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Company vs Trust for operating a business

Discussion in 'Business Legal Issues' started by Simon Hampel, 30th Aug, 2016.

  1. Simon Hampel

    Simon Hampel Founder Staff Member

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    Curious to know the implications from a legal perspective of operating a business from a trust structure rather than a company.

    What are the pros/cons from an asset protection and legal liability perspective?

    What scenarios make trusts more appropriate than companies?
     
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  2. Terry_w

    Terry_w Active Member

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    Either way a company should be in place - to limit liability.

    A unit trust (corporate trustee) or a company will make it easier to add partners by the transferring of units of the trust or shares.

    If a discretionary trust owns this will be difficult.

    Sale - trusts can get the CGT 50% discount companies cannot.
     
  3. Terry_w

    Terry_w Active Member

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    Where a company is to be used the shares should generally be held by a discretionary trust.

    Same with a unit trust - helds generally should be held by a discretionary trust.

    Where a discretionary trust is to be operating the business this won't apply.

    Limiting liability can be achieved by having just 1 director as directors sometimes go down with the ship - but are also frequently tied up in personal guarantees.
     
  4. Simon Hampel

    Simon Hampel Founder Staff Member

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    Thanks Terry.

    I know of people who operate their business (personal services I believe) via a discretionary trust - pretty sure no company involved.

    I assume they chose that primarily for tax reasons - the ability to stream income to beneficiary with lowest taxable income? Why else would they use a discretionary trust?
     
  5. Terry_w

    Terry_w Active Member

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    The discretionary trust offers asset protection, secrecy - no one would know who the beneficiaries are. Less hassle passing control to family members.

    A trust could stream income to beneficiaries. But I company with a DT as shareholders would need to declare a dividend to do this.

    Less regulation. Companies are regulated by the corporations act and this is administered by ASIC. Trusts are not regulated by ASIC so less compliance issues such as getting fined when not lodging documents on time etc. But the corporations act as will apply when a company is used as trustee - which should be the case as the risk is high.

    They may also have no intention of bringing in future 'partners'.
     
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  6. d.t.

    d.t. Member

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    The advice i got when starting my business was to use a disc trust to start with then change to a company in a year or 2. My accountant is both a tax agent and a lawyer, so i trust the advice catered to my own circumstances.

    I guess have to look at
    - forecasted earnings (ie tax potential)
    - whether there's partners, how many , what capacity
    - what risks are present for people involved
    - ongoing costs and compliance
    - Any others?
     
  7. Terry_w

    Terry_w Active Member

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    Why not just set up with the desired entity first?
     
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  8. RPI

    RPI Well-Known Member

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    I am a fan of trusts. But for bigger operations or where the individuals have already have significant other income or where there is a chance of a listing then Company can be better option.
     
  9. Terry_w

    Terry_w Active Member

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    Another thing to consider is succession on death.

    Discretionary Trusts can pose problems here because the trustee decides who benefits from income and capital of the trust so whoever controls the trustee controls the funds - but whoever controls the appointor can control the trustee.

    In either case,
    Company with shares owned by DT, or
    DT running the business
    there are going to be serious estate planning issues to consider.
     
  10. d.t.

    d.t. Member

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    It fit my circumstances that I don't really want to go into in public, but matches a future change that is already known about and planned for.
     
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  11. Redwood

    Redwood Member

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    I use a company ... I have a number of companies where the shares are owned beneficially by a trust. Get this done sooner rather than later to avoid any CGT.

    Remember when you are trading, buy a domain and also a trading name, register it asap
    Cheers Ivan
     
  12. Terry_w

    Terry_w Active Member

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    Thats a good point Ivan - when operating multiple businesses the shares in the various companies can be owned by the same trust.
     
  13. d.t.

    d.t. Member

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    Any risk there of cross loss from legal action of one company ?
     
  14. Terry_w

    Terry_w Active Member

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    Shareholders are not liable for company debt usually - unless guarantees are given.