Senate Bill 61 offers new opportunities for business trusts
Over the years, common law trusts have been to preserve and protect property due to their flexibility. However, as the common law underpinning trusts is slowly becoming outdated, 15 states, including Delaware, have codified business trusts in their business entity statutes. Through Senate Bill 61, effective July 1, 1999, Nevada has joined these states by creating Chapter 88A of Title 7 of the Nevada Revised Statutes to provide for the formation of business trusts. Although Chapter 88A is modeled after the Delaware Business Trust Act, Chapter 88A contains modifications to conform with Nevada’s existing statutory and regulatory framework. The following shall provide a brief background of a business trust, the key characteristics of a business trust, the benefits of a business trust and the requirements for the formation of a business trust.
Background
Generally, business trusts are hybrid entities possessing characteristics of a corporation, a limited partnership and a common law trust. Although business trusts, also known as “Massachusetts business trusts:’ have traditionally been used to invest in real estate, business trusts have been formed to carry on a wide range of lawful businesses and activities, such as financing ventures and transactions. Examples of financing ventures and transactions include asset-backed securities, securities transactions, collateralized mortgage transactions, real estate investment trusts, leveraged leasing transactions, mutual funds and investment companies, liquidating trusts private investment funds, joint ventures and strategic alliances.
Characteristics
Under Chapter 88A, a “business trust” is defined as an ”unincorporated association which …is created by a trust instrument under which property is held, managed, controlled, invested, reinvested or operated, or any combination of these, or business or professional activities for profit are carried on by a trustee for the benefit of the persons entitled to a beneficial interest in the trust property …. ” The structure of a business trust includes beneficial owners who hold beneficial interests in a business trust, trustees who are appointed in accordance with the governing instrument of the business trust, and a trust instrument that creates the business trust and provides for the governance of the trust. The beneficial owners, trustees and trust instrument are analogous to the stockholders, directors and bylaws of a corporation. In addition, the trust instrument may indemnify and hold harmless the trustee(s) or any other person acting on behalf of the business trust from and against any and all claims. As to the transferability of beneficial interests, unless otherwise provided in the trust instrument, beneficial instruments are freely transferable, as are shares of common stock in a corporation, subject to applicable state and federal securities laws. In addition, a business trust has perpetual existence unless the trust instrument provides for a finite term.
Benefits
Traditionally, business trusts were known for their flexibility. Although many states have codified business trusts into their business entity statutes, these states have preserved the flexibility of business trusts by reserving the governance and management of business trusts for trust instruments. In fact, Chapter 88A provides that courts “shall give the greatest effect to the principle of freedom of contract and the enforceability of governing instruments.” In addition, business trusts possess characteristics that render them “bankruptcy-remote” entities. For example, Chapter 88A provides that a “creditor of a beneficial owner has no right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, property of the business trust.”
Formation
Under Chapter 88A, a business trust must contain “Business Trust,” “B.T.” or “BT” in its name and may be formed through the filing of a certificate of trust with the Nevada Secretary of State, along with a filing fee of $125. At a minimum, the certificate of trust must contain the name of the business trust, the name and address of at least one trustee, the name and address of the resident agent, the name and address of each person signing the certificate of trust and any other information the trustees determine to include. The filing of the certificate of trust is very similar to the filing of articles of incorporation for a corporation or articles of organization for a limited liability company. In addition, to remain in good standing, a business trust will be required to file an annual list of trustees along with a filing fee of $85.
In light of the flexibility of business trusts and the bankruptcy-remote characteristics of business trusts, business trusts will provide business owners with another option when determining the business entity that best suits their needs.
Robert Kim is an associate with the law firm of Kummer Kaempfer Bonner & Renshaw in Las Vegas.
