Trust Vs Company – what is the difference
A Trust vs Company is a decision many business startups need to consider
Choosing the right business structure is crucial to impacting your company’s operations, taxation, liability, and future growth.
Family Trusts and Companies (typically Proprietary Limited or Pty Ltd companies) are two popular structures.
We stress that Family Trusts are for family affairs but suitable for non-family ownership where two non-related partners enter business.
Trust vs. Company: Each entity has advantages and considerations, and don’t be surprised if the best structure is one of each.
Here’s a comprehensive overview to help you make an informed decision:
What is a Family Trust?
A Family Trust is a discretionary trust in which the trustee holds business assets to benefit the beneficiaries, typically family members.
The right entity, such as a Trust, can assist in asset protection, tax planning, and estate planning.
Advantages:
1. Tax Flexibility: Income can be distributed to beneficiaries in a tax-effective manner, potentially reducing the overall tax burden.
2. Asset Protection: Assets held in the trust are generally protected from business risks and creditors.
3. Succession Planning: Facilitates the smooth transfer of assets and control.
4. Control: The trustee (an individual or a company) controls how income and capital are distributed.
Disadvantages:
1. Complexity: Setting up and managing a trust can be more complex than other structures.
2. Costs: Initial setup costs and ongoing administration can be higher.
3. Regulatory Requirements: Must comply with trust laws and maintain proper records.
4. Limited Tax Benefits for Business Income: Recent tax law changes have restricted some of the tax advantages for trusts, especially concerning passive income.
What is a Company?
A proprietary limited company is a separate legal entity from its owners (shareholders).
Therefore, it offers limited liability protection, meaning shareholders are typically not personally liable for the company’s debts beyond their investment.
Advantages:
1. Limited Liability: Protects personal assets from business liabilities.
2. Separate Legal Entity: Can own property, enter contracts, and sue or be sued in its own name.
3. Tax Advantages: Corporate tax rates may be lower than personal tax rates, and profits can be retained within the company for reinvestment.
4. Easier to Raise Capital: Can issue shares to raise funds.
5. Perpetual Succession: Continues to exist regardless of changes in ownership or management.
Disadvantages:
1. Regulatory Compliance: Must comply with the Corporations Act 2001, including regular reporting and record-keeping.
2. Costs: Higher setup and ongoing compliance costs than sole traders or partnerships.
3. Less Tax Flexibility: Profits are taxed at the corporate rate, and distributions to shareholders (dividends) may also be taxed. Of course in many cases these shares come with Franking credits to assist the shareholder . The % of franking credit depends greatly on what tax has been paid by the company.
4. Complexity in Management: More formalities in management structure, including directors and shareholders but probably slightly easier than a Trust
Key Considerations of Trust Vs Company
1. Control and Decision-Making:
– Family Trust: Offers flexibility in distributing income, and control can be shared between trustees.
– Company: Typically governed by a board of directors, including you and your partner, providing clear governance structures.
2. Taxation:
– Family Trust: Potentially more tax-effective distributions, but recent changes may limit benefits for active business income. Agaim , Trusts will depend upon your family circumstances
– Company: Fixed corporate tax rate, which can be advantageous if profits are retained within the business for growth or most shareholders have high incomes already
3. Asset Protection:
– Family trusts offer strong asset protection as the trustee holds assets and is not directly governed by the beneficiaries.
– Company: Offers limited liability, protecting personal assets from business debts.
4. Succession and Future Planning:
– Family Trust: Transferring beneficial interests without changing the trust structure is easier.
– Whereas a Company: Shares can be transferred but may require formal documentation and compliance.
If you are considering new partners, a transfer of business to a Company is the best structure
5. Administration and Costs:
– Family Trust: This can be more administratively complex and costly to set up and maintain.
– Company: Also involves compliance costs but offers a more straightforward structure for many business operations.
Helping you to decide Trust vs. company – what are your business goals ?
Both structures have their merits. Ultimately, the best choice depends on your specific circumstances,
These include considering your business goals and financial situation.
Here are some steps you can take to help with your decision-making about which structure Trust vs. company.
1. Assess Your Business Needs:
– Consider your growth plans, the nature of your business, and how you plan to distribute profits.
2. Evaluate Tax Implications:
– Analyze how each structure would affect your tax liabilities based on your current and projected income.
3. Consider Legal and Financial Protection:
– Think about the level of personal asset protection you require.
4. Plan for the Future:
– Even without children now, consider how you might want to handle succession or adding family members in the future.
What to do Now?
Sometimes, we recommend a combination of both structures.
Again, it will depend upon your circumstances, future needs and how much you are prepared to pay to establish a new structure.
Some start with a Company and migrate to a combined structure as we grow.
Come in and meet us, and let’s discuss your options. Once your decision is made, we can have you up and running in no time!
Disclaimer: This response provides general information and should not be considered legal or financial advice.
In conclusion, always consult a qualified professional before deciding about your business structure. Call us on 0395979966 to discuss your needs.