The Art of Creating the Modern Statutory Business Trust

Sec. 1.1. The Corporation and the Unincorporated Entity

For as long as trade and commerce has existed, business persons have organized into groups to fund the commercial venture, share the risk, and perform the tasks necessary to implement the venture. The structure of the organization as well the legal relationship between and among the persons in the group have differed substantially depending on geography, demography, culture and even religion. Despite these differences, all of these groups had in common the need for the structure to be predictable and that the legal relationship be founded on trust. In modern parlance, the business persons who form these groups are called interest holders.

In the American common law tradition, there two broad categories of business entities: corporations and partnerships. Shareholders form a corporation by applying for and receiving a charter from the state. The corporation exists and can operate only if it receives the charter. The shareholders were afforded limited liability but the internal legal relationship between and among the shareholder was formal and restricted. With the Model Corporation Act which the Amer, which all states have either enacted or have enacted portions of it, has enabled the shareholders to form a more flexible and tailored internal legal relationship. By contrast, the partners formed a partnership simple by concluding an enforceable contract. No application to the state for a charter was or is required to form the partnership but the partners were not afforded limited liability.

Over the years, the category of partnerships has expanded to included other business entities which are not corporations. The category of partnerships is now referred to as unincorporated business entities and the owners are ferred to as interest holders. These forms of business entities do apply to the state for a certificate. The certificate proves that they exist as a legal entity separate and apart from the interest holders and that the interest holders are afforded limited liability. The internal legal relationship between and among the interest holders is based almost entirely on a voluntary agreement between and among the interest holders and the business entity.

Most of the traditional distinctions between corporations and unincorporated business entities have been mostly eliminated. The states have enabled limited liability companies, limited partnerships, limited liability partnerships, limited liability limited partnerships. Like corporations, each of these business entities must apply to and receive a certificate which is the same as a corporate charter. Each such unincorporated business entity is a legal entity separate and distinct from its interest holders. It can hold property in its own name, sue or be sued in its own name and enter into contracts in its own name. Each interest holder of an unincorporated business entity is afforded limited liability so that a creditor can satisfy its claim only from the assets of the trust. All common law trusts and the statutory business trust are unincorporated business entities. They have all of the attributes of an unincorporated business entity and some attributes of a corporation.