As a small business owner, there are certain business structures you have to put into place. When it comes to business structures, the legal structures are extremely important. One of those structures is called a business trust, and perhaps its one you should start.
A business trust is a legal agreement for holding and running a business. Business owners typically use it as a model to protect their assets and the business against liability and certain taxes. As a small business owner, it’s advisable that you get a trust lawyer to handle your business trust as it is remarkably complex.
Before you start your business trust, it’s important you know how it works in South Africa. Additionally, you need to know the advantages and disadvantages of a business trust. In this article, we explore the concept of a business trust and the advantages and disadvantages of having one for your business.
What is a Business Trust in South Africa?
In a business trust, one party called the trustee is entitled to hold, manage and direct assets. The trustee works on behalf of another party called the beneficiary.
In a business trust, the trustee is entitled to manage the business. The trustee holds the business title, but the beneficiaries get proof of interest certificates. In South Africa, a business trust is typically used to protect individuals.
There are several types of individual trusts. In business, there are three main categories of business trust, namely:
- Grantor trust – In this trust, the grantor pays taxes on the income that comes from the trust and has total control over it.
- Simple trust – In a simple trust, the trustee distributes business profits directly to the beneficiaries.
- Complex trust – A complex trust means that business profits and other funds are distributed only in part to beneficiaries. The remaining profits are contributed to other organisations such as charities.
Advantages of a Starting a Business Trust
Trusts are important for business owners. They have various advantages, including:
Protection: Business trusts offer your business protection. The trust can safeguard your beneficiaries and prevent potential creditors from getting direct access to the assets that are within the trust.
Privacy: A business trust can protect your business financials from going public. In the event that your company is well-known, a business trust can protect your assets that are within the trust from going private.
Litigation Protection: A business trust can protect your assets from any legal issues. By moving your assets from your ownership, you cannot be sued for your assets.
Minimising Taxes: If your business is within a business trust, there are tax incentives that you may qualify for. Your trust lawyer will be able to help you set those up and you can then start reaping the rewards.
These are just a few advantages of having a business trust. And while it’s great for you, you need to know what the disadvantages are.
Disadvantages of Starting a Business Trust
When it comes to business trusts, they are not for everyone. It’s important to know the disadvantages of a business trust to see if it works for your enterprise. Some of the disadvantages of a business trust include:
Cost: Setting up a business trust can be quite expensive. If you don’t have the legal experience and knowledge to do it yourself, you may have to get a trust lawyer (very pricey). Additionally, there are admin fees and management fees involved.
Loss of Control: When you place your assets in a trust, you let go of control over them. This means you will have no control over how the assets are managed.
Tax implications: If your business trust is not set up properly, there can be serious tax implications. Trusts can have tax implications in relation to income tax and capital gains tax.
Complexity: A business trust requires a lot of planning and document drafting. This makes them complex, time-consuming and needing the assistance of legal and financial professionals.
These are just a few examples of how a business trust may not work for your business. Ensure that you understand the implications of getting a business trust and if you decide to get one, get the correct legal professional to help you.
How to Register a Business Trust in South Africa
To register a business trust, you will need the help of a professional. The professional will help you draft a trust deed draft. The deed will have the trust’s name, purpose, founder, trustees’ names, powers, beneficiaries, and administrative procedures.
You can register your business trust at the office of the Master of the High Court. You will register your trust under the jurisdiction where the business trust’s assets are. Sometimes, the Master of the High Court will approve certain documents and then issue Letters of Authority that appoint the trustees.
Now that you know how a business trust works, and the advantages and disadvantages of the business trust, you can make an informed decision. If you believe that you need a business trust, find a top legal professional and get started today.
