If you’re starting a business in South Africa, you’ll need to consider the different legal structures that your business can take. One of these is a business trust.
A business trust is a special legal instrument for holding and running a business. Many business owners use this model to protect their assets and safeguard the business against liability and certain taxes. Business trusts can get fairly complex, so it’s important to work with a trust lawyer if you’re planning to take this route for your business.
Follow this quick guide for everything you need to know about starting a business trust in South Africa.
What is a Business Trust in South Africa?
A trust is a type of legal agreement where one party, called the trustee, is entitled to hold, manage, and direct assets on behalf of another party called the beneficiary. A business trust is when the trustee has been entitled to manage a business. The trustee holds the business title, but the beneficiaries get proof of interest certificates.
The trustee runs the business for a profit, which benefits the trust beneficiary or grows the trust.
A business trust in South Africa is generally used as a way to protect individuals. Just like certain business insurance can help add protection, trust models can safeguard individual business owners against liability, creditors, taxes, and lawsuits.
What are the Disadvantages of a Business Trust?
Setting up a business trust offers a few key benefits, but it’s not for everyone. Here are three of the main disadvantages of operating a business trust:
- Business trusts can be expensive to set up and maintain. If you’re a small business, then operating as a trust might not always make sense financially
- Operating a business trust requires quite a lot of legal compliance and understanding. This can be challenging to achieve
- Business trusts have a limited lifetime. Don’t expect the trust to exist forever
How Does a Business Trust Work?
A business trust works similarly to a family or individual trust. The trustee manages the trust and its contents (in this case, the business) on behalf of a grantor. A business trust is essentially the legal entity that owns the business.
A business trust can have a single beneficiary or multiple beneficiaries. A business can also be owned by multiple trusts, or just by one.
Trusts offer different types of legal protection than what is offered to individuals. This means trusts can be used to safeguard against taxes and liability uniquely.
A business trust works through a document called a declaration of trust, which is drawn up by a trust lawyer. This document is based on the agreement of everyone involved in the trust, and it includes the terms of the trust and the responsibilities of the trustee.
In a business trust, the trustee is the person who holds the rights and control of the business stake. Business trusts can still conduct business transactions, just like individuals, but they are covered under a different type of legal agreement.
How Do I Register a Business Trust in South Africa?
To register a business trust in South Africa, you will need to have a trust deed drafted by a professional. The deed needs to include the name of the trust, the purpose of the trust, the founder of the trust, the names of trustees, the trustees’ powers, the nomination of beneficiaries, and the administrative procedure of the trust.
The trust needs to be registered at the office of the Master of the High Court, in the area of the jurisdiction where the business trust’s assets (the business) exist. When the necessary documents are approved by the Master of the High Court, they will issue Letters of Authority that appoint the trustees.
See Also: The Basics of Registering a Small Business in South Africa
How are Trusts Taxed in South Africa?
Trusts are taxed at a flat rate of 45% while special trusts are taxed on a sliding scale between 18% to 45%. Trusts don’t for any rebates listed in the Income Tax Act. Trusts are taxed, and not individuals, which adds a certain level of protection to the business owners.
Starting a business trust can be beneficial for certain enterprises, as long as the trust agreement makes sense. While it’s not the most common legal agreement for a business, it’s important to understand the different options that exist when developing your small business. This could help you create a unique legal structure that allows your business to access unique tax and asset protection benefits.
