Legal Structure:
A company is a separate legal entity. It can own businesses, incur debt, and be sued independently from its shareholders. Shareholders liability is limited, but directors can still be held personally liable in cases of insolvency or breach of duties.
A discretionary trust is not a separate legal entity. Instead, a trustee holds assets (potentially your business assets) for the benefit of its beneficiaries. Trustees can be personally liable trust debts, usually this risk can be somewhat mitigated by using a corporate trustee.
Tax:
A company that owns a small business in Australia usually pays a flat rate of tax of 25% on profits. Note that companies do not qualify for the 50% Capital gains tax discount for any business assets that are sold at a profit! There also might be additional income tax payable by the shareholders if any of the company profits are subsequently paid out as a dividend – see our article on franking credits which explains this in a bit more detail.
On the other hand, discretionary trusts generally do not pay tax directly. Profits earned by your business would (usually) be distributed to the individual beneficiaries, with their tax rates ranging from 16% to 45% plus Medicare Levy. Trusts are eligible for the 50% Capital gains tax discount (Provided the gain is distributed to individual beneficiaries, and the assets sold were previously held for at least 12 months).
Succession planning:
A company can exist indefinitely, allowing continuous operation despite changes in directors and shareholders.
Discretionary Trusts can be much more complicated! The trust deed needs to allow for the replacement of trustees and ongoing management of the trust. Further, a trust (in New South Wales) can only last for up to 80 years before it must end (this is called “vesting”).
Operations / ease of doing business:
Banks and suppliers typically find it easier to deal with companies due to transparency and availability of company information via ASIC databases.
Discretionary trusts may face challenges in setting up bank accounts, borrowing, and dealing with suppliers due to their less transparent nature. Although generally, these issues can be resolved if you are willing to provide the trust deeds and ID documents to these third parties.
Summary:
Each structure has its unique advantages and disadvantages, and the best choice will depend on your specific business needs and goals. Companies offer a clearer legal separation and limited liability, but with stricter regulatory requirements. Trusts provide flexible income distribution and potential tax benefits but come with complexities in management and succession planning. If you require assistance on determining which structure is the most beneficial for you, please contact us today!