Unitholder Rights in Unit Trusts | Sprintlaw Australia

If you run a small business in Australia (or you’re planning to start one), you may have heard about unitholders - especially if your accountant has suggested a unit trust for asset protection or to bring in investors without issuing company shares.

But unitholders aren’t the same as shareholders, and a unit trust doesn’t operate the same way as a company. If you assume the rules are identical, you can end up with confusion, disputes, or compliance issues down the track.

In this guide, we’ll explain what unitholders are, the rights and obligations that commonly arise (often depending on the trust deed), and the practical considerations for small businesses using (or considering) a unit trust structure.

What Are Unitholders?

Unitholders are the people or entities (like a company or another trust) that own units in a unit trust.

A unit trust is a type of trust where beneficial ownership is divided into “units” (similar in concept to how a company is divided into shares). Holding units usually gives the holder an entitlement to the trust’s income and/or capital, but the exact entitlements depend on the trust deed (and, in some cases, trust law).

How A Unit Trust Structure Works (In Plain English)

Most small business unit trusts have three key parts:

The trustee: the legal owner/controller of trust assets, responsible for running the trust and making decisions according to the trust deed and trust law.
The unitholders: the beneficial owners who hold units and may receive distributions (if and when made) according to their unit holdings and the trust deed.
The trust deed: the “rule book” that sets out how the trust operates - including distributions, decision-making, and what rights (if any) unitholders have to vote or access information.

One important point that catches many business owners out: the trust deed is central. Many unitholder rights and processes are not “automatic” - they exist only if the deed (or another binding agreement) provides for them.

It’s also why having the right documents in place matters. A properly drafted Unitholders Agreement can sit alongside the trust deed and set clearer expectations between owners, especially where people are contributing different amounts, working in the business, or planning an eventual exit.

Are Unitholders Always Individuals?

No. In Australian small business structures, unitholders can include:

individual founders (e.g. two co-owners each holding 50 units)
a company (sometimes used in broader structuring arrangements)
another trust (less common, but possible in group structures)
family members or related entities (for family business planning)

How Do Unitholders Differ From Shareholders?

It’s tempting to treat unitholders like shareholders - but there are some key differences that affect how you run your business, how you bring in investors, and how disputes are managed.

1. A Trust Isn’t A Separate Legal Entity

A company is a separate legal entity. A trust isn’t. The trustee enters into contracts, owns the assets (on trust), and owes duties to beneficiaries (which can include unitholders).

For small businesses, it’s common to have a corporate trustee (a company acting as trustee) to help manage liability risk, but it still doesn’t make the trust itself a company.

2. Rights Come Mostly From The Trust Deed (Not Company Law)

Company shareholders have rights under the Corporations Act and the company constitution. By contrast, unitholder rights are usually driven by:

the trust deed
the general law of trusts
any additional agreements between the parties

That’s why unit trust paperwork needs to be carefully set up from the start. In many unit trust structures, the “governance rules” are primarily contractual in nature, so it can help to understand the basics of what makes a contract legally binding.

3. Distributions Often Work Differently

Shareholders may receive dividends if declared by directors and paid out of profits (subject to rules). Unitholders may receive distributions of trust income or capital if the trustee resolves to distribute, subject to the trust deed.

In practice, your trust structure needs clear rules for:

how “income” is defined
when distributions are made
whether distributions are mandatory or discretionary
how reinvestment and retained working capital is handled

These commercial questions can become legal disputes fast if they’re not set out clearly.

Note: Trust distributions and tax outcomes can be complex and fact-specific. This article is general information only and isn’t tax advice. You should speak with a registered tax agent or accountant about your particular circumstances.

What Rights Do Unitholders Typically Have?

Unitholder rights can vary widely between different unit trusts. The most accurate starting point is always: check the trust deed (and any unitholders agreement).

That said, the rights below are commonly dealt with in small business unit trusts (either because the deed provides them or because the parties negotiate them).

