Disadvantages Of Using A Trust For Your Business In Australia

Trusts are often spoken about like a “smart” business structure - especially when someone mentions asset protection, tax planning, or family wealth. And in the right context, a trust can be genuinely helpful.

But if you’re running (or about to launch) a startup or small-to-medium business in Australia, it’s important to understand the other side of the story too. A trust isn’t automatically the best structure for every business, and it can create very real legal, admin, and commercial friction.

In this guide, we’ll break down some of the most common disadvantages of using a trust to run a business - in plain English - so you can make a confident, well-informed decision before you commit to the structure (and the ongoing costs that come with it).

Keep in mind this article is general information only (and not tax or financial advice). Trusts can have tax implications that depend heavily on your circumstances, so it’s a good idea to speak with an accountant or tax adviser before deciding.

If you’re currently weighing up a trust vs a company vs another structure, keep reading - getting this right early can save you a lot of time, money and stress later.

What Does It Mean To Run a Business Through a Trust?

In Australia, a “trust” isn’t a business entity in the same way a company is. A trust is a legal relationship where:

• the trustee holds and manages assets (including a business) on trust,
• for the benefit of the beneficiaries,
• under the rules set out in a trust deed.

In practice, a business “run through a trust” often looks like:

• a discretionary (family) trust that operates the business, with distributions made to family members or entities; and/or
• a corporate trustee (a company) acting as trustee for the trust (which can improve governance and may reduce personal exposure compared to individual trustees, depending on the circumstances).

Trusts are commonly used by established SMEs, family businesses, and businesses with significant assets. But if you’re a fast-moving startup, raising capital, hiring staff, or aiming for scale, some of the disadvantages of using a trust for your business can become more obvious very quickly.

Disadvantage #1: More Complexity and Higher Ongoing Costs

One of the biggest disadvantages of using a trust for your business is simply the added complexity.

A trust can work well when it’s carefully planned and properly maintained. But compared to operating as a sole trader or standard company structure, it usually comes with more moving parts and more “maintenance”. That tends to mean higher accounting fees, more admin, and more places where mistakes can happen.

Why Trusts Add Complexity

• Trust deed rules: you have to operate strictly within the deed (including trustee powers, beneficiary classes, distribution mechanics, and decision-making rules).
• Ongoing record-keeping: trust resolutions and distribution records often need to be prepared properly and on time each year.
• Extra entities: many trusts use a corporate trustee company, which means you may be running both a trust and a company in parallel (with separate obligations and costs).

Even if your business is relatively simple, the structure can be “heavy” for where you are right now.

Where This Hurts Startups and SMEs Most

If you’re early-stage, you’re likely trying to keep overheads lean. Spending time and money on structure admin can be frustrating when what you really need is to build product, win customers, and find a repeatable growth path.

It’s also easy to assume you can “set it and forget it” - but trusts generally require ongoing care. A structure that’s neglected can create compliance issues and disputes later (especially when money starts flowing or family circumstances change).

Disadvantage #2: Raising Investment Is Often Harder

If you’re planning to raise capital (even modestly), this is a crucial disadvantage to understand.

Many investors - particularly sophisticated angel investors and venture capital funds - prefer investing into a company with a clear share structure. Trusts can make investment structures more complicated, less familiar, and less attractive.

Why Investors Often Prefer Companies

• Shares are straightforward: equity, voting rights, and ownership percentages are clearly defined.
• Governance is familiar: directors, shareholders, and company constitutions are standard, with clear rules and legal frameworks.
• Exit pathways are clearer: selling shares or issuing new shares is generally cleaner than restructuring a trust arrangement.

If you’re a startup thinking “we might raise later,” it’s worth thinking about whether a trust could slow you down when the time comes. Investors don’t just invest in ideas - they invest in structures that are investable.

In many cases, founders eventually restructure into a company to raise capital, which can add delay and extra cost at the worst possible time.

If you’re considering a company pathway from day one, tools like a Company Set Up can be part of creating a foundation that’s easier to scale, hire, and fundraise from.

Disadvantage #3: Trusts Can Be Risky If You Get the Paperwork Wrong

A trust structure is only as strong as the legal and administrative discipline behind it.

Unlike a company (where governance is generally supported by legislation and standard practices), a trust depends heavily on the trust deed and on correct trustee decision-making.

Common Trust Pitfalls

• Out-of-date trust deeds that don’t match how the business is actually operating
• Incorrect trustee resolutions (or resolutions created late)
• Distributions not documented properly (or made to people/entities not properly within the beneficiary class)
• Confusing who owns what (the trust vs the trustee vs individuals)

When these things go wrong, the consequences can be serious - including tax issues, disputes with beneficiaries, and major headaches during a sale, divorce, death in the family, or an audit.

It’s Harder To “Standardise” Trust Governance

Many early-stage businesses lean on clear, modern governance documents to keep decisions fast and clean - particularly if there are co-founders. With trusts, this can be harder to standardise, especially where family members are involved or where the trustee changes over time.

In contrast, company-based governance is generally easier to structure around predictable documents like a Company Constitution and founder agreements.

