While running a business through a company structure has a number of benefits, adding an additional level to your structure, such as by having your company shares held by another company (a holding company) or trust, can produce further benefits. This article sets out why business owners should consider setting up a holding company or trust.
Operating a Business through a Company
Operating your business through a company has a number of benefits:
- 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 on their tax paid to reflect the amount of tax already paid by the company.
How Can I Hold My Company Shares?
Once you have decided to operate your business through a company, you will then need to decide how the shares will be held. Company shares are usually held in one of three ways:
- in a person’s individual capacity;
- through a second company (often referred to as a holding company); or
- through a trust.
Holding shares, other than in your individual capacity may provide additional benefits, such as reducing tax and limiting your liability, but there are additional setup costs to consider.
Why Use a Holding Company?
A holding company is a company that owns or controls an operating company. An operating company is the face of the business that enters into arrangements with clients, suppliers and employees. A holding company owns the valuable assets of the operating company, including intellectual property.
There are a number of benefits of a holding company structure:
- the holding company protects the business assets from any liability incurred by the operating company;
- dividends paid by the operating company to the holding company will not be taxed;
- dividend profits can be held by the holding company (rather than automatically distributed to shareholders) until it is advantageous to distribute them from a tax perspective.
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. A unit trust holds the trust assets for the beneficiaries 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 assets are to be apportioned to the beneficiaries. This allows for flexibility regarding income distribution and can have favourable tax consequences, for example, if you were to distribute share dividends under the trust to lower income earning family members. By holding your shares in a trust, you may also be able to access the 50% capital gains tax discount earned when selling/transferring shares that 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, this requires the incorporation of another company and therefore increases your setup and maintenance costs.
Holding shares in your operating company through a holding company further limits liability and allows for greater asset protection. Whereas shares held under a discretionary trust may provide greater tax benefits. You may even choose to combine these models and have your shares held by a trust with a corporate trustee.
When setting up a complex or multi-faceted business structure, it is always recommended to seek legal advice. You should also consider speaking with an accountant regarding the tax implications of transferring assets. Want to discuss your structure with a business structuring lawyer? Call us on 1300 544 755.