Company v Trust - what's the difference?
Your business structure can affect how your business grows and how easily you can sell your
business. Each structure (Company or Trust) has different legal and financial obligations.
*Always seek specialist advice that is tailored to your situation and risks.
This article and the PDF below summarise some of the common advantages and disadvantages of Trusts and Companies.
Pros and Cons of a Trust
What are the advantages of a Trust?
Protect selected assets against claims and creditors, but only to the extent that there is no advance within the trust that is owed back to you – for example, to protect a family home from the potential failure of a business venture
Customising and controlling how your wealth is distributed
Ensure your children, not their partners, keep their inheritances and address family dynamics;
for example, divorce or blended families
Helping a parent or other relative manage their financial affairs
Manage the risk of unwanted claims on your estate when you die – such as from a former
partner
Provides more privacy than a company
There can be flexibility in distributions among beneficiaries, (but remember, if you distribute,
you have created an obligation to pay out those funds to that beneficiary if not at the time of
distribution at some point in the future)
What are the disadvantages of a Trust?
The ongoing disclosure and maintenance responsibilities are now legislated
If assets are held in your personal name, there is no obligation to tell your children or family anything about them, but when assets are in a trust, the trustees have disclosure obligations to the beneficiaries (often your children)
When placing assets into a trust, those assets become trust assets. Hence, you lose control of those assets, including personal property or shares in a company
There is no guarantee that a trust structure will result in tax savings. We suggest you seek specialist tax and legal advice to determine whether a trust is appropriate for you
Research indicates problems can be encountered when borrowing due to additional complexities of loan structures (talk to your bank to understand if this is a reality for you)
The powers of trustees are restricted by the trust deed and recent legislation.
Pros and Cons of a Company
What are the advantages of a Company?
Limits your personal exposure to commercial risk, i.e. as a shareholder your liability is limited to the amount you paid for your shares. In an insolvency situation, your shareholder advance account may be foregone too
Currently, the company tax rate is lower than the top personal rates
When it comes to selling the business, you have two options, not one. You can sell the business
or sell the company with the business
The business can grow indefinitely – it’s not tied to one person
Often seen as more credible than sole traders and partnerships, and provides the opportunity to continue beyond the initial creator
Allows you to raise funds from investors by issuing or selling shares to them
What are the disadvantages of a Company?
Directors need to understand their legislated responsibilities
In practice, a company's limited liability is often compromised as a result of shareholders personally guaranteeing the company’s loans and debts, including property leases
The powers of directors and shareholders are restricted by the shareholders’ agreement, constitution, and legislation
Disclaimer
This article is for informational purposes only and should not replace specific tax advice. For
personalised advice please contact us.
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