On the face of it, unit trusts and companies may seem like similar structures. For example, they both allow participants to have a proportionate interest in the structure: units in a unit trust and shares in a company. However, they do have key legal and tax differences which will affect your decision as to which structure is best for you business operations. You should therefore understand the advantages and disadvantages of both structures. This article explains the difference between a unit trust and a company, so you can choose which is most suitable for your situation.
What is a Unit Trust?
A trust is not a separate legal entity. It is a way for the trustee to hold property and income on behalf of others, namely unitholders. Here, the unitholders have a fixed entitlement to the income and capital of the trust in proportion to their units. This is unlike a discretionary trust, where the trustee decides how and when to distribute income to beneficiaries.
Unit trusts are ‘flow through’ vehicles, which are generally not taxed in their own right (although they still need to complete tax returns). Instead, unitholders pay tax on their proportion of the trust income.
An individual trustee may incur personal liability if they breach their fiduciary duties as trustee for their trust. A fiduciary is a person who holds a legal or ethical relationship of trust with one or more parties. For example, as a fiduciary, a trustee has a duty to act in the best interests of the unitholders. Unit trusts may have corporate trustees to limit any liability incurred by the trustee to that corporate entity and protect the assets of the unit trust.
Furthermore, unit trusts are predominantly governed by their unit trust deed which establishes the trust. It is also useful for a unit trust to have a unitholders agreement or shareholders agreement, setting out the management and decision-making of the unit trust and its corporate trustee.
What is a Company?
A company is a separate legal entity and therefore holds assets and income in its own name. The key participants in a company are the:
- directors, who manage the company and make the day-to-day decisions of the business; and
- shareholders, who are the owners and in many instances the capital contributors of the business.
Companies are their own legal entity and shareholders do not have direct entitlements to particular assets or income of the company. Therefore, the company pays tax in its own right. However, shareholders may have individual income tax obligations in circumstances where the directors choose to distribute dividends to them.
Furthermore, companies are governed by the replaceable rules in the Corporations Act or the company’s constitution. It is also useful for a company to have a shareholders agreement if the company has multiple shareholders. This agreement sets out the management and decision-making of the company.
|Main Feature||Separate legal entity carrying on business for its own benefit, managed by directors and owned by shareholders.||Trustee carries on business for the benefit of unitholders, to whom distribution of capital and income is made in proportion to their units.|
|Set-Up Costs||Australian Securities and Investments Commission (ASIC) registration fee and associated legal fees.||Legal fees for preparing unit trust deed and any stamp duty payable.|
|Ongoing Costs||Annual ASIC renewal fees and accountancy fees for tax return preparation and financial statements.||Accountancy fees for tax return preparation and financial statements.|
|Liability||A company is a separate legal entity, so its assets, debts and liabilities are treated as separate from that of directors and shareholders.||An individual trustee may be sued in their personal capacity. By having a corporate trustee, you can achieve some limitation of liability.|
The company pays tax at the flat tax rate (usually between 25-30%).
The imputation system avoids double taxation on dividends paid to shareholders.
Companies do not have access to the 50% capital gains tax (CGT) discount.
Unitholders taxed on their share of the unit trust income.
Undistributed trust income will attract tax at the highest marginal rate. This is inconvenient for businesses requiring ongoing working capital.
The 50% CGT discount can reduce tax on capital gains.
|Commerciality||Investors can subscribe for shares in exchange for an investment.||Investors can apply to the trustee for units and pay for units.|
|Method to end||
A company can last forever.
A company can be wound voluntarily. This can happen by court order, or by deregistration by ASIC.
|The unit trust deed will set out a vesting date or termination date when the trust property will vest to unitholders, typically 80 years from the date of establishment of the trust.|
Which Structure is Best For My Business?
The main advantages of a company are that it:
- provides legal protection for participants because it is its own legal entity;
- allows business to retain profit and use it as working capital; and
- is easier to understand and therefore more attractive to investors.
On the other hand, the main advantages of a unit trust are that it:
- provides unitholders with a fixed entitlement to income; and
- is eligible for the 50% CGT discount.
If your business needs a lot of working capital, or has growth plans and wants to take on investors in future, a company may be the most appropriate structure. However, if your business has a particular purpose which includes selling a capital asset in the near future and will greatly benefit from the 50% CGT discount, or the participants of the business want fixed entitlements to income, a unit trust may be most appropriate.
Is there a difference between a unit trust and a company? The answer is yes, as they both have their respective advantages and disadvantages. Which structure is most appropriate for your business will depend on your particular business operations and plans. You should therefore understand the main differences between the structures. If you have any questions, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
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