When the structure question comes up
You have just signed the contract that doubles your revenue, or you are about to take a lease on premises, hire your first employee, or bring in a business partner. The accountant asks how the business is structured, and you realise you have been trading as a sole trader the whole time. That growth stage is exactly when the choice between a company and a trust stops being an abstract question and starts deciding who is personally exposed if something goes wrong, how much tax the business pays on its profit, and what the business will be worth when you eventually sell it.
The two structures, and what each actually is
A company is a separate legal entity. It can own assets, sign contracts and incur debts in its own name, and its debts are generally its own, not those of its directors or shareholders. Shareholders are only liable for any amount unpaid on their shares, and directors are only exposed through their duties under the Corporations Act 2001 (Cth) or through personal guarantees.
A trust is not a separate legal entity at all. It is a relationship in which a trustee holds assets and runs the business for the benefit of the beneficiaries. The trustee, not "the trust", owns the assets, signs the contracts and is liable for the debts. That is why the practical question is rarely "company or trust" in the abstract. A trust with an individual trustee gives you almost no protection, because that individual is personally liable for the trust's debts. The meaningful comparison is between a company trading in its own right and a trust whose trustee is itself a company. The corporate trustee gives the trust the same limited liability that any company enjoys, while the trust keeps the flexibility that companies lack. If you choose a trust, you are almost certainly choosing a corporate trustee, and that means you are running both structures at once.
Factors to weigh
Who carries the risk if the business fails
Asset protection is usually the first question, because it decides what happens to your house and savings if the business collapses. In a company structure, the company's debts are the company's problem. Creditors can generally pursue the company's assets, but not your personal assets, subject to the exceptions below.
In a trust structure, the trustee is liable for the trust's debts. With an individual trustee, that person's personal assets can be used to satisfy the debts. With a corporate trustee, the company is liable and the individuals behind it are not, in the same way that shareholders of a trading company are not liable for its debts. The corporate trustee also has a right to be indemnified out of the trust's assets for liabilities it properly incurs, which is what lets it trade without the owners funding every loss.
The protection is not absolute in either structure. The common exceptions to limited liability include:
- Personal guarantees: if a director or trustee signs a guarantee for a lease, loan or supplier account, that person is personally on the hook for the amount guaranteed.
- Insolvent trading: under s 588G of the Corporations Act 2001 (Cth), a director who lets the company trade while insolvent can be personally liable for debts incurred in that period, and the same duty applies to directors of a corporate trustee.
- Breach of directors' duties: directors of a company or corporate trustee owe duties of care, good faith and proper purpose, and can be personally liable for breaches.
- Trustee misconduct: a trustee who acts outside the powers in the trust deed, or who misapplies trust assets, can lose the protection of the indemnity and be personally liable to the trust.
Both structures can protect you, but only if the business actually runs through the entity. If the corporate trustee is never properly appointed, if contracts are signed in your own name, or if trust and personal money share one bank account, the structure will not protect anyone. The comparison comes down to this:
| Company | Trust with corporate trustee | |
|---|---|---|
| Who owns the assets | The company | The trustee, as trustee for the beneficiaries |
| Who is liable for debts | The company | The corporate trustee, with a right of indemnity from trust assets |
| Personal exposure of owners | Generally none, subject to exceptions | Generally none, subject to the same exceptions |
| Main risk | Insolvent trading and director duties | The same, plus trustee duties and the deed's limits |
Who pays tax on the profit each year
Tax is where the two structures genuinely diverge. A company pays tax on its profit at the company rate: 25 per cent if it is a base rate entity with aggregated turnover under $50 million and no more than 80 per cent of its assessable income being base rate entity passive income, and 30 per cent otherwise, per the ATO's company tax rates. Profit left in the company is taxed at that rate, and when the company later pays a dividend, the shareholders receive franking credits for the tax the company has already paid, which offsets their own tax.
