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CEO Insights

Where Purpose Meets Planning

A New Ownership Tool for an Evolving Marketplace: The past twenty years has seen a slow but steady shift in how businesses organize and operate, with an increasing number looking beyond the short term goal of simply maximizing financial profits for shareholders.  From an organizational standpoint, more and more companies are structuring themselves as B Corporations or Low-Profit Limited Liability Companies so that they can use metrics other than the bottom line and can take into account things like community, environmental, and social impact. 

Beyond simply trying to be better corporate citizens, many businesses see a greater focus on purpose as helping to attract, engage and retain employees.  Research by Bain & Company found that if a satisfied employee’s productivity level is 100%, the productivity level of an engaged employee’s level is 144% and the productivity level of an employee that is truly inspired by the purpose of their employer is a whopping 225%.  According to a research project by Rutgers University, 2/3rds of students prioritize the potential to positively contribute to society and make the world a better place when searching for work.

While many businesses have altered their governing documents to enable them to operate with greater intentionality, one of the issues that can hamper these objectives over the long term comes to ownership.  In closely held businesses, ultimately someone must own the entity and the owner (i.e. shareholder in the case of a corporation or member in the case of a limited liability company) typically has the ability to alter, change, or even abandon these more lofty aspirations. 

Traditionally, owners of these businesses have turned to trusts to hold and manage their business interests after their passing.  Trusts have been used for hundreds of years to effectively hold, manage, and protect assets.  Trusts are established by one or more individuals called settlors who determine the terms and conditions in which trustees hold and manage assets for the benefit of one or more beneficiaries of the trust.  

That said, most trust statutes carry with them the same bent as traditional corporate structures and typically require not only that trustees diversify their holdings, but also that those trustees attempt to maximize return and financial benefit to the beneficiaries of those trusts.  These statutes can hamper trustees from looking beyond simply return and profit in the same way that a traditional corporate structure can limit Directors and Officers from thinking more broadly.  Beneficiaries have what is known as legal standing and can require trustees to sell assets or operate businesses that act in ways other than simply creating the greatest financial return.

Purpose Trusts are unique in that, unlike traditional trusts that hold and manage assets for the benefit of one or more beneficiaries, these trusts are drafted and operated to effectuate one or more purposes. Such purposes could include continuing to operate a closely held business, providing benefits to certain communities or groups, or maintaining certain personal or real property for specific purposes. Unlike a more traditional trust that must operate for the benefit of one or more beneficiaries, a Purpose Trust could be established to hold an operate a for-profit business and have, as one of its specific purposes, the continuation of the business and the care of its employees. Like a B corporation or low profit limited liability company that can operate for purposes other than simply the maximization of profit, a Purpose Trust can take into account broader goals and objectives beyond simply providing current distributions to a select group of named individuals.

Purpose Trusts can also be used to effectuate charitable or civic objectives that may not neatly fit within the confines of an exclusively charitable organization. For example, Purpose Trusts could operate a business without having to be subject to the self-dealing and prohibited transaction rules that can often hamper a private foundation’s ability to hold such interests.

Purpose Trusts could also be used to avoid the excess business holdings and jeopardy investment rules that might otherwise require.  Great care and thought should be put in when considering a Purpose Trust.  Statutes vary greatly by State and for Purpose Trusts to be valid and enforceable, they must clearly articulate their purpose and must have actual “enforcers” who can ensure that the trust is operated by its trustees to effectuate those objectives.

Business owners who want to create structures and organizations that make lasting impacts should look not only at the organizational structures for today but the ownership vehicles for the future. 

Written by David R. York.
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CEOWORLD magazine - Latest - CEO Insights - Where Purpose Meets Planning
David R. York
David R. York is an attorney, CPA, and managing partner of York Howell & Guymon, named an Inc. 5000 Fastest-Growing Company. He works with closely held business owners and ultra-high net worth clients in the areas of tax and estate planning. His newest book The Gift of Lift: Harnessing the Power of Stewardship to Elevate the World is available on Amazon and B&N starting on June 6, 2022. David previously co-authored two nonfiction books (Entrusted: Building a Legacy That Lasts and Riveted: 44 Values that Change the World), has given a Ted Talk, and is a frequent national speaker.

David R. York is an opinion columnist for the CEOWORLD magazine. Connect with him through LinkedIn. For more information, visit the author’s website.