Transitioning company management to trust structures

When the owner of a business ages, he becomes increasingly anxious about what happens to the business. He is constantly asking the question: who would assume the responsibility of sustaining the business and, by implication, the legacy when he retires? His anxiety is further exacerbated by the fact that children of some entrepreneurs are sometimes unwilling to take over those businesses, preferring to chase their own dreams and being their own persons rather than step into a stereotyped and ready-made family business. This reality compels the business owner to begin to conclude that the company he had so laboured to build over time may not survive him.

This article is therefore intended to dissect the problem and to attempt an expose of how forward-thinking entrepreneurs can strategically innovate to ensure that the enterprise continues to thrive whether they are directly involved in its management or not.

One such innovative strategy that is fast gaining momentum is the transition of company management to trust structures, also referred to as business trusts. Although business trusts are not as common in Nigeria as they are in some other jurisdictions, such as the United States and certain Asian countries like Singapore, many Nigerians entrepreneurs are increasingly becoming aware of the possibility and benefits of using the business trusts as a way of ensuring the sustainability of their enterprises.

The business trust approach involves transferring ownership of the company to a trust, a legal entity overseen by a trustee (often a professional trust company). The trustee manages the business according to a pre-determined trust deed, safeguarding the company’s future while benefiting designated beneficiaries – which can be family, future generations, or even employees.

In Nigeria, the most usual form of business organization is the company, typically structured as either a private limited liability company or a public limited liability company. These entities are governed by the Companies and Allied Matters Act (CAMA) and are widely used for conducting business activities across various sectors of the economy.

While business trusts are not as prevalent in Nigeria as in other climes, there are some instances where they are used, particularly in sectors such as real estate investment, infrastructure development, and collective investment schemes. For example, real estate investment trusts (REITs) have gained popularity in Nigeria as a vehicle for pooling funds from investors to invest in income-generating real estate assets.

Additionally, the Securities and Exchange Commission (SEC) of Nigeria has regulatory frameworks in place for the establishment and operation of collective investment schemes, including unit trusts and mutual funds, which utilize trust structures.

Trusts offer a unique blend of asset protection, tax optimization, and succession planning benefits that align closely with the evolving needs of modern businesses.

Benefits of Managing a Company Under a Trust:

Traditionally, Nigerian companies have operated under conventional corporate structures such as sole proprietorships, partnerships, or corporations. While these structures have served their purpose, they often come with inherent limitations, including exposure to personal liability, complex governance procedures, and challenges in succession planning. In contrast, trust structures provide a robust framework that addresses these concerns while offering unparalleled flexibility, protection, and strategic advantages.

One of the key advantages of company management under a trust structure is enhanced asset protection. By transferring ownership of company assets to a trust, Nigerian businesses can shield those assets from personal and business liabilities. This separation of ownership and control not only mitigates risk but also safeguards valuable assets from potential legal claims or creditor actions, thereby safeguarding the company’s financial integrity and ensuring continuity of operations.

Furthermore, trust structures offer greater flexibility and autonomy in decision-making and management. Unlike traditional corporate structures, which may involve cumbersome governance procedures and public disclosure requirements, trusts operate with a higher degree of privacy and confidentiality. This flexibility allows businesses to tailor management practices to their specific needs and objectives while maintaining confidentiality regarding sensitive business matters, thus facilitating agile decision-making and strategic planning.

Moreover, a business trust facilitates seamless succession planning and continuity of operations. By appointing trustees to oversee company affairs, businesses can ensure a smooth transition of ownership and management in the event of retirement, incapacity, or death of the principal characters in the company. This proactive approach to succession planning minimizes disruption to business operations and preserves the company’s legacy for future generations, fostering long-term stability and resilience.

In addition to these benefits, trust structures offer strategic advantages in tax planning and optimization. Although Nigerian tax system is plain vanilla, the trust structure can leverage the inherent flexibility and tax-efficient features of trusts. Through careful structuring and management of trust assets, companies can take advantage of tax deductions, exemptions, and deferrals, thereby optimizing their financial position and enhancing competitiveness in the marketplace.

As important as this subject is to business owners, a business considering transitioning company management to trust structures, should consider several key factors to ensure a smooth and successful transition. Here are some essential considerations.

Legal and Regulatory Compliance: Businesses must ensure compliance with relevant laws, regulations, and guidelines governing the establishment and operation of trusts in Nigeria. This includes understanding the requirements set forth by regulatory bodies such as the Corporate Affairs Commission (CAC) and the Securities and Exchange Commission (SEC), as well as any tax implications associated with trust structures.

Strategic Objectives and Goals: Companies should assess their strategic objectives and goals to determine how transitioning to a trust structure aligns with their long-term vision. Considerations may include asset protection, succession planning, tax optimization, governance flexibility, and as business continuity strategy.

Asset Evaluation and Transfer: The Settlor needs to engage a Valuer to thoroughly evaluate the company assets to determine the total assets value and which assets will be transferred to the trust and how they will be managed. This may include tangible assets such as property, equipment, and inventory, as well as intangible assets such as intellectual property, patents, and trademarks.

Selection of Trustees: Since the structure involves transferring management of the enterprise to a Trustee, careful consideration should be given to the selection of trustees who will oversee the management of the trust and act in the best interests of the beneficiaries. Trustees should possess integrity, competence, and fiduciary responsibility.

Governance Structure and Protocols: A company transiting to the trust structure must establish clear governance structures and protocols to govern the operations of the trust, including decision-making processes, reporting requirements, and accountability mechanisms. This may involve drafting trust documents, such as trust deeds or indentures, which outline the rights, duties, and obligations of the trustees and beneficiaries.

Communication and Transparency: As is usual with all transitions or changes in company structures, some stakeholders and employees may be apprehensive or suspicious of the change and may resist it. Effective communication and transparency are essential throughout the transition process to ensure stakeholders are informed and engaged. Companies should communicate openly with employees, shareholders, customers, and other relevant stakeholders about the reasons for transitioning to a trust structure, the potential benefits, and the expected impact on business operations.

Risk Management and Contingency Planning: In view of the potential risks and uncertainties associated with the transition to a trust structure, companies should develop robust risk management strategies and contingency plans to mitigate potential risks and uncertainties. This may include identifying and addressing legal, financial, operational, and reputational risks that may arise during the transition process.

Professional Advice and Expertise: For a seamless transition, it is imperative for the Settlor to seek professional advice and expertise from legal advisors, financial consultants, tax experts, and trust specialists on how to navigate the complexities of transitioning to a trust structure. These professionals can provide valuable insights, guidance, and support throughout the transition process, ensuring compliance with legal requirements and optimizing the benefits of the trust structure.

Conclusion:

Essentially, transitioning to trust-based management offers a paradigm shift for Nigerian businesses. It provides a holistic approach to tackling governance, asset protection, and the ever-present hurdle of succession planning prevalent in most Nigerian companies. Entrepreneurs can thus leverage trusts to access a spectrum of benefits that engenders efficiency, transparency, and long-term sustainability. Businesses that adopt this structure are likely to continue to be more successful and prosper within Nigeria’s thriving business environment. As the Nigerian economy continues to develop and with improved education, trust structures have the potential to become a cornerstone of good corporate governance and management practices.

Bunkaya Bitrus Gana Esq is the Managing Director/CEO of Greenwich Trustees Limited. He can be reached on 08033335436 or [email protected]