Introduction to Business Structures
A business structure refers to the legal entity under which a business operates, such as a company or trust, each with its own advantages and disadvantages.
Choosing the right business structure is crucial for asset protection, tax benefits, and long-term success.
Understanding Trusts
A trust is a legal arrangement where a trustee holds trust assets for the benefit of beneficiaries, as outlined in a trust deed. Trusts are commonly used in small businesses and family businesses to protect assets, distribute income, and manage wealth across generations.
There are several types of trusts, including discretionary trusts, unit trusts, and family trusts. In a discretionary trust, the trustee has flexibility in how trust income is distributed. This flexibility supports income distribution strategies and potential tax minimisation.
The trustee has complete control over the family trust’s assets and can make decisions without the input of the beneficiaries. Beneficiaries have no fixed rights to income or capital.
Trusts are generally not taxed directly. Income is usually distributed to beneficiaries, who pay tax at their own marginal rates. However, if income is not distributed by the end of the financial year, the trustee may be taxed on that income at the top marginal tax rate. Where trust assets are held for more than 12 months, the trust may pass on a 50% capital gains tax (CGT) discount to individuals. Trusts may also be eligible for other tax concessions depending on their activities.
Trust assets are generally protected from creditors in the event of bankruptcy or legal action, provided the trust is properly structured and administered. This protection may not apply if the trust is found to be a sham or if the trustee breaches their legal obligations. Using a corporate trustee enhances legal protection by maintaining a clear separation between trust and personal assets.
Setting up a trust can be more complex than establishing a company due to ongoing management and compliance requirements.
Understanding Companies
A company is a separate legal entity that can own assets, incur debt, and operate independently of its shareholders. It is registered with ASIC and operates under the Corporations Act 2001 (Cth). The legal identity of the company is separate from the business owner, which provides limited liability protection.
Shareholders own the company through shares. These shares determine voting rights, profit entitlements, and ownership proportions. A company continues to exist regardless of changes to its directors or shareholders.
Companies are taxed as separate entities. The corporate tax rate is currently 25% for base rate entities and 30% for others. Companies do not receive a capital gains tax discount, but they generally lead to a lower effective tax rate than individuals, especially as profits increase. Companies may also be eligible for various tax concessions based on their business activities.
Setting up a company can be more complex and expensive than operating as a sole trader or partnership. Companies are required to comply with more regulatory obligations. All companies must maintain financial records, and public companies must hold annual general meetings. Private companies may have less stringent meeting requirements depending on their structure.
The company structure allows for easier capital raising and attracting investment. It suits businesses planning to grow or scale with external funding.
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Key Differences Between a Trust and a Company
| Feature | Trust | Company |
|---|---|---|
| Legal Status | Not a separate legal entity | Separate legal entity |
| Ownership | Trustee holds assets for beneficiaries | Shareholders own the company |
| Control | Trustee makes decisions without beneficiary input | Directors manage company; shareholders have voting rights |
| Taxation | Beneficiaries taxed on distributed income | Company pays tax at corporate rate |
| Capital Gains Tax (CGT) Discount | 50% CGT discount may apply on distributed gains | No CGT discount |
| Income Distribution | Flexible (discretionary) | Fixed (dividends to shareholders) |
| Asset Protection | Strong, especially with corporate trustee | Strong due to limited liability |
| Succession | May require restructure or new deed | Perpetual existence through shareholding |
| Capital Raising | Limited (usually private beneficiaries only) | Easier via share issuance |
| Compliance | Complex (trust deed, trustee duties, ongoing admin) | High (ASIC, AGMs, records) |
Asset Protection
Both companies and family trusts can provide excellent separation between assets and risk. A company provides limited liability, meaning shareholders are generally not personally liable for company debts. Only the company’s assets are at risk, unless personal guarantees have been provided.
Trusts protect assets by keeping them separate from the personal assets of the trustee or beneficiaries. When a corporate trustee is used, this protection is enhanced by further separating personal liability from trust property.
Choosing the right structure depends on your exposure to risk, the nature of your business, and whether you need to separate business assets from personal assets.
