What Is a Business Trust Act?

Geisha A. Legazpi

A business trust act refers to the laws that govern a commercial organization established for the purpose of managing and controlling assets set up in a trust. Although it is an organization conferred with a status, a business trust should be differentiated from a corporation. A corporation is created by legislative action of a particular state; it then acquires the status of a juridical person that has rights, privileges, and responsibilities under the law. This personality is distinct from the members that make up the corporation. A business trust, on the other hand, acquires its status not by the grant of the state’s legislature, but by voluntary action of the people who establish the trust.

Business trusts are often discussed in relation to corporations and partnerships.
Business trusts are often discussed in relation to corporations and partnerships.

Typically, a business trust act involves processes similar to that found in a traditional trust setup wherein there are trustees and beneficiaries. The trustees are people who manage the assets, while the beneficiaries reap the advantage or benefit arising from this administration. Moreover, as with a traditional trust, essential to the business trust is a contract outlining the terms and the duration of the trust, the extent and limitations of the powers of the trustees, and the interests of the beneficiaries. Asset management may result in profit or losses, and since a trust usually consists of a number of beneficiaries, the share of the beneficiaries in the profits is proportional to their interests. As proof of their stake in the trust, the beneficiaries are given certificates indicating their interests.

The purpose of the business trust act is to ensure that the assets of a business are kept safe from creditors, particularly as a result of a final judgment in a lawsuit initiated for that purpose. If, however, the liability of a trust prospers and is considered in a lawsuit, the trustees are answerable to third parties who are looking to execute on the properties involved in the trust. Consequently, the trustees may sue under circumstances involving the trust. The trustees, therefore, must always have in mind the best interests of the beneficiaries. In some cases, the business trust act may also result in the tax exemption of certain types of assets.

A business trust act is formulated in consideration of the trust laws of the state or country where it was created, as well as the partnership and corporation laws existing in that state or country. This is because the business trust can be subjected to either. Finally, it should be noted that while a business trust is distinct from a corporation, it is considered one for purposes of collecting income tax.

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