BUSINESS TRUST
An unincorporated business organization created by a legal document, a declaration of trust, and used in place of a corporation or partnership for the transaction of various kinds of business with limited liability.
The use of a business trust, also called a
Massachusetts trust or a common-law trust,
originated years ago to circumvent restrictions
imposed upon corporate acquisition and devel-
opment of real estate while achieving the limited
liability aspect of a corporation. A business trust
differs from a corporation in that it does not
receive a charter from the state giving it legal
recognition; it derives its status from the volun-
tary action of the individuals who form it. Its
use has been expanded to include the purchase
of SECURITIES and commodities.
A business trust is similar to a traditional
trust in that its trustees are given legal title to
the trust property to administer it for the
advantage of its beneficiaries who hold equi-
table title to it. A written declaration of trust
specifying the terms of the trust, its duration,
the powers and duties of the trustees, and the
interests of the beneficiaries is essential for the
creation of a business trust. The beneficiaries
receive certificates of beneficial interest as evi-
dence of their interest in the trust, which is
freely transferable.
In some states, a business trust is subject to
the laws of trusts while, in others, the laws of
corporations or partnerships govern its exis-
tence. The laws of each state in which a business
trust is involved in transactions must be con-
sulted to ensure that the trust is treated as an
entity whose members have limited liability. If
the laws of a particular state consider a business
trust to be a partnership, the beneficiaries may
be fully liable for any judgments rendered
against it. The trustees of a business trust are
liable to third parties who deal with the trust
unless there is a contract provision to the con-
trary, since they hold legal title to the trust prop-
erty and may sue and be sued in actions
involving the trust. They may, however, seek
indemnity from the trust property and possibly
from the beneficiaries.
The property of a business trust is managed
and controlled by trustees who have a fiduciary
duty to the beneficiaries to act in their best
interests. In many states, the participation of the
beneficiaries in the management of the property
destroys their limited liability, and the arrange-
ment will usually be treated as a partnership.
Profits and losses resulting from the use and
investment of the trust property are shared pro-
portionally by the beneficiaries according to
their interests in the trusts.
A business trust is considered a corporation
for purposes of federal INCOME TAX and similarly
under various state income tax laws.
