Corporate Structure: Should You Choose a Trust or a Company?

Choosing a business structure

Corporate structure is important — should you operate through a trust or a company? In this article Fullstack weighs the pros and cons of trusts & companies.

There are many options that should be considered when deciding on a business structure for your company. Two of the most common options are either operating your business through a company, or operating through a trust.

In this article, Fullstack will break down the advantages and disadvantages of operating a business through a trust versus operating through a company.

Why Operate Your Business Through a Company?

Setting up a business structure using a company provides business owners with a range of benefits. When you incorporate a business, your personal legal identity is considered a separate legal entity to your company. This can provide business owners with protection in a variety of circumstances, such when as the business makes losses because shareholder’s liabilities are only limited to their share capital – be wary of director’s liabilities around trading whilst insolvent though!

In addition to providing business owners with limited liability, operating a business as a company can also deliver tax benefits. Businesses operating as companies are entitled to tax concessions. Corporate tax is set at 30% of company’s taxable income (27.5% if you’re a startup/SME), but when these profits are distributed to shareholders they are taxed at a marginal rate.

The disadvantages of operating a business as a company, however, may cause some business owners to consider operating as a trust.

Companies do not benefit from the capital gains concession that provides a 50% discount on assets disposed of over one year from acquisition or when relevant taxable events occur. Capital gains concessions are only available to sole traders, partnerships, or family trusts.

Companies are also subject to rigorous tax reporting requirements including maintaining a regular set of accounts & bookkeeping. If you choose to incorporate your business, the directors of the company and the company itself are subject to additional requirements and duties enforced by ASIC.

Why Operate Your Business Through a Trust?

Operating a business structure using a discretionary trust can deliver a variety of tax advantages. Trusts are generally considered to be extremely effective business structures for tax effectiveness due to the manner in which profits can be distributed amongst adult family members.

If you choose to operate your business through a trust, the profits generated by the business can be distributed according to a strategy that ensures tax is paid at the lowest possible marginal tax rate for each individual.

Discretionary trusts also offer business owners asset protection benefits. Should a business become insolvent or bankrupt, a discretionary trust can, in most cases, protect the assets of the beneficiaries of the trust — with creditors are less able to make claims against the assets of a trust.

Operating a business as a trust makes it possible to take advantage of the 50% capital gains tax concession that is not available to businesses that operate as a company.

It’s important to note that tax obligations vary depending on individual financial circumstances and are not applicable to every person. If you’re considering establishing a discretionary trust to operate your business, it’s best to get in touch with a tax or accounting professional for personalised advice.

Companies and trusts offer different benefits and advantages to business owners. If you’re seeking personalised information based on your individual business and financial situation, contact Fullstack today for professional guidance on business structure advice and trust tax benefits.

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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech & online companies.

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