Business Growth and Investment
Companies are often better suited to businesses looking to raise capital or attract outside investment. Ownership is divided into shares, which can be sold or transferred to new investors. This structure offers clear mechanisms for bringing in external funding and scaling operations.
Trusts are more limited in this respect. Beneficiaries are usually predefined, making it harder to include external partners. Trusts allow for flexible profit distributions to beneficiaries, which can support business growth in a tax-effective way, particularly in family-run businesses.
If your business growth plan involves expansion, multiple investors, or seeking finance, a company structure is likely to offer greater flexibility.
Tax Considerations
Trusts and companies are taxed differently. A company pays tax on its income as a separate legal entity. Trusts distribute income to beneficiaries, who then pay tax at their personal marginal rates.
This allows for income splitting through trusts, often resulting in lower overall tax. If trust assets are held for more than 12 months, a 50% capital gains discount may apply. This discount is not available to companies.
Companies are taxed at a flat rate. Base rate entities are taxed at 25%, while others are taxed at 30%. Profits distributed to shareholders as dividends may attract further tax, depending on individual circumstances.
Both companies and trusts may be eligible for various tax concessions and incentives depending on the nature of their business activities, such as small business CGT concessions or other tax offsets under federal law.
Family Trusts
A family trust is a type of discretionary trust set up to hold and manage assets for the benefit of family members. It is often used in small businesses or family-run operations.
The trustee has complete control over the trust’s assets and decisions, with no requirement to seek input from beneficiaries. Beneficiaries have no automatic rights to income or capital.
Family trusts allow for flexible income distribution and can help reduce tax obligations across a family group. They are commonly used for estate planning in family businesses and may offer asset protection in the event of personal liabilities or family law proceedings such as divorce or property settlements.
Using a corporate trustee adds another layer of separation and reduces personal liability for those managing the trust.
Corporate Trustee
A corporate trustee is a company appointed to act as the trustee of a trust. It offers greater asset protection by limiting personal liability and ensuring clear separation between trust and personal assets.
It is common for family trusts to use a corporate trustee, especially where significant assets are involved. The corporate trustee structure supports continuity and simplifies succession planning.
Legal protection is enhanced by this structure, particularly in the event of disputes or changes to trust management.
Distribute Income
How income is distributed depends on your business structure.
In a company, income is distributed as dividends. Shareholders may be entitled to franking credits to offset the tax already paid by the company.
In a trust, the trustee can distribute income to one or more beneficiaries, often choosing recipients in lower tax brackets to minimise tax. Beneficiaries pay income tax on what they receive.
This flexibility makes trusts attractive where strategic income allocation is important.
Company Shares
Shares represent ownership in a company. They define who owns what percentage of the business, who controls voting decisions, and how profits are distributed.
Companies issue shares to raise capital, attract investors, and structure ownership between partners. The rights of shareholders are determined by the share structure and company constitution.
Shareholders of a company have rights to income and capital, unlike beneficiaries of a family trust, who rely on trustee decisions.
Shareholding is central to the function and growth of a company. It allows for scalability, succession, and external funding.
What to Consider When Choosing a Structure
To choose the right structure for your business, assess your:
- Risk exposure and need for asset protection
- Income distribution goals and tax strategy
- Capital raising plans and investor involvement
- Succession or exit strategy
- Compliance tolerance and management capacity
Setting up a company or family trust can be complex and requires ongoing management and compliance to ensure they are structured correctly. Your decision should reflect your business model and personal circumstances, including the legal contracts and advice you’ll need to support it.
Get Legal Advice Before You Set Up
Choosing between a company and a trust is a significant decision that affects tax, liability, and long-term planning.
If you’re purchasing an existing business or starting a new one, we help you choose the right business structure. We provide tailored legal advice to support your goals, such as launching a company, managing a family trust, or scaling your operations.
Speak with our team today for expert legal support on business structures in Western Australia.
Disclaimer: Laws are subject to change, and the information provided is general in nature. Readers are encouraged to seek professional legal advice tailored to their specific circumstances to ensure accurate and relevant guidance.