For private transactions, businesses, or investments a trust operates quite differently. People deceive themselves thinking they can just plug in a standard LLC model.
This becomes apparent when attempting to implement the business trust model. The mindset must shift from “owner to fiduciary control.”
Let’s add further detail…
Who Manages it?
Corp are run by the officers. LLC are run by the managers.
Business trusts are run by the trustees.
Who are the legal owners?
- Corporation Stockholders
- LLC Shareholders
- Business Trust Trustees
Who are the equitable owners?
- Corporation Stockholders
- LLC Shareholders
- Business Trust Beneficiaries
What’s the Difference?
A business trust has a unique “bifurcation” mechanism. This means that legal and equitable title are divided so you have a three-party structure.
Person(s) who created it, person(s) with legal title, and the person(s) with equitable title.
A corporation or LLC does not have this bifurcation mechanism. Both legal and equitable title are undivided which is a two-party structure.
Person(s) who created it, and person(s) with both legal & equitable title.
This bifurcation mechanism confuses most people, including politicians, bureaucrats, legal and accounting professionals. Consequently, handicaps and opportunity.
Internal vs External
Trustees have responsibilities to people outside the trust. They also have responsibilities to people inside the trust. The dynamics with each are different because of their “fiduciary” status. This special obligation is missing from the Corp/LLC model.
Rights and Limitations
Trustees have unique rights and limitations within the business trust. For example, trustees are authorized to make certain decisions and execute them. In other cases they are prohibited from actions which could harm the trust.
Beneficiaries also have unique rights and limitations. For example, they must not influence trustee decisions or risk having the business trust viewed as a partnership. However, they can replace trustees.
Trustees
Their job also requires the ability to lead various external participants such as bankers, escrow agents, title officers, government agencies, state licensing boards, insurance underwriters, institutional & private lenders, and tax authorities, etc.
As these vendors and agencies are generally unfamiliar with business trusts they depend upon the trustee to correctly navigate questions. Any missing or conflicting answers can jeopardize or handicap progress especially when on a tight deadline.
Success includes asset conveyances. Knowing how to interconnect with Corporations, LLC and a Living Trust is helpful too.
Summary
LLCs, Corporation and Business Trust all have the same objective. But their differences are unique in concept and execution.
