In South Africa, business trusts can be created, as a form of inter vivos trust, to carry on the business with a profit incentive. Business trusts are a legal arrangement created to hold and manage assets for the benefits of individuals or entities.
Given that a business trust is an inter vivos trust, this means that it was created during the founder’s lifetime. It is established by a trust deed which sets out who the founder, trustees and beneficiaries are, defines powers and duties of trustees, and how and when the trust is to be wound up.
- may be either public or private
- beneficiaries enjoy limited liability trading
- administration is less complex and less expensive than a company or close corporation
- trustees may each individually face personal liability in the event of recklessness or failure to exercise reasonable care and skill
The main provisions specified in the deed of a business trust should include the following:
- Objectives of the trust
- Names or class of the beneficiaries and whether they are income or capital beneficiaries or both
- Rights, obligations, power, and duties of trustees
- Rules and restrictions regarding the distribution of income and capital
- Duration and procedure on termination of the trust
- Procedure for trust amendments
- Requirement for trustee meetings
- Requirements for trustee appointment, removal, or replacement
In South Africa, there are three types of business trusts:
The trust founder transfers ownership of assets or property to a trustee/ the trustees to be held for the benefit of defined or determinable beneficiaries of the trust. This is the most common form of a trust and is also known as an “ordinary trust”. The rights of the beneficiaries in respect of the trust assets are usually determined by the trust deed.
The founder makes a bequest to the beneficiaries and vests the administration of the assets in the trustees. The assets vest in the beneficiaries. Furthermore, the trustees only have administrative control of the trust assets that they manage for the benefit of the beneficiaries until the assets are transferred to the beneficiaries.
Similar in structure to the bewind trust, except that the assets are administered on behalf of beneficiary who does not have the capacity to manage his/her own affairs. Ensure that you are mindful when utilising a trust for business purposes. Consider carefully how you are going to set it up and how you will administer it.