There are four small business structures in Australia – sole trader, partnership, company, and trust. Thus, if you want success in the long term, you must choose the appropriate structure, depending on the nature and size of your business. Differences occur in terms of tax benefits, liabilities, income procedure, etc.
For example, rules for a company tax lodgement will never be the same as those for lodging trust tax. This blog is made to help readers understand the significant differences between a trust and a company.
What are the basic features of trust?
When you operate your business under a structure of a trust, it means that the trust:
- owns and runs the assets,
- should obey the trust deed obligations, and
- distributes the total income.
The person who executes these responsibilities is a trustee who can either be a company or an individual. In a word, the trustee operates all the assets and handles contracts on behalf of the trust.
What are the different types of trusts?
There are usually two different types of trusts, which are discussed here.
Discretionary trust
In this type of trust, the trustee can decide what capital or income should be distributed to each beneficiary.
Unit trust
In contrast, the trustee of a unit trust has no discretion and can divide the trust’s property into countable and fixed parts known as units. Just like shareholders subscribe to company shares, unit trust beneficiaries subscribe to units.
What are the advantages and disadvantages of a trust structure?
Advantages of running a trust
While running your business under trust, you can enjoy the following advantages.
- You can distribute the business income at your own choice. In the case of a trust, the lowest marginal tax rates apply, which effectively reduce the aggregate payment of tax beneficiaries.
- There will be more privacy in operating your business.
- Even if a beneficiary runs into bankruptcy that will never be a problem because the trust’s beneficiaries do not own their assets. However, a unit trust should be considered an asset so that it can be available to a trustee or creditor when bankruptcy occurs.
Disadvantages of running a trust
Running a trust comes with several disadvantages, too.
- A major disadvantage is that it is mandatory to distribute the business income to the beneficiaries each year. If the trustee fails to do that, they may need to pay tax on any undistributed income, which comes at the highest marginal rate. They will also need to apply for a TFN (tax file number) and file an annual trust tax return.
- It will cost you huge to establish a trust structure. Not only that but maintaining it is also pretty complex.
- You may face serious issues when dissolving an existing trust.
- There will be the difficulty associated with borrowing funds.
- The trust deed limits the power of a trustee.
- You will not be able to distribute losses, and earned profits will result in higher tax rates.
- A trust can last for only 80 years.
- If the trustee is an individual, they will be liable for all debts. But, there will be a limited liability when the trustee is a company.
When can the company structure be a better alternative?
If you want better tax benefits and limited liability, you can choose to operate your business under a company structure.
What are the essential elements of a company structure?
A company is a separate legal entity and can last for an indefinite period. Members and shareholders are responsible for its control, while it is operated through directors, agents, or managers. It means irrespective of the situations arising with the shareholders or directors, companies can exist forever. The company structure allows the business to retain valuable property in its name.
What are the advantages and disadvantages of a company structure?
Running a business through a company structure has both advantages and disadvantages.
Advantages of running a company
The benefits of running a company are as follows.
- If you want to enjoy tax benefits and avoid liability, this structure is for you.
- As already mentioned, the business can retain valuable property in its name.
- A company structure also allows the business owner to transfer and sell shares.
Disadvantages of running a company
Despite the benefits, there are several drawbacks to running a company, too.
- The reporting fees may be costly, and you may find it challenging to maintain.
- Company control may become subject to its shareholders.
- The requirements associated with reporting are highly strict, so directors and managers find it challenging to keep up with the pace.
What are the key differences between a trust and a company?
Here we list all the fundamental differences between the two structures.
- First of all, a trust is not a separate legal entity like a company. In contrast, you will be able to have better protection for your assets and better investment opportunities. A company also lasts longer than a trust.
- For a trust, there are lesser tax obligations. On the other hand, a company will be more useful as a structure to produce working capital. It happens because higher rates are imposed on trust taxes when profits are made.
- Investors feel more comfortable dealing with a company than a trust because tax benefits for a company are much better than trust.
- Trust is better than a company, however, in some aspects. Here you can distribute the business income according to your discretion, enjoy more privacy in business operations, and have better protection for the business from the bankruptcy of a beneficiary.
- A trust is also costly and difficult to maintain in the long term. You cannot distribute losses and will have unlimited liability.
- In a word, a company will always be a better alternative to a trust as it allows a business to produce tax-effective working capital.
Final words
While making the final decision on your business structure, you must consider all the advantages and disadvantages of each business structure. If you wish, you can take help from an experienced business professional such as financial advisors.
