I am trying to decide between setting up my business as an LLC or a business trust. The reason is that I am a photographer in California that basically has sales reps in other states that sell photography to small businesses. I use local contractors in each of the states to do the work. the reason I was thinking about a business trust is to forgo the foreign business taxes in each state, while choosing the business type with the least amount of taxes. Do you think this is the best option?
3 Answers from Attorneys
A business trust is a little-known and little-used alternative for organizing a business in California. Perhaps for good reason. Despite the glowing analyses of the reasons for using a business trust set forth on a few Web sites, there are still a number of drawbacks and complicating features that relegate business trusts to last place as a practical choice for most new businesses. Specifically, I doubt that using a business trust will exempt your business from paying taxes it would otherwise be liable for in other states, in comparison with, for example, a lawfully-operated and properly-reporting S corporation. When you hear about ideas like business trusts, research the negative side as well as the glowing positive stuff. There is a reason, or perhaps many reasons, why business trusts are very rarely chosen by experienced entrepreneurs.
It would be virtually impossible to set up a business trust to operate as you describe, and have it not be subject to being set aside and you treated as a sole proprietor. Furthermore, a business trust in California is taxed as a partnership, meaning the trustees must give a K-1 to you each year and then you pay personal income tax on the revenue of the trust. You save nothing in taxes that way. In most states a business trust is treated the same as either a partnership or a corporation. In no state I know of is it taxed less than other business entities with which it is grouped. Unless you actually have employees or operations in a given state, there is no reason you have to register or pay any taxes in that state, except sales tax, and you would have to pay that whether you are a sole proprietorship, LLC, corporation, business trust or any other business entity. The only reason to go to the trouble and expense of ANY form of business entity is liability protection. Quite frankly I can't imagine what liability protection you would need in the business model you describe. So I can see no reason to do anything but be a sole proprietor with independent commissioned sales reps to whom you issue 1099-MISC forms every tax year. If you deliver your photos electronically, you may not even have to collect and remit sales tax in many states.
My colleagues offered very good responses and I agree. I would add as well that given your objectives it is not likely that setting up a trust would offer any practical advantage and can under the right conditions hinder you, not help.
This is a link to a brief general overview of entity types and of course there is a lot of information online about this topic: http://www.lanternlegal.com/reading_entityformation.php
I suggest that you consult several lawyers in private and get some insights. Most of us here, including myself, will offer a free phone consultation.
DISCLAIMER: this is not intended to be specific legal advice and should not be relied upon as such. No attorney-client relationship is formed on the basis of this posting.