or Reuters financial news and you’ll see Business Trusts used extensively in Singapore, the United Kingdom, Australia, South Africa, and India. As these are often registered public investment companies they apply a different purpose to their mission.
A Business Trust is recognized as wholly, valid and legal form of business organization, with the right to do business, hold and convey real estate, make contracts and enforce its rights in court.
Why Many Prefer Business Trusts
When states tightly controlled corporate charters, business trusts offered practical advantages:
• faster formation without special legislative acts,
• limited liability and anonymity for beneficial owners,
• flexibility to hold and manage real estate across jurisdictions, and
• centralized control by trustees.
Industrialists and large landholders used trusts to assemble diversified holdings without the constraints of early corporate codes. Today we can use them for asset privacy.
