Trust or company: the question every founder asks
At some point every growing business owner hears the advice: you should be in a trust. Or: you should be a company. Usually from someone who's in one themselves. The honest answer is that it depends, and the reasons it depends are worth understanding.
A company is a separate legal person. It owns things, earns income, pays tax at the company rate and is owned by shareholders. A trust isn't a legal person. It's a relationship where a trustee holds assets for beneficiaries, and the income generally flows out to them to be taxed in their hands.
That difference drives everything: how profit is taxed, how flexible the distributions are, what happens to accumulated money and how each handles risk.
How a discretionary trust works
A discretionary trust, often called a family trust, gives the trustee discretion over which beneficiaries receive income each year. That flexibility is the main attraction. Income can be directed to the people in the family who are in the best position to receive it, within the ATO's current rules.
The trade-offs: a trust generally can't hold onto profits without the trustee paying tax at the top rate, so it isn't a great vehicle for accumulating money. It also needs a distribution resolution before 30 June every year, a trust deed that's kept up to date, and careful handling if beneficiaries are overseas or under eighteen.
Discretionary trusts are often used to run a business, hold investments, or sit above a company as its shareholder. The right use depends on the goal.
How a Pty Ltd company works
A proprietary limited company pays tax on its profits at the company rate and can keep the after-tax profit inside the business. That makes it well suited to a trading business that reinvests, or to a holding entity that accumulates.
Profit comes out as dividends, carrying franking credits for the tax already paid, or as wages to working directors. Loans to shareholders are a classic trap: Division 7A rules can treat them as unfranked dividends if they're not managed properly. That's one of the most common issues we fix in new clients' affairs.
Companies also bring director duties, ASIC obligations and a bit more admin. In exchange, you get a clear, well-understood structure that banks, customers and buyers are comfortable with.
Unit trusts and holding companies
A unit trust divides ownership into fixed units, like shares, so it suits unrelated parties going into business together or jointly holding property. Each unitholder's share of income is set by their units rather than a trustee's discretion.
A holding company sits above a trading company and owns its shares. Profits paid up as dividends can generally be held there, away from the operating risk. Many Brisbane groups we work with end up with a trading company, a holding company above it and a discretionary trust as the ultimate shareholder. That combination balances flexibility, accumulation and protection.
None of this is one-size-fits-all. The structuring and asset protection page covers how we design the group as a whole.
Setting up and running the entity properly
Setting up a trust or company is the easy part. Running it properly is where the value is created or lost. We handle both.
John and Maeghan from Snap On Tools: "Lauren & Greg have provided an end to end service which goes above and beyond what we were expecting." End to end is the goal: setup, operation and planning in one place.
- Entity setup, including trust deed, company constitution and registrations
- ABN, TFN, GST and PAYG registrations with the ATO
- Bank account structure and Xero setup for each entity
- Annual financial statements and tax returns for each entity
- Trust distribution resolutions before 30 June
- Dividend documentation, franking accounts and Division 7A management
- ASIC annual reviews and company secretarial support
Which structure is right for you
Ask three questions. Will the business keep profit or pay it out? A company suits keeping, a trust suits paying out flexibly. Who's involved? Family suits a discretionary trust, unrelated partners suit a company or unit trust. What's the risk profile? Higher-risk operations generally want their valuable assets held elsewhere.
The answers usually point to a combination rather than a single entity. We'll work through them with you in a strategy call and recommend a structure that fits now and leaves room for later. Clients in Brisbane can meet us at Victoria Point or Jimboomba; everyone else, by video.
Questions we get asked
Is a trust better than a company for tax?
Neither is better in all cases. A trust distributes income to beneficiaries who pay tax at their own rates, which can be efficient when there are several family members. A company pays a flat rate and can retain profits. Which comes out ahead depends on how much profit there is and whether it's being spent or kept.
What is a family trust?
It's the everyday name for a discretionary trust, where the trustee can choose which family beneficiaries receive income each year. It's widely used to run small businesses and hold investments in Australia. It needs a trust deed, a trustee, usually a corporate trustee, and a distribution resolution before the end of each financial year.
What is Division 7A?
Division 7A is the part of the tax law that deals with loans, payments and debt forgiveness from a private company to its shareholders or their associates. Without a complying loan agreement and repayments, such amounts can be treated as unfranked dividends. It's one of the most common problems we see in company structures.
Should my trust have a corporate trustee?
Often, yes. A corporate trustee is a company whose only job is to act as trustee. It separates the trust's liabilities from any individual, makes it easier to change who controls the trust, and avoids problems if an individual trustee dies or becomes unable to act. There's an extra entity to maintain, but it's usually worth it.
Can I convert my sole trader business to a company or trust?
Yes, and it's a common step as a business grows. The move involves transferring the business and its assets to the new entity, which can have capital gains, GST and stamp duty consequences. The ATO's current rules include rollovers that may reduce the cost. Planning the sequence before you act is essential.
