Summary
- A trust is not a separate legal entity or business structure in England and Wales, but rather a special relationship in which trustees hold and manage property on behalf of beneficiaries, with trustees owing the highest fiduciary duties to act in beneficiaries’ best interests.
- Trusts arise naturally in general partnerships where partners holding legal title to partnership property owe trustee duties to other partners, and are commonly used to hold shares in family businesses, allowing family members to receive dividends without participating in business decisions.
- Unit trusts may function as investment vehicles, but these structures are complex and heavily regulated, making legal advice essential before establishing one.
- This article is a guide to trusts as a business structure for business owners in England and Wales, explaining the law of trusts, trustee duties, and how trusts interact with different business structures.
- LegalVision is a commercial law firm that specialises in advising clients on business structures, trusts, and corporate governance.
Tips for Businesses
Understand that trusts cannot own property, enter contracts, or sue in their own right, as trustees act on the trust’s behalf. If considering a trust over company shares for family succession planning, address director succession carefully. Seek legal advice before establishing any trust arrangement connected to business ownership or investment activity.
A trust describes a special relationship between individuals where trustees manage property on behalf of beneficiaries, but it is not a business structure in the way that a company or sole trader is. Understanding this distinction is essential before deciding how to structure your business. This article will outline the law surrounding trusts and consider the limitations of trusts as a business structure.
The Law of Trusts
Trusts are not separate legal entities like an incorporated company. They cannot enter contracts, sue others or own property. Instead, a trust describes a special relationship the law recognises between the trustees and the beneficiaries. The law of trusts governs how the trustees must treat trust property and the relevant rights the beneficiaries have.
There are three key individuals in a trust.
| Settlor | The settlor is the person that owns some form of property — shares, equipment, land, security interests, etc. — before a trust comes into existence, and then takes the property and creates a trust over it. |
| Trustees | The trustee is the person with the legal right in the property. When the settlor creates a trust, the legal title to the property transfers to the trustee. Since they own the legal title in the property, they can manage the property, such as by buying and selling trust property. As is common in business cases, the settlor may be the same person as the trustee and will often also be a beneficiary. |
| Beneficiaries | Beneficiaries are those that stand to enjoy the property in some capacity. This interest is called an equitable interest. For shares, this might mean beneficiaries enjoy dividends or a right in the future to own the shares outright. For property, it might mean receiving rental payments or outright owning the property in the future. |
Duties of a Trustee
A settlor can intentionally create a trust, or they can arise automatically by operation of the law. Where a trust exists, regardless of the context, the trustee owes the beneficiary a fiduciary duty. This is the highest standard the law imposes on an individual. In practical terms, a trustee must:
- always act with the best interests of the beneficiaries and the trust as a whole in mind;
- never use trust property for personal gain; and
- always account to the trust for any gain that arises incidentally from the trustee’s position.
In a commercial context, trustees often exist as beneficiaries. A common example is in a partnership, where one or more partners holds property on trust for the other partners and the partnership as a whole. The practical effect of this is that the interests of all parties are more closely aligned. However, a beneficiary that is also a trustee cannot act independently and privately with the trust property.
Companies and Sole Traders
As mentioned, a trust is not recognised as a legal entity in England. It is not a business structure like a sole trader, partnership, or company. Therefore, unlike a company, you cannot bring a trust into existence through incorporation.
Likewise, a trust will not exist as a sole trader business. This is because it requires two or more people with ownership interests in business property. Since sole traders are, by definition, the only owner of a business, a trust will not exist.
Trust Corporations
Despite the name, trust corporations are not businesses run as trusts. Instead, they are incorporated entities, such as a company, that manage trusts on behalf of the beneficiaries. You can think of trust corporations as for-profit trustees and not trusts themselves.
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General Partnerships
Trusts are relevant for (unincorporated) partnerships because the partnership itself has no legal existence apart from any of the partners. This means that all business assets are legally owned by at least one of the partners in their personal capacity.
Ideally, each partner would have their name on the title to partnership property. However, property law does not always permit multiple people to have their names on a piece of property. The most common example is land law – no more than four individuals can have their name on the title to the land. Therefore, in the context of a partnership, where a piece of land is used as partnership property, partners with their names on the legal title owe trustee duties toward all the other partners without their name on the title. In other words, the law says these partners — the trustees — hold the property on trust for the other partners.
Ultimately, general partnerships are governed by the law of equity and trusts, but partnership structures themselves are not trusts.
Trusts Over Family Shares
In the context of a trust regarding a family business, generally, this is not a trust over the business itself but rather a trust over the shares in the business. That is, the business is not run through a trust, but instead, the ownership rights in the business are held on trust.
This commonly arises when there is an incorporated business owned by a single person. The owner, who owns all the shares in the company, may want some of their family to benefit from the success of the business without giving them any input into how the business is run. Accordingly, the owner (settlor) can create a trust over some or all of the shares, entitling the family member beneficiaries to the dividends (declared profits) from the company.
Additionally, the trustees will have legal rights in the shares, meaning they can sell them if they believe it will benefit the trust and its beneficiaries. Likewise, trustees will typically exercise voting rights in the shares on behalf of the beneficiaries.
Where the settlor/owner is the sole director (as may be common for smaller businesses), the business will need to consider succession planning for when they die. Specifically, the trustees will likely become directors in the company, which entails substantial additional duties.
Finally, while you often see trusts over company shares in the context of family businesses, trusts can and do own shares in very large companies. In fact, many of the largest shareholders in public companies are investment funds that hold shares in the company on trust for its investors.
Investment Vehicles
An exception to the rule that you cannot run a business through a trust may be for certain investment activities run through unit trusts. Unit trusts are special vehicles in which investors can buy shares and receive a portion of the return on the investment fund.
However, the way that these vehicles are structured is quite complex. Additionally, investment activity is highly regulated. It is advisable to engage a lawyer if you are considering creating a trust as an investment vehicle.
When you incorporate a company in England and Wales, you must maintain a number of company registers at its registered office or at the Companies House. This template includes these company registers.
Key Takeaways
Trusts are not business structures. You cannot necessarily run a business through a trust, though trusts may arise between business owners. For example, in a general partnership, partners with the legal right to partnership property will hold it on trust for the other partners and the partnership. Trusts over family shares are also quite common. These allow family members to benefit from the property without directly controlling the company. However, this is not the same as running a business through the trust.
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Frequently Asked Questions
Trusts are not business structures like a company or partnership. As such, you cannot operate a business through a trust structure.
Trusts govern special kinds of ownership over property. In partnerships, the business owners (partners) owe each other fiduciary duties and may own business property on trust for the other partners. Separately, you can create a trust over company shares so that beneficiaries receive dividends but do not participate in the decision-making of the business.
For family businesses, it can be the case that the business owner (the settlor) wants other family members to profit from the business. At the same time, they may wish to avoid having family members provide input into running the business itself. In this case, trusts usually exist over the shares in the business. This allows family members to gain a share of the dividends/declared profits. These trustees may then succeed the business owner as company directors when they pass away.
Trustees must always act in beneficiaries’ best interests, never use trust property for personal gain, and account to the trust for any incidental gains arising from their position as trustee.
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