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 development 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 voluntary 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 equitable 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 evidence 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 existence. The laws of each state in which a business trust is involved in transactions must be consulted 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 contrary, since they hold legal title to the trust property 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 arrangement will usually be treated as a partnership.
Profits and losses resulting from the use and investment of the trust property are shared proportionally 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.
The word trust can be used to designate a group of companies that join together to control a domestic industry. The term was widely used in the late nineteenth century and early twentieth century. The American economy changed substantially following the American Civil War (1861–1865). Cottage industries, artisan production, and small-scale manufacturing declined, and a new, larger, factory-based manufacturing sector grew. Operating under relatively relaxed state business laws, financiers and manufacturing moguls became rich, often by suppressing the competition.
This led to a concentration of capital in just a few huge corporations, especially in transportation and heavy industry. The giant manufacturing and mining companies that survived the period of cutthroat competition soon folded into nationwide monopolies known as trusts. In a trust, the companies transferred their properties and stocks to a board of trustees who ran the companies in a way that avoided competition—for instance, by dividing the markets up to protect regional monopoly. Such business arrangements substantially restricted the opportunities for new competitors.
See also: Standard Oil, Tobacco Trust, Trust-Busting, William Howard Taft,