A company is a legal entity separate from its shareholders or officers. Consider this structure if you want limited liability but be aware of legal obligations and set up costs.
All companies are governed by the Australian Securities and Investments Commission (ASIC), which administers the Corporations Act 2001 (Commonwealth) and other legislation. Public companies must also comply with the rules of the Australian Stock Exchange.
Advantages of a Company
- liability for shareholders is limited
- easy to transfer ownership by selling shares to another party
- shareholders (often family members) can be employed by the company
- can trade anywhere in Australia
- taxation rates can be more favourable (currently as low as 27.5% for some companies)
Disadvantages of a Company
- can be expensive to establish, maintain and wind up
- reporting requirements can be complex
- your financial affairs are public
- if directors fail to meet their legal obligations, they may be held personally liable for certain company’s debts
- profits distributed to shareholders are taxable.
In a Family Trust (sometimes called a ‘Discretionary Trust’), the trustee has the power to determine which beneficiaries receive income or capital from the trust and how much each is to receive.
The discretionary power of the trustee is limited to a nominated class of beneficiaries that are outlined in the trust. Entitlement to assets is not predetermined and fixed, as is the case with a fixed trust. In a business situation where the beneficiaries are unrelated third-parties a fixed structure, such as a fixed unit trust, may be more appropriate.
Advantages of a Family Trust
- asset protection and tax purposes
- estate planning for the benefit of members of the “family group” in the event of an unexpected death
- property held in a trust is legally protected from creditors. A creditor cannot take trust property in bankruptcy or liquidation (unless the debt was originally a trust debt)
- minimise tax – individuals are entitled to a 50% Capital Gains Tax exemption under a trust
- flexible and easy distribution of trust income and capital
Disadvantages of a Family Trust
- complexity in establishing and maintaining a trust structure
- only profits (not losses) are distributed
- vesting date: in NSW, trusts generally end after no more than 80 years; extending this date requires foresight in drafting the trust, otherwise, you may face costly court action
If you need to review your Business Structure, please contact us at The Quinn Group on (02) 9223 9166 or submit an online enquiry.