BUSINESS ENTERPRISES LAW: Section C BUSINESS TRUSTS ___________________________________________ Lecture 8 & 9: The Business Trust ___________________________________________ Reading Materials:

: Slides / Transparencies as discussed during lectures. Kopel, S Guide to Business Law (4th Edition) Oxford Publishers Chapter 25 pp 299-305. Relevant Case Law as discussed. Additional Text Book: Havenga et al General Principles of Commercial Law (5th Edition) Juta Publishers Chapter 26. ___________________________________________ RECOMMENDED TEXT BOOK:

 Pretorius et al Entrepreneurial Law (4th Edition) Lexis Nexis Publishers Chapter 35. THE TERM BUSINESS TRUST: In practice? Difficult to find definition of business trusts Books definition: A business trust is defined as a trust where the trustee does not simply protect, manage and apply the trust assets, but uses these primarily for carrying on a business for profit in order to benefit the trust beneficiary or to further the aims of the trust Trustee has duty to preserve trust assets / therefore does not generally have right to expose trust assets to business risks Trust deed may afford such a right to a trustee, but the right must be exercised reasonably, in good faith and with circumspection

 Extensive management powers are indispensable for conducting business therefore essential that trust document of business trust should give trustee wide powers Powers? * To enter into business transactions on behalf of trust * To acquire new assets * To employ staff * To provide security Practice? Trustee of business trust possesses only those management powers conferred on him in trust document ADVANTAGES TRUST: OF THE BUSINESS

Advantages includes: * Limited liability * Continued existence * Limited regulatory duties

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Participation by legal persons Flexibility

Limited liability: Trust does not have legal personality but debts of the trust is normally payable from trust estate General rule? Neither estate of trustee nor estates of founder / beneficiary can be excused for those debts Effect? Parties to trust enjoy measure of protection against liability for debts of trust (similar to protection enjoyed by shareholders / directors of company in respect of debts of company) Continued existence: Possible to provide that trust will continue despite change in trustees / beneficiaries

 Therefore trust can offer benefit of perpetual succession Limited regulatory duties: Trust is not really subject to similar statutory rules applying to companies and CCs Example: There are no equivalent rules regarding disclosure by trusts (mostly the very fact of no disclose [greater confidentiality in trusts] prompts interested parties to use business trust Trusts do not have to comply with statutory rules which bind companies and CCs therefore parties of business trusts enjoy same benefits of corporate business forms (without regulatory duties) Lack of effective regulation & disclosure gives rise to risk of insiders / 3rd parties that deals with trust

Participation by legal persons: Legal and natural persons may be parties to trust (as founders / trustees / beneficiaries) Therefore trust offers distinct advantage compared to CCs (where membership is limited to natural persons) and companies (where only natural persons may be appointed as directors)

Flexibility: Trust is fairly flexible business form because of few statutory restrictions on trusts Flexibility of trusts makes it possible to structure trust in such way that income tax & estate duty benefits can be attained

TYPES OF BUSINESS TRUSTS: Business trusts: Subdivided private and public trusts into

Lack of unanimity regarding nature of difference between 2 trusts Private Business Trusts: Parties concerned usually know each other / related Structure? * Two or more founders jointly create business trust / appoint themselves as trustees & trust beneficiaries * They contribute capital / manage trust business jointly * Distribute trust benefits partly as salaries to themselves * Resembles partnerships / CCs Public Business Trusts: Displays characteristics of public company Structure?

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Trustees invite public to invest capital in trust in exchange for which they become beneficiaries of trust Normally large / fluctuating number of beneficiaries they are not involved in management of trust Beneficiaries often receives certificates in exchange for contributions Collective Investment Schemes Control Act 45 of 2002

PRACTICAL CONSIDERATIONS: Private business trust is well-known in business world Reasons for popularity? See above! Addition? Trust may offer tax benefits (depending on structure) But parties should benefits against risks! always way

The income tax position of a trust:

 Trust is not legal person but still liable to pay income tax Past? Many trusts were created because of favourable tax scales but position has been altered to less favourable to discourage formation of trusts for tax / business proposes (May go down even more in future) Current tax position / tax scales are not as beneficial as in past, but still offers advantages (depending on structure) Trust does not pay income tax on profits distributed as benefits to beneficiaries Beneficiaries are taxed on their own scales upon receipt Beneficiary exempted from income tax / enjoys favourable income tax dispensation / large accumulated assessed loss? Would much rather

receive max profits than to have profits reduced by income tax (as in case of company) before being distributed Trust offers advantages similar to partnership but unlike partners, participants of trust are free from risk of personal liability Parties who want to form business trust / wish to utilize tax advantages? Should ensure that trust is created with care to obtain max benefit Extent of benefit will depend on: * Measure of control that founder can exercise over trust assets * Allocation of trust income * Nature of rights that beneficiaries have to benefit from trust Parties must also take note of SARS If trust is formed in abnormal way & mainly to have tax benefit? Commissioner will ignore trust for tax

purposes to prevent the avoidance of income tax Inherent risks: Parties should also consider risks in structure of business trust Founders of business trust are usually also beneficiaries They contribute assets of trust / place these in hands of trustees Control of founder & beneficiaries over trustee? Dependent on provisions of trust deed (Supplemented by fiduciary duty to act in accordance with the instructions of the trust deed) Parties often attempts to limit risks by appointing all parties to private trust as trustees but its difficult for trustee to exercise control over cotrustees

 This creates legal risks: If all beneficiaries are appointed as trustees? Insufficient separation of control & enjoyment will undermine legal validity of trust Element of risk & minimal control over trustees? Have to be weighed against benefits of business trust 3rd Parties should be careful in contracting with trust trusts are not comprehensively regulated / info is not public Also trustees / other parties to trust are not generally liable for any debts of trust