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Modern Uses Of Private Trust Part Two; Business Trust

This is not a completely new concept when the Indian trust act was brought into action lots of businesses operated as sole proprietorship's taking on debt and lending money to others and having debtors and creditors et cetera. Very few people at that time would incorporate companies to do business; in such situations the business did not have perpetual succession like in the case of companies.

The management and ownership of a sole proprietorship vests in the same person, not the case in a company. More often than nought the proprietor would pass away without a capable successor to manage the business.

Firms requiring a high level of skill and technical processes like sugar industries or engineering concerns need to be assured of continuity. Unlike a basic industry like a rice mill where the rice is polished, a partnership or a proprietorship fails to serve the purpose, as while the ownership can be transferred in the case of death of the concerned person, the management is also thrust upon the same person. That is to say that the ownership and management of an enterprise would necessarily go hand in hand in the case of a partnership or proprietorship.

In events like these the sole proprietor would leave his business in a trust and appoint suitable trustees to manage the affairs of such a business for the benefit of his family. In the trust act itself we see many cases where the settlor creates a trust for discharging his debts. This would happen as sole proprietorships accumulate debt or credit supplies for the day to day operations, leading to the need of a capable person to discharge such debt.

It is important to note that only businesses that satisfy the conditions laid in section 4 of the Indian trust act of 1882 maybe put into trust i.e. illegal enterprises cannot be put into trust for the benefit of one's family example a prostitution brothel or smuggling racket or Dacoity enterprises etc.

When the act was made the beneficiary was envisioned to be a natural person, someone in the relation of the settler or someone the settlor cared for. And generally the settlor would be dead when such a trust was made. Or would make such a trust by his testament.

Today even a few companies have use this model of using a trust as a subsidiary or a separate business entity under their holding company; all this is possible due to section 7 of the Indian trust act which says a trust may be created by every person competent to contract this includes: a joint stock company as per section 11 of the act contract act. A very good example of this is the media trust called 'Network 18' under Reliance industries Ltd.

Why should business be done in a Trust?

A major reason to form a trust instead of a subsidiary company would be to avoid the corporate scrutiny imposed by the Ministry of corporate affairs and also the mounting corporate fees that have to be paid in the ROC's office to keep the company and its directors from being struck off the books and being imposed with heavy fines recently in 2016 a large number of companies was struck off due to non-filing of corporate returns using trust can avoid this scrutiny.

When you do business under a private trust you are not required to disclose the sales or the number of employees or, even the registered office for that matter to the public such information may be kept confidential

One of the greatest advantages is that the top management doesn't have to be disclosed, like in a company where the directors of the company are known to the public. Trusts enable such information to be kept confidential and under wraps.

Like forming a subsidiary company a trust may also offer limited liability to the holding company as the beneficiary or the holding company in this case is not liable for the actions of the trustee as stated by section 11 to section 29 of the Indian trust act this provides great relief to the holding company moreover additional liabilities may be added in the trust deed completely exempting the beneficiary or the holding company from any whatsoever.

One of the biggest benefits is that the profit of the trust can directly be transferred to the holding company and be taxed at the slab rate rather than having taxation twice and also there is no question of any dividend distribution tax of course now dividend distribution tax has been abolished and it is also important to note that the income tax act provides relief to companies having hundred percent subsidiaries by allowing 100% deduction of dividend distributed my hundred percent subsidiaries but it is still important to note.

That if such incidents of tax is restored the trust will provide relief by allowing the balance profit of the trust to directly be transferred to the balance sheet of the holding company or beneficiary

A very important feature is that when you transfer immovable property from the trust to its beneficiaries there are no incidents of stamp duty. This is unlike the case of 100% subsidiary company to the holding company; here the stamp duty is payable however in the case of mergers and amalgamations a court order can be filed with the registrar to reduce the burden of stamp duty. However this is a length procedure and most ineffective if the company in question was incorporated for the purpose of investment.

Who should look at creating trust instead of a subsidiary company?

A company with 100% subsidiary who is not looking to sell the subsidiary or any part of it in the near future should certainly look into forming a trust instead of a subsidiary company as the profit can directly be transferred to the holding company and liability be limited and restricted to the trustees of the trust.

A small company looking for the benefits of a subsidiary company but without adequate funds to create such a subsidiary company or a small company which needs to diversify itself into various verticals of business but does not wish to have the corporate compliance or disclose a lot of information to the public.

If a company wishes to hide or keep a part of its business or assets or liabilities under wraps and does not wish to disclose such items to the public a business trust is the ideal method to deal with this problem

To avoid dividend distribution tax or other instances where taxation is charged to subsidiary companies

A different GST registration may be provided giving small companies the flexibility to try out new products and services in the market at a discounted rate and get a flavour of the market meanwhile providing a low incidence cost to the consumer.

Company secretaries, Chartered Accountants and lawyers should look into the possibility of using the Indian Trust act to create SPVs for small businesses to better facilitate experimental technology and services while providing limited liability to the parent entity, which is sometimes not available in Partnerships or business divisions within a company. Separation of ownership and control isn't contemplated in the Partnership act, however this can be achieved through trusts.

Award Winning Article Is Written By: Mr.Madhavraje Ramraje Patwardhan
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Authentication No: NV43014570329-16-1122

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