By: Max Newnham
Is there any advantage of a company over a family trust owning a business? Photo: Supplied
There are many ways businesses can be owned and operated. The simplest is a sole trader, the next is a partnership of individuals, and then there are the more complex and costly options of a company, a family discretionary trust, or a unit trust. The most complicated of all is a business operated through a combination of both companies and trusts.
Q. Is there any advantage of a company over a family trust owning a business? Some people recommend a company with a trust as the shareholder, while others recommend a trust with a company as a trustee, don’t both of these options achieve the same thing?
A. The recommendations mentioned in your question relate to two different options. The first is how a business should be owned and the second is who, or what, you choose to act as trustee if you decide to operate through a discretionary family trust.
When a family trust is formed it requires a settlor, a trustee or trustees, and beneficiaries. The settlor starts the trust with a settled sum. The trustee or trustees of a trust are responsible for the day-to-day running of the trust, and can either be individuals or a company.
Where a trust operates a business that has a high risk of being sued or suffering losses, it makes sense to have a company act as the trustee. This is because when individuals act as trustee for a family trust that is sued or suffers a major loss, and there are insufficient assets to pay out what is owing, the personal assets of the individual trustees can be put at risk.
Having a company act as trustee for a family discretionary trust costs about $900, and in addition there are extra accounting and company fees payable each year. Where the owners of the business want to protect their personal assets, these extra costs are a relatively cheap form of insurance for them.
When it comes to a business, which will only be owned by the members of one family, the best tax result is achieved by using a family trust as part of the ownership structure.
This can be done by either the family trust owning and operating the business, or it can be done by the business being operated through a company where all of its shares are owned by the family trust.
Having the business operated through a company that is owned by a trust assists a business to maximise after-tax profits that will be used to grow the business. This unfortunately comes at the cost of the loss of some of the small business entity CGT tax concessions.
Where owners of business want to withdraw the maximum amount as income, and also want access to all of the small business entity CGT concessions, a family trust is often the best option. Before deciding on what entity to use you should seek professional advice.
Source: Sydney Morning Herald
