Deciding on the structure of your new business is one of the most important decisions you will need to make. Careful consideration of your circumstances and goals will need to be made to determine the optimal structure for your business. This blog will cover the basics of companies and trusts as well as their basic pros and cons, however, it is not exhaustive, and it is recommended to contact an accounting or legal professional to ensure the best outcome is reached.
A company differs from the other business structures in that a company is a separate legal entity. Companies are governed by the Corporations Act and ASIC. Companies also have different tax rates to the other entities and provide a degree of asset protection.
Separate legal entity status. A company bears the responsibility of accounting for liabilities, provided no director duties are broken. This provides a degree of asset protection.
Corporate tax rate. Companies in Australia are taxed at either 27.5% (for Small Business Entities), or 30% (all other companies). This standard rate can be beneficial where profits are high, or the company’s related individuals have high external income.
Structure can become complex. There are 4 main roles in a company: Director, Secretary, Public Officer and Shareholders. Each of these have their own rights and responsibilities, and while in small companies all these roles can be the one person, understanding the responsibilities you bear to the company can become complex.
The corporate veil can be breached. If a director fails to abide by their director’s duties, then the veil of asset protection can be lifted. For example, a company must not trade insolvently, however, if it does a director can become personally liable for company liabilities from the point of insolvency.
The final main business structure in Australia are trusts. Trusts are an inherited concept from English law. Trusts are made up of several roles including the trustee, appointor, settlor and beneficiaries. There are also multiple forms of trusts, such as discretionary trusts, unit trusts, fixed trusts, etc. Trusts are governed by the terms used within the Trust Deed.
Provide a great deal of flexibility and are useful for tax planning (i.e. allowing for income splitting etc)
Very complicated. It is recommended to seek legal or professional advice before creating a trust structure due to the legal and taxation complexities inherently present in a trust.
Compliance costs can be expensive due to the complexity of tax laws concerning trusts.
The trust structure may not be recognised in some international jurisdictions.
This information is not to be relied upon without speaking to your accountant, tax agent or financial adviser depending on the advice