Disadvantage #4: Personal Liability and Asset Protection Aren’t Automatic

A common reason people consider trusts is asset protection. But an important disadvantage of using a trust for your business is that the “asset protection” benefit is often misunderstood or overstated.

A trust can help separate ownership of assets from individuals, but it doesn’t automatically prevent personal exposure. For example, you may still face personal risk if:

• you sign personal guarantees (common for leases and lending),
• you’re a director of a corporate trustee and you breach director duties (or other laws impose personal liability), or
• you’re personally involved in conduct that creates liability (such as misleading or negligent conduct).

Individual Trustee vs Corporate Trustee

When an individual is the trustee, they can be personally exposed to liabilities incurred in the trustee role (even if they may have rights of indemnity out of trust assets, subject to the trust deed and the law). Many businesses use a corporate trustee to reduce the risk of individuals being directly sued, but that adds cost and compliance (because you’re also running a company).

Even with a corporate trustee, the company will have its own obligations, and directors can still be personally exposed in some situations (for example, where personal guarantees are given, duties are breached, or specific laws apply).

Commercial Reality: Personal Guarantees Can Limit The “Protection”

In the real world, landlords, lenders and suppliers often require personal guarantees from small business owners, regardless of whether you operate via a trust or company.

That means you can still end up personally on the hook - so the structure alone may not deliver the level of protection you were expecting.

Asset protection is usually more effective when it’s part of a broader strategy that includes:

• carefully drafted contracts,
• insurance,
• an appropriate business structure for your risk profile, and
• clear separation of ownership and operations.

Disadvantage #5: Selling the Business (or Bringing Someone In) Can Be More Complicated

Another major disadvantage of using a trust for your business is that it can make business growth and exit steps more complex.

Many startups and SMEs eventually want to:

• sell the business (partially or fully),
• bring in a co-founder or equity partner,
• create employee equity incentives, or
• separate different parts of the business (for example, operations vs IP ownership).

Trust structures can handle some of these outcomes, but they often require more bespoke legal work than a standard company share sale or share issue.

Why A Trust Can Make Transactions Messier

• Ownership isn’t “shares”: you’re not just transferring shares; you may be transferring business assets, changing trustees, or assigning trust interests.
• Due diligence can be harder: buyers will want clarity on who owns what, how distributions work, and whether the trust has been properly administered.
• Confidentiality and decision-making can be unclear: especially if multiple family members are beneficiaries or have influence.

Even if a sale is still achievable, it can take longer and cost more in legal and accounting fees.

If you’re already thinking about an eventual exit (even years away), it’s worth understanding how your structure might impact a future Business Sale Agreement process.

Co-Founders and Control Issues

If you have co-founders, a trust structure can sometimes blur the lines around control and decision-making, especially if the trustee is controlled by one founder or family group.

Many SMEs and startups with multiple decision-makers benefit from clearer “rules of the road” documents like a Shareholders Agreement (for companies) that sets out voting, exits, and dispute processes.

Disadvantage #6: Compliance, Contracts and Day-To-Day Operations Still Need Attention

Some business owners set up a trust expecting it to “take care” of legal risk. But regardless of your structure, you still need strong legal foundations to operate safely day to day.

This matters because if your contracts, policies and compliance settings are weak, the trust won’t necessarily save you from disputes - it may just affect which entity is dealing with the fallout.

Customer and Consumer Law Obligations Still Apply

If you sell products or services to customers, you still need to comply with the Australian Consumer Law (ACL) - including advertising rules, refund rights, and warranties.

That’s true whether you operate as a sole trader, company, or trust, and it’s why small businesses often need well-drafted terms (and a clear customer process) early.

Privacy and Online Compliance Still Apply

If your business collects personal information - even something as basic as names, emails, phone numbers, delivery addresses, or IP addresses - you should think about privacy compliance.

For many SMEs, having a properly drafted Privacy Policy is a practical starting point, especially if you run a website, sell online, or build an email list.

Employment Obligations Still Apply

Hiring staff (even casuals) comes with Fair Work obligations, workplace policies, and clear written terms. A trust doesn’t remove the need for proper employment documentation or lawful processes.

If you’re planning to hire, it’s often worth putting a compliant Employment Contract in place early so everyone is on the same page.

Trusts Can Create Confusion Internally

In small teams, clarity matters. If your business is “the trust,” but invoices are issued by a trustee company, and branding is in a different name, this can confuse staff, suppliers and customers.

This is manageable - but it takes care, consistency, and good systems.

Key Takeaways

• One of the biggest disadvantages of using a trust for your business is the extra complexity, with more administration and typically higher accounting and legal costs.
• Trust structures can make fundraising and investment more difficult, especially for startups aiming to scale or attract outside capital.
• Trusts rely heavily on correct documentation and trustee decision-making - if the paperwork isn’t kept up to date, the risks can be significant.
• Asset protection isn’t automatic: personal guarantees, director duties, and commercial requirements can still expose you personally depending on the circumstances.
• Selling the business or bringing in partners can be more complicated under a trust than under a standard company share structure.
• No matter your structure, you still need strong contracts, privacy compliance, and employment documents to protect the business day to day.

If you’d like a consultation on whether a trust is the right structure for your startup or SME, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.