Right To Receive Distributions (When Declared)

Often, unitholders are entitled to receive trust distributions in proportion to their units - but only if and when distributions are made, and only to the extent the deed provides.

A key commercial issue is whether distributions are:

automatic (e.g. all net income must be distributed each year), or
at the trustee’s discretion (e.g. trustee decides timing and amounts), or
subject to conditions (e.g. minimum cash reserve, bank covenants, or working capital thresholds)

Voting And Decision-Making Rights

Unlike company shares (where voting rights are heavily standardised), unit trust voting rights can be highly customised, and in some trusts unitholders may have limited or no voting rights unless the deed provides otherwise.

Your trust deed (and any side agreement) might set out things like:

what decisions require unitholder approval
voting thresholds (simple majority vs special majority vs unanimous consent)
whether voting is “one vote per unit” or “one vote per unitholder”

For small business owners, it’s common to reserve certain “big decisions” for unitholder approval, such as:

issuing new units (which would dilute existing holdings)
selling major assets
taking on large borrowings or granting security
changing the trustee
changing the trust deed (if permitted)

Information And Inspection Rights

Unitholders often want visibility over how the business is running. Depending on the deed and the circumstances, unitholders may have rights to access certain trust information or records, such as:

financial statements and trust accounts
tax information relevant to distributions
records of trustee resolutions (e.g. distribution resolutions)

This is a major area where clear documentation prevents conflict. If one unitholder is active in the day-to-day business and another is passive, it’s best to agree upfront on what reporting will be provided and how often.

Rights On Winding Up (Capital Returns)

If the trust is wound up, unitholders may have rights to a share of the trust’s remaining assets after liabilities are paid, depending on:

the trust deed
the class of units (if there are different classes)
any priority arrangements

This matters if you’re using a unit trust to hold valuable assets (like equipment, intellectual property, or business premises) and operating the trading business through a separate entity.

What Obligations Do Unitholders Have?

When people hear “rights”, they often forget the other half of the relationship: unitholders can also have obligations. These are often set out in the deed or in a separate agreement between the parties.

Paying For Units (And Future Funding Calls)

In some unit trusts, unitholders pay for units upfront and that’s the end of it. In others, you may have:

partly paid units
requirements to contribute additional capital when needed
loan arrangements between owners and the trust/trustee

Where funding is provided as a loan (instead of buying more units), it’s worth getting clarity early and documenting it properly, including repayment terms and what happens on exit.

Complying With Transfer Restrictions

Many unit trusts restrict how units can be transferred. This is a major protection for small businesses, because you don’t want to accidentally end up “in business” with someone you didn’t choose.

Typical restrictions include:

requiring trustee consent before a transfer
giving other unitholders a first right to buy units (pre-emptive rights)
setting a valuation method for the units
limiting transfers to related parties

If you expect future exits, succession planning, or investor entry, it’s worth putting proper transfer and valuation rules in writing from day one.

Confidentiality And Restraints (Where Agreed)

Unitholders who are involved in the business may be asked to agree to additional obligations, such as:

keeping business information confidential
not competing with the business while they’re an owner (and possibly for a period after exit)
not soliciting customers, suppliers, or staff

These obligations are usually not “automatic” under trust law - they typically come from an agreement between the parties.

Tax And Administrative Responsibilities

Unitholders may have tax obligations associated with distributions they receive. The trust will generally provide distribution statements or relevant information, and each unitholder will need to ensure their own reporting is correct.

At a business level, you also need to make sure the trust is set up and administered properly, including having the right registrations and records. If you’re still working out the basics of what identifiers the trust needs and what ongoing compliance can involve, trust requirements can be a helpful reference point.

Key Considerations For Small Businesses With Unitholders

If you’re a small business owner using a unit trust (or considering one), the legal risks tend to show up in predictable places: unclear decision-making, unclear distribution rules, and unclear exit pathways.

