While running a business using a company structure has a number of benefits, adding an additional level to your structure, for example by having your shares in the company held through another company or through a trust, can produce further benefits. This article sets out why business owners should consider holding their shares in an operating company through another company or a trust.
Operating a Business through a Company
Operating your business using a company has a number of benefits including:
- As a company is a separate legal entity, its shareholders will generally not be personally liable for the debts of the company. Directors of a company do however have certain duties imposed upon them which should also be considered;
- A company can be established relatively quickly, but there are costs involved with its incorporation and maintenance; and
- Companies are taxed at the flat company tax rate of 30%, but when profits are distributed to shareholders, the dividends are taxed at the shareholder’s marginal rate. However, since the company has already paid tax on the profit, the shareholders will receive a credit to reflect the amount of tax already paid by the company.
How Should I Hold My Company Shares?
Once you have decided to operate your business using a company, you will then need to decide how the shares in that company will be held. Company shares are usually held in one of three ways:
- in a person’s individual capacity;
- through a second company; or
- through a trust.
Holding shares other than in your individual capacity can provide additional benefits, such as further limited liability and tax advantages, but there are additional setup costs to consider.
Why Hold Shares Through a Company?
The key benefit to holding your shares through a second company is that, if the corporate veil of the operating company is pierced and its shareholders are exposed, having a limited liability company as your shareholding entity (rather than you personally) will help protect your personal assets.
The big disadvantage to owning your shares through a company is that when the company sells those shares it will not be eligible for the 50% capital gains tax discount (which is generally available to individuals and trusts).
Using a holding company will require the incorporation of an additional company and associated costs, but it can be more affordable than using a trust, especially if the trust has a corporate trustee.
Why Use a Trust?
Unit trusts and discretionary trusts are commonly used to hold shares. The trustee of a unit trust holds the trust assets for the unitholders in proportion to the specified number of units that they hold. Alternatively, a discretionary trust (often referred to as a family trust) does not specify how trust income is to be distributed amongst the beneficiaries; it is to be distributed at the complete discretion of the trustee(s). This allows for flexibility regarding income distribution and can have favourable tax consequences, for example, if you were to distribute dividends under the trust to lower income earning family members. By holding your shares through a trust, you may also be able to access the 50% capital gains tax discount earned when selling the shares provided that they have been held in the trust for over 12 months. Companies are not eligible for this discount.
When setting up a discretionary trust, you will need to consider whether you wish to appoint an individual or corporate trustee. While a corporate trustee allows for additional protections (in particular limited liability), this requires the incorporation of another company and therefore increases your setup and maintenance costs.
Holding shares in your operating company through a second company allows for greater asset protection whereas shares held through a discretionary trust may provide greater tax benefits. You may even choose to combine these models by holding your shares in the operating company through a trust with a corporate trustee.
When setting up a complex or multi-faceted business structure, it is always recommended to seek legal and tax advice. Want to discuss your structure with a business structuring lawyer? Call us on 1300 544 755.