When starting a business, there’s lots of information to get through and decisions to make. One of the biggest questions we get asked as business advisors relates to business structures. In particular, what’s the difference between a company and trust, and how do you know which is best for you?
We sat down with MEAD Partner and business advisor Shaun Borg to find out the biggest differences between Companies and Trusts and how to assess which is right for your business.
What is a Company?
A company is a separate business entity from its owners (known as members or shareholders). As a legal business entity, a company can incur debt, sue or be sued just like an individual.
Companies need to have at least one shareholder, and are managed by a company director. Although a Company has shareholders, it does not usually sell shares to the public like a publicly listed company.
Companies are governed by the Australian Securities and Investments Commission (ASIC) and they must comply with the Corporations Act.
“While companies can be liable for GST, this only applies if your annual turnover is more than $75,000*,” said Shaun.
“There are also key legal and reporting obligations, such as keeping financial reports, submitting annual financial statements to ASIC, and complying with director obligations.”
As a separate legal entity, tax is paid at Company tax rates^ and you must submit a separate tax return for the Company.
What is a Trust?
Similar to a Company, a Trust is a separate legal entity. Its managed by a Trustee on behalf of beneficiaries according to defined terms and obligations, and is governed by a Trust Deed. Unlike a Company, a Trust has its own Tax File Number (TFN) and income is distributed to beneficiaries.
“While a separate tax return must be filed for a Trust, it’s important to note that beneficiaries must also include any Company income they receive on their personal tax returns,” said Shaun.
“There can also be Discretionary Trusts – such as a Family Trust – and Unit Trusts. In a Discretionary Trust, a Trustee has the discretion in distributing income and capital to beneficiaries. In the case of a Unit Trust, a beneficiary can hold units that allow them a share of the Trust’s income and capital.”
Company vs Trusts: Pros and Cons
Like with any company structure, there are pros and cons for both Companies and Trusts.
Shareholders are generally not personally liable for a Company’s debts.Perpetual existence
The Company can continue to operate even if the ownership changes.Greater access to capital
Shareholders have access to more through the issuance of shares.Tax
Tax is calculated at a Company Tax rate, which is generally lower than individual rates.
Companies come with additional upfront and ongoing costs, including registration and annual ASIC Review
A Company must comply with more legal and tax obligations as well as ASIC requirements and reporting and
super regulations set by the ATO.
Trusts give you more flexibility for income distribution, allowing for better tax planning and asset
A Trust’s overall taxable income can be lower due to the ability to distribute income to beneficiaries.Asset protection
Trusts can offer asset protection
benefits as Trust assets are held separately from your personal assets.
The legal support required to create a Trust Deed can be costly, and could come with incorporating
A Trust comes with additional legal obligations that a Trustee must comply with.
Company or Trust: How do you know what’s right for you?
When assessing what’s right for you, it’s important to consider a number of factors.
“There is no right or wrong answer when it comes to choosing a business structure, and you should consider what’s right for you and your financial situation,” said Shaun.
“You should also consider your long-term goals, such as expansion, attracting investors, or succession planning.”
Other considerations include:
Consider the level of personal liability you’re willing to assume.
- Asset Protection
Consider the nature and value of your business assets.
- Tax Implications
Understand the tax implications associated with each structure as well as the impact on your personal income tax, capital gains tax, and the ability to claim deductions.
- Complexity and Compliance
Consider the level of administrative and compliance responsibilities you’re comfortable with.
- Income Distribution
Evaluate how you want to distribute profits among owners or beneficiaries. How you distribute income can affect tax planning and the financial benefits you derive.
“Future flexibility, risk tolerance and exit strategies should also be considered and are often overlooked. There are also industry-specific considerations that you may not be aware of,” said Shaun.
In some cases, you may need to consider using multiple entities to serve various purposes of the overall group. A good example of this relates to Company shares, which can be owned by a holding Company or Trust rather than an individual. Business assets can also be held in a separate Company or Trust to protect your business assets from the trading company.
“This is where a business advisor can be invaluable. We know what questions to ask and where to probe to uncover potential risks and help you make an informed decision.”
How often should you review your business structure?
The biggest misconception is that business structures don’t need to change. To ensure your business continues to meet your needs, your business structure should be periodically assessed.
“There is no fixed frequency for reassessing your business structure, and in some cases it can carry on the same from beginning to end,” said Shaun.
“However, triggers to assess your business structure could be business growth or expansion plans, ownership changes, long-term planning, or legal or regulatory changes. Personal circumstances may also change, in turn changing your financial position.”
“By meeting with your business advisor regularly, you can make informed decisions long before it impacts your business and take proactive steps for your business. We can also help you avoid tax traps and highlight potential tax, financial or legal risks.”
* As at May 2023. Please chat to our team or a tax professional for the current GST threshold amounts or visit the ATO’s website.
^ Tax rates are subject to change. Please speak to our Accounting team to understand current tax rates or visit the ATO’s website.