Here are the practical considerations we see most often.

1. Make Sure Your Trust Deed Matches Your Commercial Reality

Your trust deed should reflect how you actually want to run the business. If it doesn’t, you can end up with:

a trustee with powers that are too broad (creating mistrust)
unitholder voting rights that are too weak or unclear (increasing dispute or deadlock risk)
distribution rules that don’t fit your cashflow needs

For example, if your business is growing, you may want to retain cash to reinvest rather than distribute everything. If the deed effectively forces distributions, that can create cash pressure.

2. Decide Early: Are All Unitholders Passive, Or Are Some “Working Owners”?

This is one of the biggest sources of conflict in small businesses.

If one unitholder is doing the day-to-day work (sales, operations, staff management) and another unitholder is passive, you need to address questions like:

Will the working owner be paid wages or a management fee?
Are distributions the only “return” for owners, or is there compensation for labour?
What happens if the working owner wants to step back?

These issues are less about “legal theory” and more about preventing resentment. The right documents can bake in a fair framework before things get tense.

3. Think About How You’ll Bring In New Investors (Without Losing Control)

Unit trusts are often used to bring in investors. But if you’re issuing new units, ask:

Who can approve issuing new units?
Do existing unitholders get first option to invest (to avoid dilution)?
Will new investors get the same class of units, or a different class with different rights?

If you’re planning to scale, you’ll want a structure that allows you to raise capital without constantly renegotiating from scratch.

4. Have A Clear Exit Path (Before Anyone Wants To Exit)

A good exit framework protects everyone - not just the person leaving.

Common exit triggers include:

one unitholder wants to sell and the other doesn’t
retirement or succession planning in a family business
relationship breakdown between owners
death or incapacity

Practical things to plan for include:

valuation: how units will be priced (and who pays for valuation)
payment terms: lump sum vs instalments
drag-along/tag-along: if you sell the business, what happens to minority unitholders?
compulsory transfers: whether certain events force a sale of units

5. Don’t Forget The Trustee’s Role (And Potential Conflicts)

In many small business unit trusts, the trustee is controlled by the same people who are unitholders. That’s normal - but it does raise conflict questions.

For example:

If one unitholder controls the trustee, do the other unitholders have enough protection?
Are trustee decisions properly documented?
Are trustee powers and limits clearly drafted?

Good governance isn’t just for “big business”. In small businesses, governance is what helps keep relationships functional when money is on the line.

6. If You Operate Online Or Collect Customer Data, Think Beyond The Trust Structure

Your ownership structure doesn’t remove your operational legal obligations.

If your unit trust business sells to consumers, you still need to comply with the Australian Consumer Law. If you collect customer data (emails, payment details, delivery addresses), you also need to think about privacy compliance and website terms.

It’s worth treating your unit trust setup as one part of a bigger “legal foundation” for your business - not the only document you need.

Key Takeaways

Unitholders are the owners of units in a unit trust, and their rights and entitlements usually depend heavily on the trust deed (and any supporting agreements).
Unitholders are not the same as shareholders - trusts operate differently, and the trustee plays a central role in owning assets and making decisions.
Common areas covered in unit trust documents include distributions (if and when made), approval rights on key decisions (if provided), access to information (if provided), and how capital is dealt with on winding up.
Unitholder obligations can include paying for units, complying with transfer restrictions, and following agreed rules on confidentiality, restraints, and governance.
For small businesses, the biggest risk areas tend to be unclear distribution rules, unclear decision-making, and unclear exit/valuation pathways.
Getting the trust deed and supporting documents right early can help prevent disputes and make future growth (investment, expansion, succession) much smoother.

If you’d like help setting up a unit trust or documenting unitholder arrangements for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au.

Official Sources to Check

Rules and regulator guidance can change. Check the current official material most relevant to this issue before relying on the article:

Unitholder Rights and Duties in Australian Unit Trusts