3 Benefits of Establishing a Business Trust
Contributed by Kc Chohan, an EO Los Angeles member who is the founder of Together CFO, a financial strategy firm that helps business owners optimize their tax strategies so they can keep more of their wealth and focus on growing and scaling their business.
Since I started my business in 2016, I have always been curious to know the best way to protect my assets, both personal and business. The conventional wisdom of starting a company as a limited liability company (LLC) or S-Corporation was fine when we had minimal assets. However, my company quickly grew both in headcount and assets, so it soon needed more advanced financial protection strategies.
I studied the best practices of how elite and family businesses protect their assets and implemented these strategies in both my business and personal life.
I learned that it all starts with trusts. A trust is a fiduciary arrangement with three parties: grantor, trustee and beneficiary. In a trust, the “grantor” transfers the financial benefit of property—such as a company—to a “beneficiary.” The legal ownership and control of the property (or company) is either maintained by the grantor or given by appointment to another individual or financial institution, called the “trustee.”
Depending on local laws where you establish a trust, the grantor, trustee and beneficiary may be the same person or may also be two or three different people or entities.
When you create a trust, you enact a contract agreement that is much more powerful than an LLC, S-Corp or C-Corp. There are many different types of trusts, including simple trusts, complex trusts, real estate trusts, land trusts and charitable remainder trusts—the list goes on. So, it can get very confusing very quickly and you should consult your estate planning and tax teams if you are interested in pursuing this option for your business.
Here are 3 ways a business trust may benefit your company:
1. Asset protection
From an asset protection standpoint, a trust is a smart strategy. It’s important for the trust to own all of the company’s assets, which can then be leased or used by your main business. This gives you additional asset protection once the trust is set up accordingly with this strategy in mind. When a trust is set up and operated correctly, it can also offer tax benefits to help optimize your tax strategy so you can maintain more of your wealth to use to grow and scale your company.
2. Employee management
Did you know that a trust can help a business manage its employees? Sometimes the stress of W2 employees, unions and insurance claims can deter you from wanting to scale your business. Here’s how a trust can help in that situation: You can set up a company inside of a trust that hires and pays employees. Then, you can contract that new company to provide the workforce for your main company. This setup can protect your main company from any legal or insurance issues that could impact it.
3. Legal protection
When a company’s assets are held in the correct type of complex trust, the legal arrangement makes it increasingly difficult for people to sue the company or you as its trustee. Because the trustee of the trust is technically a guardian and not the beneficiary of the trust, people cannot sue you as a trustee. Similarly, as the beneficiary of a trust, if you are sued, the assets in the trust cannot be accessed by the party suing you because you are not due anything from that trust unless the trustee issues a distribution. When seeking this type of legal protection from a trust, it is very important and a best practice to keep the trusts’ beneficiary information private so that no one can conduct a search for the names of the trust’s beneficiaries.
The hardest part of this transition for me was learning how to properly administer the trusts after I opened them. First, you must learn a new set of rules when you’re operating in the trust world, which are different from the Generally Accepted Accounting Principles most business owners are familiar with. You must take steps to ensure not to comingle funds. There can be no mixing of your business or personal funds with trust funds. I treat the trust as its own company, with its own credit card and debit card, which makes it much easier to manage.
When your assets and wealth grow, it’s important to update your structure and setup so that you can protect your company and your family from unknown and unforeseen dangers. As you scale your company, you often outgrow your team and need to update processes and procedures. One of the key lessons I have learned is that the team, processes and structure that got you where you are is not the same team, processes and structure that will get you where you want to be.
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