As a creditor, trying to collect from a debtor can be frustrating. After all, the debtor may have let their debts go for months or years without paying anything back. In some cases, they may not even work anymore. In this article, we’ll cover what prospective lenders need to know about Delaware Statutory Trusts.
1. What is a Delaware Statutory Trust (DST)?
A DST can act as an escape hatch for individuals who don’t want the responsibilities of having frank ownership over the property but aren’t interested in using a limited liability company. For example, businesses may use this type of structure if they have more than one owner since LLCs are limited to only one person.
According to 1031 exchange listings, a DST is a company authorized to carry out a specific type of business or investment. The cost for setting up a trust varies from state to state, but you can expect it to be somewhere in the range of $1,000-2,500.
2. How does it work?
The most important aspect of how it works has to do with taxes. A DST doesn’t pay income tax on its earnings the same way that a traditional business would.
Instead, it passes these earnings directly onto its owners. However, they must still report them to the IRS just like a business would. Also, owners of the trust are responsible for paying taxes on their shares of any profits.
A creditor can’t force a DST to dissolve while it’s still under contract with them or before the end date of that contract. The law only allows creditors to initiate an involuntary dissolution if the debtor fails to comply with their debt settlement obligations within 30 days after missing payments.
If this happens, the creditor must notify the debtor of what they’re doing and why they’re doing it. It also has to cover all fees involved in dissolving the business. This bill has to be paid before anything else is collected from the debtor through assets or property.
3. What’s the catch?
The only real difference between a DST and an LLC is that while an LLC may have unlimited owners, a DST can have only up to twenty-four. They must also have a board of managers who oversee the business’s day-to-day operations, though they don’t necessarily represent ownership in any way.
In addition to this, they must file what’s referred to as an “Annual Return” with both their home state and the IRS every year. That said, it isn’t quite as demanding as some reporting requirements for businesses might be since there aren’t many restrictions on how extensive these reports need to be or who needs to sign them off on them.
4. What are the advantages?
The main advantage is that it doesn’t require as much paperwork and other such formalities to get started. In addition to this, there’s no minimum or maximum limit on how many owners a DST can have.
However, they cannot be corporations themselves and must be wholly owned by individuals or other LLCs. When it comes to taxes, they must pay a yearly franchise tax to their home state. Also, they aren’t allowed to own assets themselves. In addition, they must get a taxpayer ID number from the IRS if their tax liability exceeds $1,000.
5. What are the drawbacks?
The main drawback is what ultimately happens if some of the owners need or want out of the business or ownership itself. It’s quite easy for new shareholders to join the DST as needed.
Still, it may be difficult for some existing shareholders to leave without having their interests bought out by some other person or company entirely.
Additionally, there is no provision in place allowing for involuntary buyouts and so on. That said, most businesses wouldn’t have this prevalence anyway since they often grow and shrink over time based on how long it takes for one shareholder to leave voluntarily versus how quickly someone can be brought on board to replace them.
That being said, prospective lenders have a lot to keep in mind when it comes to this type of business structure. For example, they won’t get the protection they would get if the debtor used an LLC or some other form of limited liability company.
This is why many people considering using this sort of arrangement may opt for an LLP (Limited Liability Partnership) instead since it provides creditor protection like an LLC while still allowing more than one owner or shareholder.
Prospective creditors need to consider all of their choices before deciding how best to proceed with debt collection.
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