Choosing A Business Structure is one of the most important things to think about before you go ahead with any of your plans. This is because your business structure needs to work well with your long-term goals and strategies. For example, you’d need to ask yourself:
- What is my long term plan?
- How much can I afford to do?
- How do I plan to raise capital?
- Who will be joining me?
- What kind of business am I running?
- How complex are my business activities?
- What is the level of risk involved?
- What are my tax obligations?
When you think of a business structure, you might be thinking of a company or a partnership (you can read about this here). But when might you need a trust?
A trust involves managing a business’ assets and distributing its income for someone else’s benefit. It can get pretty tricky and expensive to set up, however it has a number of advantages. If you’re considering a trust business structure, this article covers everything you need to know.
What Is A Trust?
Generally speaking, a trust is a way of holding property for someone else. This means the trustee (the person managing the property) will need to deal with it in a way that benefits the beneficiary (the person receiving).
There are usually three main parties involved in a trust:
- Trustee – this is the person or legal entity (e.g. a private company) that is responsible for managing the trust according to the terms set out in the deed
- Beneficiary – this is the person receiving the benefit of the trust e.g. income
- Settlor – this is an unrelated third party who signs the trust deed and gives the initial settlement sum
So, in the context of business structures, a trust allows the trustee to manage the business for the beneficiary’s benefit. This means the trustee has legal ownership and control of the business’ property and other assets, which will eventually end up with the beneficiary (in some cases, there may be more than one). They’ll also have an obligation to act in the best interests of the beneficiary.
You may even consider a trust even if you’re just thinking about how to distribute shares in your business – we’ve written more about this here.
What Types Of Trusts Are There?
There are two main types of trusts you can choose from:
- Discretionary trusts
- Unit trusts
A discretionary trust is exactly what it sounds like. The appointed trustee will have discretion over who receives distributions from the trust. However, what they can do is also limited by the trust deed itself (this is something you can discuss with your lawyer when setting up a business trust structure).
Discretionary trusts are quite common in family businesses. But what if this isn’t the type of trust you’re after?
Unlike discretionary trusts, unit trusts will distribute to beneficiaries according to how many units each person holds. Each unit represents a portion of the income or property that the beneficiaries are entitled to.
An easy way to understand this is to think of these distributions as shares in a company.
Let’s say you’ve started a makeup company called Dazzle & Co Pty Ltd. You want to be able to distribute shares to different people, and your parents want to be beneficiaries. This is where a unit trust might be suitable.
You’ve lived with your mother growing up, so you want to give her more shares than your father. Your mother is entitled to 75 units, while your father is entitled to 25.
Therefore, these units represent the portion of shares they can receive.
Like any other business structure, a trust comes with its advantages and disadvantages.
Advantages Of A Trust
- Assets are well protected. Any legal action against the beneficiary will not compromise the assets since the trustee technically owns the property.
- Less formality – you don’t really need an explicit intention to create a trust, just a relationship that indicates one.
- Tax planning purposes – each beneficiary needs to pay income tax on what they receive, so when the trustee decides how much to distribute, it makes it easier for tax planning purposes
- Issues with estate – having a trust can avoid difficult situations such as where bankruptcy can compromise the survival of an estate
- More investment – there is no limit to how many investors can contribute to the trust. However, if the public is investing, this will be subject to the Corporations Act 2001
- More privacy – there is no obligation to disclose financial information to the public, so there is more privacy afforded here.
Disadvantages Of A Trust
- Setting up a trust can be complex. There are a number of steps to go through before a valid trust business structure arises (we’ll go through this shortly).
- You need to satisfy the three certainties rule (intention, subject matter and objects)
- It can be difficult to make changes to an established trust later down the track
- The trustee’s power is limited to the terms in the trust deed (their actions are also regulated by the Trustee Act 1925
- If the trustee is not a company, it will not be protected by limited liability (in other words, the trustee will be personally liable for the trust’s debts)
- Since you cannot distribute losses under a trust, any profits will attract increased tax rates
How Can I Set Up A Trust For My Business?
Now that we’ve covered how a trust business structure works, let’s go through how you’d actually set up a trust. The process generally looks something like this:
- Select a trustee – this can be either a person or a private company. If it is a company, the trustee will be protected by limited liability (you can register the company with ASIC here).
- Have a lawyer draft a professional deed of trust
- Have the trust settled by a settlor (unrelated third party)
- Pay relevant stamp duty (if applicable)
- Apply for an Australian Business Number (ABN) and Tax File Number (TFN)
- Open bank account – you should deposit the settlement sum first before anything else
Once you’ve established a trust, it’s important to remember to complete your yearly administrative tasks. For example, you need to administer the relevant distributions to the beneficiaries every financial year.
You’d also need to do the following:
- Register for GST if your annual GST turnover exceeds $75,000
- Determine whether the terms of your trust deed require taxes to be paid on your distributions
- Pay super to employees (this might also include the trustee)
If you’re set on establishing a trust for your business, ASIC has provided more detail about your obligations here.
What Is In A Trust Deed?
A trust deed should generally include the following:
- The beneficiaries
- The trustee/s
- The entitlements of the beneficiaries (and the amount)
- Method of distribution/payment
- Object of the trust
- Signature of trustee
- Exit clause (for cancelling a trust)
However, it’s important to note that a trust deed needs to be drafted by a lawyer as there are certain requirements for forming and executing a valid business trust depending on your state.
If you’re not sure about whether a trust is the right structure for you, you can also consider:
- Sole trader
Each structure has its own advantages and disadvantages, so after carefully considering your personal circumstances and unique business goals, it’s a good idea to look into each of these options.
Otherwise, if you’re set on pursuing a trust business structure, it’d be best to speak to a lawyer about setting one up. This way, you can ensure you’ve complied with the relevant laws around setting up a trust.
Sprintlaw has a team of lawyers who can help. You can reach out to us at firstname.lastname@example.org or contact us on 1800 730 617 for a free, no-obligation chat.
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