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When deciding what business structure is appropriate for your company, there are a number of issues and options to consider. Two such options include owning your business through a trust or a separate company. This article will outline the legal and taxation implications of each structure. As such, you can ensure that you operate your business in a way that best suits you.

What is a Trust?

A trust is a kind of business structure which involves a trustee who owns the business assets and enters into contracts on behalf of the trust. They are also in charge of:

  • owning and operating the trust assets of the business;
  • distributing income; and
  • complying with the obligations of the trust deed.

Unlike a company, a trust is not a separate legal entity.

What is a Company?

A company is a kind of business structure involving the creation of a new legal entity separate from its owners and operators. A company will have the same rights as a person, meaning it is also subject to debts and individual legal responsibilities. Within a company, your shareholders own your business and your directors will inform your obligations.

Asset Protection

One of the main benefits of running your business through a company is asset protection. When you register a company, your legal identity is separate from that of your business. As a result, it will be your company, not you personally, that is responsible for your business’ contracts and risks.

This ensures that if the business cannot pay off its debts, the assets of the company owners will receive protection. This is because individual shareholder responsibility will be limited to the amount unpaid on their shares, subject to some special circumstances, like committing fraud. However, the directors of the company may be personally liable for breaches of their directors duties.

This benefit of asset protection can extend to a business run through a trust that uses a corporate trustee, rather than an individual trustee. However, this is subject to the terms of your trust deed, so it is important to seek legal advice when establishing your trust.

Capital Gains Tax

A trust and a company may both be able to access the small business capital gains tax (CGT) concessions. Here, your business must satisfy the tests of:

  • $2 million turnover; or
  • $6 million net asset value.

However, one of the main disadvantages of running your business through a company structure is that, unlike trusts, companies typically cannot access the general 50% CGT discount. The only way to access this discount during a business exit is if there is a share sale by an eligible taxpayer, such as an individual or a trust. However, this does not occur very often. 

People purchasing businesses often purchase the assets of the company, rather than the underlying shares. This way, they will not be responsible for any underlying potential liabilities of the company.

Tax

A trust is often one of the most tax-effective methods of running a business. Profits of the business can be easily distributed amongst family members and other beneficiaries and can be distributed in such a way that tax is paid at the lowest available individual marginal tax rate (subject to various rules). 

However, it is important to obtain your taxation and accounting advice from a lawyer or accountant to ensure that running your business through a trust suits your personal taxation and financial circumstances.

In contrast to trusts, companies pay a flat rate of tax. This rate is 27.5% for eligible base rate entities that have a turnover under $50 million. Entities outside of this qualification pay 30%. 

Again, you should seek the advice of a tax specialist to ensure that you are making the right decision in regard to the tax implications of your different business structuring options.

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Working Capital

Companies are usually more tax-effective when income generated is retained to fund ongoing working capital requirements.

In contrast, trusts are generally taxed at higher rates when profits are retained. 

Investment, Debt Financing and Commercial Suitability

If you anticipate that your business is going to be raising money through external investment or debt financing, it may be more appropriate to opt for a company structure. This is because investors and institutional lenders are typically more comfortable dealing with companies rather than trusts. 

Additionally, as a startup, you may be wanting your business to: 

Here, choosing to run your business through a company will likely be a more suitable arrangement.

Key Takeaways

Both companies and trusts have their advantages and disadvantages. Before you decide on how to best structure your business, make sure that you consult your tax, legal and accounting advisers. If you have any questions about how to structure your business, contact LegalVision’s business structuring lawyers on 1300 544 755 or fill out the form on this page.

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