In Part 1 and Part 2 of this series, we discussed a single company structure and a dual company structure. If you do not want to operate your business through a company, there is one more option available to you. You can run your business through a trust.
Running your business through a trust
Running a business through a trust involves appointing a trustee that will:
- own the assets of the business;
- operate the business; and
- distribute the income of the business to beneficiaries.
There are different types of trusts, including discretionary and unit trust.
In a discretionary trust, usually used by families (and sometimes known as a family trust), the trustee has discretion over what income and capital is distributed to each beneficiary of the trust.
For a unit trust, the property held by the trust is divided into fixed units, and beneficiaries subscribe to these units to obtain a fixed proportion of the trust.
To set up a trust, you need to do the following:
- select a trustee;
- draft a trust deed;
- settle the trust through a settlor; and
- pay applicable stamp duty.
What are the advantages of this structure?
One of the greatest advantages of this structure is the potential for tax structuring. For example, in a discretionary trust, income can be distributed at the discretion of the trustee to beneficiaries, with the lowest marginal tax rates. However, given that we are lawyers, and not qualified to provide any taxation advice, we recommend that you discuss tax structuring matters with an accountant or tax adviser.
Other advantages of a trust structure include:
- privacy – operating a business through a trust means that information is not made publicly available on the ASIC register; and
- asset protection – as the beneficiaries do not own the trust assets so there is some scope for asset protection from third party creditors or beneficiaries.
What are the disadvantages of this structure?
A trust structure is generally speaking more expensive and more complex to establish and maintain compared to a company structure.
In addition, there are also other problems such as:
- difficulties in altering a trust once it has been established;
- difficulties when borrowing funds;
- the necessity of distributing profit/income to beneficiaries each financial year;
- limitations on the trustee’s power by the trust deed;
- the limited lifetime of a trust in certain states in Australia; and
- the trustee being personally liable for debts incurred by the trust.
Conclusion
Part 3 concludes this series. In this series we have discussed the single company structure, the dual company structure, and the trust structure. Each structure has its own advantages and disadvantages, and you (with the assistance of an experienced business lawyer and accountant/tax adviser) should make a decision based on your individual circumstances.
Your business structure forms the foundation of your business and it is important that you get it right from the beginning! We recommend that you gather advice from the relevant professionals to help you make an informed decision that will help your business expand and grow, and ensure that it is able to meet your personal objectives.