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 a business through a trust or through a separate company.
Should you own your business through a company?
There are number of benefits for running a business through a company. Upon incorporation of a business, your legal identity is separated from that of your business. This ensures that the assets of the owner are protected in the event of the business being unable to pay off its debt. Where a business has incorporated the liability of its owners is described as limited. There are also tax concessions for running a business as a company. Although the corporate tax rate is 30% upon a company’s profit, when profits are distributed to shareholder it will then be taxed at their marginal tax rate.
However there are also a number of disadvantages if you choose this structure.
The capital gains concession will not apply to companies. This concession allows a 50% discount for assets held for more than 12 months or more when they are sold or when the relevant capital gains event occurs. The only way to take advantage of this concession is for your business to operate as a sole trader, partnership of individuals or as a family trust. The tax reporting requirements to the Australian Taxation Office are also more onerous for companies. Choosing to incorporate will also place your company and its directors under additional duties and requirements as they will be regulated by the Australian Securities and Investments Commission (ASIC). The decision to incorporate should not be taken lightly.
Should you own your business through a trust?
Choosing to own and run a business through a discretionary trust does have a few advantages.
Firstly, a trust has often been viewed as one of the most tax-effective structures. Profits of the business can be easily distributed amongst family members and can be distributed in such a way that tax is paid at the lowest possible individual marginal tax rate. This article is not taxation advice, and while there are benefits to setting up a discretionary trust, it is not suited for every person and every financial circumstance. It is best to obtain your own taxation and accounting advice from a lawyer or accountant.
Secondly, discretionary trusts offer the advantage of asset protection. In the unfortunate event that your business goes bankrupt, the assets of the beneficiaries under the trust are protected. Creditors of the business have no claims against assets of the trust. Only direct creditors of a trust have claims against such assets.
Thirdly, unlike a company, operating the business through a trust means that you can take advantage of the 50% capital gains concession.
However, you should note that operating through a trust may not be the best option for you, depending on the nature of your business, and setting up a trust may be a complicated and expensive process.
Are you considering switching from a sole trader to company or trust business structure? Make sure you make the most suitable decision for your business by consulting the relevant tax, legal and accounting advisers. This article is not taxation advice. Call LegalVision to discuss all of your options with an experienced commercial attorney!