Generally, trusts are most suitable for protection of an existing asset portfolio and for personal succession planning purposes, also including charity.
In contrast, companies (corporations) are designed for launching, building and managing an active business, be it in trading, services or any other segment of commercial activity.
As a typical interaction, many trusts are shareholders in business corporations. Or, to put it otherwise, business companies are often part of a trusts’ asset portfolio.
The main differences between companies and trusts are in their purposes and operational mechanics.
A company is a separate legal person. It is owned by shareholders. There can be just a single shareholder, or there can be thousands of them – it does not significantly change the mechanics of how the company operates.
The shareholders elect directors to manage the company. The directors, in turn, hire employees and junior managers to run the routine business of the company. Companies are meant to operate businesses for profit. The profits are either reinvested in growth and expansion of the asset base, or distributed to shareholders as dividend. There is absolutely no ambiguity in that the company is owned by its shareholders and it exists, works and makes profit for them.
Companies act through the various individuals who run them in their various roles. These roles are defined by the corporate documentation – memorandum and articles of association, shareholder resolutions, director’s actions. The company directors and officers can bind the company by signing contracts and other binding documents on its behalf. The company directors and officers are accountable directly to the shareholders to run the corporation for the benefit of the shareholders.
A trust is usually not a separate legal person. It is a legal arrangement between three main parties – the Settlor, the Trustee and the Beneficiary. Those roles can also overlap.
The most significant distinction in a trust is the split between the ownership of the trust property, which vests in the Trustee, and the economic benefit (a.k.a. beneficial interest) of the trust property, which vests in the Beneficiaries. In comparison, in any corporation both the ownership and the beneficial interest vest in the shareholder.
Trusts are also different in terms of assets. By definition, there must be some materially valuable asset, which the Settlor has transferred into the Trust, for the Trustee to keep and manage for the ultimate benefit of the Beneficiaries. Without such asset the Trust has no reason to exist and should in all fairness cease to exist.
This is not necessarily the case for all business corporations. A company can carry on without a meaningful asset base or even with negative assets – provided that the owners and managers of the business have a feasible plan of how to ultimately generate earnings. The presence of a meaningful, valuable, income-generating property is not really a mandatory pre-requisite for a corporation, but is for a trust.
The mechanics of operation of trusts are also different.
Trusts have beneficiaries, for whose benefit the trust is established and is to be managed. The beneficiaries do not necessarily need to be people. They do not even need to currently exist – for example, an unborn child can be designated as a trust beneficiary. Some trusts are known to have animals as chosen beneficiaries. Trusts can be established for charitable purposes, where specific charitable organizations are set out as beneficiaries, or some general charitable purpose is to be supported.
In stark contast to company shareholders, the trust beneficiaries do not have much of a say in how the trust should be ran. They can’t remove the Trustee. (The Protector can, though.) They can’t resolve to wind up the trust and distribute its assets. They can’t demand if, when or how much they will be paid. All of that has already been pre-determined by the Settlor through the Trust Deed, which binds the Trustee to act accordingly.
In a proper trust, the beneficiaries are like passengers in an airplane. They will get the benefit of travelling in comfort to their desired destination, but they most definitely are not allowed to fly the aircraft.
To continue with that analogy, the Trustee is the captain of the aircraft. Trustee is designated with the responsibility and the authority to carry out the instructions of the Settlor, which are embedded in the terms of the Trust Deed. The Trustees are entitled and responsible to make decisions when decisions need to be made. Same like company directors, Trustees have the authority to bind the trust assets through deeds and contracts. The Trustee is accountable to the beneficiaries to handle the trust for their benefit, but enjoys significant discretion of decision under the laws and the Trust Deed. As a safety mechanism against dishonest trustees, a Protector can be appointed to remove such trustees or override their decisions.
Trusts are usually set up for private, personal purposes. The most typical purposes are asset protection and efficient transition of the Settlors’ estate to its designated successors.
Companies are usually set up for active business and for-profit purposes. They are great for scaling and attracting capital, running a wide variety of business models and management structures. Unlike trusts, companies do not accommodate legal separation between their formal and beneficial ownership.