When setting up a business in Australia, one of the most important decisions entrepreneurs must make is choosing the right business structure. Among the most common options are trusts and companies, each offering distinct advantages and disadvantages. This article explores these two business structures, comparing their key features to help you decide which one best suits your business needs.

What is a Trust?

A trust is a legal arrangement where one party (the trustee) holds property or income for the benefit of others (the beneficiaries). In a business context, a discretionary trust (also known as a family trust) is the most commonly used structure, where the trustee distributes the income among beneficiaries, often within a family or group of related individuals.

What is a Company?

A company is a separate legal entity created under the Corporations Act 2001. It is owned by shareholders and managed by directors. The most common type of company for small businesses in Australia is a Proprietary Limited (Pty Ltd) company, which limits the liability of its owners (shareholders).

Key Differences Between Trusts and Companies

1. Ownership and Control

• Trust: The trustee manages the trust’s assets and business operations, while the beneficiaries are entitled to the trust’s income and capital. The trustee can be an individual or a corporate entity. The beneficiaries don’t have direct control over the management of the business, but they may influence decisions through the trustee.
• Company: Ownership is divided among shareholders, who may appoint directors to run the company. Shareholders have voting rights, and directors are responsible for managing the day-to-day operations. The company is an independent legal entity, meaning its actions and obligations are separate from those of its shareholders.

2. Liability

• Trust: In a business trust, the trustee is usually personally liable for the debts and obligations of the trust, unless a corporate trustee is appointed. However, a discretionary trust structure often provides a level of protection for individual beneficiaries, as their personal assets are generally not at risk (unless they are also trustees).
• Company: One of the most significant advantages of operating through a company is limited liability. Shareholders’ liability is generally limited to the amount they have invested in the company. This provides strong protection for personal assets in case of business failure or legal disputes.

3. Taxation

• Trust: Trusts generally do not pay tax at the entity level. Instead, the income is distributed to beneficiaries, who then report the income on their personal tax returns. Trusts can provide flexibility in distributing income to beneficiaries in a tax-efficient way, as income can be split based on individual tax rates. This is particularly beneficial for families or groups with varying income levels.
• Company: A company is taxed at the corporate tax rate, which can be 25% for small businesses (under certain conditions). When profits are distributed to shareholders as dividends, they may be subject to further taxation. However, there is no flexibility in how income is distributed within a company.

4. Asset Protection

• Trust: A trust can offer significant asset protection. Since the trust itself is a separate legal entity, the assets held in trust are generally protected from creditors of the trustee or beneficiaries. However, this protection depends on the structure of the trust, particularly whether the trustee is an individual or a company. A trust structure is often used to safeguard family assets from potential business risks.
• Company: A company also provides a level of asset protection, as the business is a separate legal entity. However, this protection is limited to the extent of the shareholder’s investment in the company. Directors may still be held personally liable for breaches of director duties or if they have been negligent in their management of the company.

5. Management and Flexibility

• Trust: Trusts are often preferred for family businesses, as they offer flexibility in income distribution and management. The trustee has discretion over how income and assets are allocated to beneficiaries. This can be beneficial for tax planning, especially for families with members in different tax brackets.
• Company: Companies provide a more structured form of management, with clearly defined roles for directors and shareholders. While this can lead to more formal decision-making processes, it also provides a clearer governance structure. However, companies are less flexible in terms of distributing income, as profits are taxed at the corporate level and shareholders receive dividends based on ownership percentage.

6. Compliance and Administration

• Trust: Trusts generally require less formal administration than companies. There is no requirement for annual meetings or statutory reports like a company. However, a trust deed must be carefully drafted, and trustees must ensure they comply with all legal obligations regarding distributions and tax reporting.
• Company: Companies are subject to much more stringent regulatory requirements. They must adhere to Australian Securities and Investments Commission (ASIC) rules, file annual financial statements, hold annual general meetings (AGMs), and comply with corporate governance standards. While this adds to the administrative burden, it can also increase credibility with investors, lenders, and other stakeholders.

7. Raising Capital

• Trust: Trusts can find it more difficult to raise capital compared to companies. Since trusts cannot issue shares, they typically rely on personal assets or loans for funding. This can limit growth potential, particularly for businesses that require significant capital investment.
• Company: Companies have the advantage when it comes to raising capital. They can issue shares to raise funds from investors or venture capital. This can provide a company with the financial resources it needs to expand and grow. For small businesses, this is often an attractive option if they plan to scale quickly.

Common Features at a Glance

Feature	Trust	Company
Ownership & Control	Control by trustee, income distributed to beneficiaries	Ownership by shareholders, managed by directors
Liability	Trustee is personally liable unless corporate trustee used	Limited liability for shareholders
Taxation	Income taxed at the beneficiary level	Company taxed at corporate rate, then dividends taxed
Asset Protection	Strong protection for beneficiaries	Limited asset protection for shareholders
Management	Flexible, discretion for trustee	Structured, formal management and decision-making
Compliance	Less formal administration required	More stringent reporting and compliance obligations
Raising Capital	Limited ability to raise capital	Can issue shares to raise funds

Which is Right for You?

The choice between a trust and a company depends largely on your business’s goals, ownership structure, and tax planning needs.

• Trust: Ideal for family businesses or where flexibility in income distribution is desired. It is particularly useful for asset protection and tax efficiency, especially if the beneficiaries are in different tax brackets.
• Company: Best suited for businesses that need to raise capital, want limited liability protection, and are prepared to handle more complex regulatory requirements. A company structure also works well for businesses with multiple owners or investors.

Before making a decision, consult with a legal or financial advisor to assess your specific needs and circumstances. Each structure has its own set of advantages and challenges, and professional guidance will help ensure you choose the right one for your business.

Disclaimer: The information provided in this article is intended for general informational purposes only and should not be relied upon as legal, financial or any other type of professional advice. The content presented here is not tailored to individual circumstances, and therefore, readers should not act upon this information without seeking appropriate professional guidance specific to their unique situation. The author and publisher of this article disclaim any liability or responsibility for any loss or damage that may arise from reliance on information contained in this article.