Deciding on a business structure can be very confusing for business owners because there are a wide variety of business structures available, and many different benefits and disadvantages to be considered. The way to choose your business structure is to determine what the intentions of your business structure are, for both the short and the long term, and then to discuss the alternatives with a professional advisor. Professional advice should always be sought, to ensure you are making the best choice for your circumstances.
One popular, but confusing, type of business structure in Australia is a trust. A trust differs from the other forms of business structure in that the trust is not a legal entity. A trust refers to the relationship between a trustee and a beneficiary – where the trustee operates the business on behalf of the beneficiaries. Two important advantages of a trust are its ability to minimise tax and its ability to offer a certain level of asset protection.
For example, ownership of the business by a corporate trustee limits liability in relation to the business, protecting the assets belonging to the trust if the business or any individual in the business, encounters financial difficulties.
In relation to tax, by using a trust as your business structure, businesses can minimise their tax by nominating which beneficiaries will receive proceeds at the end of each financial year, directing the proceeds towards the members with the lowest incomes, who will pay the least amount of tax.
In situations where all the beneficiaries of a trust have significant taxable income in the current financial year, it may be possible to include a corporate beneficiary. In this case, the corporate beneficiary can receive the proceeds, and these will be taxed at the company tax rate of 30%, rather than the marginal tax rate that the other beneficiaries might be charged at (which means a potential saving of 15% on your tax bills).