A trust is an extremely flexible option and is often used for purposes of business. It is referred to as a “trading trust”. There is also a distinction made in practice between a public and private trading trust and for the purposes of this article, I will focus on the trading trust.

A trading trust is a trust which has its main aim as conducting business which must not merely be of an ancillary nature. The main difference between a general trust and a trading trust is the relationship created in relation to beneficiaries and the duties of the trustees. A contractual agreement regulates the relationship, and the trustees accordingly manage the assets of the trust for a profit.

Below is a list of some of the trading trusts often used in South Africa:

1. Voting Trust – where a shareholder of numerous shares transfers the voting rights to a trust
2. Trust for agricultural purposes – to circumvent the prohibition of the Subdivision of Agricultural Land Act 70 of 1970
3. Property holding trust – often used to hold property for investment purposes
4. Investment trusts
5. Estate planning trusts
6. Other trusts such as employee share scheme trusts, unit trusts, BEE trusts etc.

When considering the use of a trust for business purposes, it is useful to understand how it compares to a company as this may guide a decision on the appropriateness of the entity.

On comparing the 2 different entities it is clear that it is important for any venture to consider the legal framework that is most suitable to their needs, also taking into consideration the tax liability of the entity. Taxation of trusts over the past few years have made the use of trusts a lot less efficient than in the past and this must be taken into consideration on the study of costs involved for the business.

Trusts are further denied the various tax exemptions and rebates available to individuals and care must be taken when loans to trusts are made so as not to be seen as an interest free or low interest loan (as that will trigger a donations tax in terms of s7(C) of the Income Tax Act).

Similarly, VAT could or would also apply when using a trading trust as it may meet the definitions of a vendor and enterprise in accordance with the Value Added Tax Act 89 or 1991.

To conclude, it is certainly an exciting time when starting out a new venture and guidance should always be sought from a professional around the formalities of an entity and which structure would serve the purpose of the business and its goals best.