Can a business trust be labeled a partnership?
May 28th, 2021 08:03
Even though a trust is not a legal “person”, a trust has an existence, separate and apart from the founder, the trustees and the beneficiaries. It should therefore achieve a separation between ownership/control and enjoyment. The majority of trustees in a business or trading trust should be persons other than the beneficiaries. If not, the trust will be regarded as a partnership. In the Land and Agricultural Bank of South Africa v Parker case of 2005, the Court held that there is nothing wrong with using a trust for business purposes, but that there should be a separation between control and enjoyment of assets – that being the very core of trust law and the basis on which it was developed. This principle is reinforced by Section 12 of the Trust Property Control Act, which states that “Trust property shall not form part of the personal estate of the trustee except in so far as he as the trust beneficiary is entitled to the trust property.”
Without such separation, all the elements of a partnership are often present – in other words, a legitimate contract whereby each partner contributes money or skills towards the common business purpose of making a profit (Joubert v Tarry & Co case of 1915). As stated in the Thorpe v Trittenwein case of 2007, there must not be a blurring of the separation between ownership and enjoyment and that such separation is the very core of the idea of a trust. In the Raath v Nel case of 2012 it was held that “the separateness of the trust estate must be recognised and emphasised, however inconvenient and adverse to the respondent it may be”, even though it is not a “person”. In the Khabola v Ralitabo case of 2011, a “trust” was formed to acquire agricultural land to conduct farming activities. The “trust” was registered with the Master and had a reference (IT) number. However, no beneficiaries were appointed. The Court held that no trust was formed (even if it was registered with the Master), as it is a legal requirement to appoint beneficiaries for a trust to exist. The Court found that it was rather a partnership or some other association that was formed, and not a trust.
It is very possible that a business trust will be seen as a partnership if the trustees are also the beneficiaries of the trust, and the arrangement was entered into for business purposes to make a profit. It is therefore important to adhere to this requirement in the appointment of the various parties (founder/s, trustee/s and beneficiary/ies) to the trust, the drafting of the trust deed and the administration of the trust.
The elements for a structure to be labelled a ‘partnership’ are:
1. Each partner must bring something into the partnership or must themselves to bring something into it;
2. The business must be carried on for the joint benefit of all partners;
3. The objective should be to make profit; and
4. The contract between the partners should be a legitimate contract (Joubert v Tarry and Co case of 1915).
The benefits of a trust compared to a partnership:
· There is a lot of flexibility in creating the rights and powers of all the parties to the trust.
· The assets of a trust are separate and distinct from those of the trustees and beneficiaries of that trust – no creditor of the trustee or beneficiary can lay their hands on trust assets.
· The nature of the beneficial interests can ensure that the beneficiaries can obtain all the rewards resulting from business activities, whilst ensuring that none of the risks associated with carrying on a business are assumed by the beneficiaries.
· When a partner dies, the partnership automatically terminates, which may cause severe disruption, whereas a trading trust can offer perpetual succession, or its termination can at least be planned in advance, subject to the terms of the trust instrument.
· If the partner went insolvent their share will fall into their insolvent estate and be subject to claims of creditors. Trust assets are not impacted by the insolvency of a trustee or beneficiary.
· Any partner can terminate a partnership at any time, whereas all trustees should (preferably) agree to the termination of a trust.
· There is no limited liability for partners in an ordinary partnership, whereas neither trustees, nor beneficiaries, are personally liable for trust liabilities. Creditors can look to a trust’s assets for settlement of their claims and not to the donor, trustees or beneficiaries. However, en commandite and anonymous partnerships can provide for limited liability of partners.
The benefits of a partnership compared to a trust:
· Partners do not always have to be disclosed, unlike trustees who are known.
· A partnership agreement is not a public document, unlike a trust instrument, which has to be lodged with the Master.
· Partners are not required by any person or official to provide security, unlike trustees who may be required to provide security by the Master.
~ Written by Phia van der Spuy ~