Why the structure question keeps coming back
Most businesses start in whatever structure was quickest at the time. A sole trader ABN, a Pty Ltd set up online, or a family trust an accountant suggested years ago. That is fine for a start. It is rarely fine forever.
Structure comes back onto the table at predictable moments: profits grow beyond what the owner needs to live on, a partner or investor arrives, assets build up, a second business starts, or a sale appears on the horizon. Each of those changes what you want the structure to do.
The good news is that the choice is not binary. The question is less trust or company and more which job each one is best at, and whether your business now needs both.
How a company works
A company is a separate legal entity. It owns its assets, signs its contracts and is responsible for its own debts. The owners are shareholders, the people who run it are directors, and often in a small business those are the same people wearing two hats.
A company pays tax on its profits at the company rate under the ATO's current rules. Profit that is not paid out can stay in the company after tax, which makes it a natural home for a business that wants to reinvest. When profit is paid to shareholders as dividends, the tax the company has already paid can generally be passed on as franking credits.
Companies are familiar to banks, investors and buyers. Shares can be issued to new partners and sold on exit. The trade-off is that companies are less flexible about who receives the profit, generally cannot access the general capital gains tax discount on asset sales, and have rules around money moving between the company and its shareholders.
How a discretionary trust works
A trust is not a separate legal entity in the same way. A trustee, often a company set up for the purpose, holds the business or its assets for the benefit of the beneficiaries, according to the rules in the trust deed.
In a discretionary trust, the trustee decides each year how the income is shared among the beneficiaries, typically members of a family group. The trust itself generally does not pay tax on income that is distributed. The beneficiaries do, at their own rates. Income that is not distributed by year end is generally taxed to the trustee at the highest rate, so trusts are designed to distribute, not to retain.
That flexibility is the main attraction. A trust can also provide a layer of asset protection, because beneficiaries do not own the assets, and eligible beneficiaries can generally access the capital gains tax discount when trust assets are sold. The trade-offs are that trusts cannot easily take on outside investors, losses stay inside the trust, and the deed and the annual resolutions need to be done properly.
Comparing trusts and companies on what matters
Here is the comparison on the things that actually change as a business grows. No single line decides it. The weight you give each one depends on where the business is heading.
A business planning to reinvest heavily and bring in investors leans company. A family business with fluctuating income and growing assets often leans trust. Many end up with both, which is the next section.
- Control: a company is run by directors for shareholders; a trust is run by the trustee under the deed
- Retaining profit: a company can keep after-tax profit inside; a trust is built to distribute each year
- Sharing profit: a company pays dividends in proportion to shares; a discretionary trust can vary who receives what
- Asset protection: both separate business risk from personal assets when run properly; trusts add a further layer for held assets
- Bringing in investors: companies issue shares; trusts are awkward for outside investors
- Selling: company shares or the business can be sold; the capital gains tax outcome differs between the two
- Losses: stay in the entity in both cases, subject to the ATO's tests
- Admin: both need proper records; trusts add annual distribution resolutions and deed management
Why the answer is often both
Growing businesses frequently end up with a company doing the trading and a trust owning the shares. The company deals with customers, staff and risk. The trust holds the ownership and receives dividends, which it can then distribute with discretion.
Add a holding company between the two and you can retain profit at the group level, hold other investments and keep the trading entity clean for an eventual sale. Add a separate entity to own valuable assets, such as property, equipment or intellectual property, and those assets sit away from trading risk.
This is the multi-entity group that many of our clients grow into. It is not complicated for its own sake. Each entity has a job. If an entity has no job, it should not exist.
Questions to answer before you choose
Before settling on a structure, write down honest answers to these. They decide the outcome far more than any general comparison can.
Changing structure later is possible but has a cost. Capital gains tax, transfer duty and the practical work of moving contracts and accounts all come into play, although rollovers and concessions can apply in some situations under the ATO's current rules. Getting it right at the first real growth point is cheaper than fixing it twice.
This guide is general information, not advice. Your circumstances, your family situation and your plans for the business determine what fits, and that is a conversation to have with an adviser who knows all three.
- Will the business reinvest profit, or pay it out to the owners?
- Are there family members with different income levels who might share in profit?
- Will you bring in a partner or outside investor in the next few years?
- What assets will the business own, and how much risk does it carry?
- Is a sale likely, and would a buyer want the shares or the business?
- Are you building one business or a group of them?
Questions we get asked
Is a trust better than a company for tax?
Neither is better in every case. A trust distributes income to beneficiaries who pay tax at their own rates, which suits a family group with different income levels and gives access to the capital gains tax discount for eligible beneficiaries. A company pays a flat rate and can retain profit after tax, which suits reinvestment. The right answer depends on what you plan to do with the profit.
Can a trust own a company?
Yes, and it is a common arrangement. The company trades and carries the business risk, and the trust holds the shares and receives dividends, which it can distribute among beneficiaries with discretion. A holding company is sometimes placed between the trust and the trading company to retain profit at group level. Each layer should have a clear purpose.
What is a corporate trustee and do I need one?
A corporate trustee is a company set up to act as trustee of a trust instead of an individual. It is widely used because it separates the trustee role from a person's own assets, makes it easier to change who controls the trust over time, and avoids complications if an individual trustee dies or becomes unable to act. Most advisers recommend one for business trusts.
Can I change from a company to a trust, or the other way, later?
Generally, yes, but it is a restructure rather than a paperwork change. Moving a business between entities can trigger capital gains tax and transfer duty, and contracts, bank accounts, licences and staff all need to move too. Rollover relief and small business concessions can apply in some situations under the ATO's current rules, so it is worth planning rather than rushing.
Which structure is better for selling a business?
It depends on what a buyer wants and how the gain is taxed. Buyers often prefer to buy the business assets from a clean entity, but some prefer shares. A trust can generally access the capital gains tax discount for eligible beneficiaries, while a company generally cannot, although small business concessions may apply in either case. Plan the structure with the exit in mind.
Do I need a trust or company if I am a sole trader?
Not necessarily. A sole trader structure is simple and can suit a small, low-risk business. The case for a company or trust grows as profit increases, as the business takes on staff, contracts or debt, and as personal assets build up. If any of those are happening, it is worth reviewing the structure before the next financial year rather than after a problem.