A trust itself does not pay tax on its income. The net income of the trust is taxed in the hands of the beneficiaries who are presently entitled to it, at each beneficiary's own marginal rate, as the ATO explains for trust income. That is the flexibility people mean when they say a discretionary trust is tax-effective: the trustee can distribute income among family members so that it is taxed at the lowest available marginal rates, and can stream franked distributions and capital gains to particular beneficiaries. But the flexibility has a hard edge. If no beneficiary is presently entitled to the income, the trustee is taxed on it at the highest marginal rate that applies to individuals, currently 45 per cent plus the 2 per cent Medicare levy, which makes 47 per cent. Distributions must be resolved and documented before the end of the income year, and the deed must actually permit the distribution the trustee wants to make.
| Company | Trust with corporate trustee | |
|---|---|---|
| Tax on profit | 25% or 30% in the company | Beneficiaries' marginal rates on distributed income |
| Undistributed profit | Retained at 25% or 30% | Trustee taxed at up to 47% |
| Paying owners | Franked dividends | Distributions of income and capital |
What you pay in tax when you sell the business
When you sell a business asset, capital gains tax follows the structure. Under the ATO's CGT discount rules, individuals and trusts that have held an asset for at least 12 months can reduce a capital gain by 50 per cent. Companies cannot access the discount, so a company pays tax on the full gain.
The small business CGT concessions can change the picture for both structures. To qualify, you generally need to meet the maximum net asset value test: the net value of your CGT assets, including assets of connected entities and affiliates, must not exceed $6 million just before the CGT event. Alternatively, you can qualify as a small business entity with aggregated turnover under $2 million. The concessions can reduce, defer or disregard a capital gain on an active asset, and the tests must be assessed before the sale, not after.
The difference is easy to understate. If a business asset is sold for a $2 million gain, an individual or trust that has held the asset for more than 12 months reduces the taxable gain to $1 million. A company pays tax on the whole $2 million, unless a small business concession applies. That gap is one of the main reasons family businesses that expect to sell one day hold their operating assets through a trust rather than a company.
How you will raise money and grow
If the business needs external capital, the company structure is usually the better fit. Investors and institutional lenders are familiar with companies: equity is issued as shares, control is governed by the constitution and shareholder agreements, and the Corporations Act provides a well-understood framework. A company is also the vehicle for the incentives that matter to startups, including early stage innovation company tax incentives, the research and development tax incentive, and employee share schemes. For businesses with international ambitions, the company form is recognised everywhere, while trusts are largely an Australian and common law concept.
A unit trust can accommodate outside investors, with each investor holding units much like shares. But a unit trust that has more than 20 members must generally be registered as a managed investment scheme under s 601ED of the Corporations Act 2001 (Cth), and operating an unregistered scheme that should be registered carries penalties. That threshold alone pushes most businesses that expect to grow a large investor base towards the company structure.
What the structure costs to run and keep compliant
Both structures carry ongoing administration, and the trust adds a layer on top of the company. A trust needs a valid trust deed that actually permits the business it is running; a deed drafted for passive investment may not authorise active trading. The trustee must make and record distribution resolutions each year, minutes must be kept, and trust assets and money must be kept strictly separate from the trustee's own. The corporate trustee has its own ASIC registration, annual review and director obligations.
A company has its own compliance load: ASIC lodgements and fees, director duties, and, depending on size, financial reporting. On top of that, state taxes can differ between the structures, including payroll tax, which can turn on who employs the staff, and land tax, which can turn on who holds the property. The trust with a corporate trustee is the most administratively demanding option of the three, so the tax flexibility it offers needs to be real enough to justify the running costs.
How an Artificer Legal lawyer helps you make the call
This is a decision where the paperwork decides the outcome, and that is where an Artificer Legal practitioner earns their fee. Before you choose, a lawyer can stress-test the assumptions the choice rests on: whether the trust deed permits the business activity you have planned, whether a corporate trustee properly appointed will actually hold the assets, and what happens to the structure if a beneficiary is a minor, a director signs a guarantee, or the business trades through a downturn. Modelling the downside in advance, including insolvent trading exposure under s 588G of the Corporations Act 2001 (Cth) and the managed investment scheme threshold in s 601ED, is cheaper than discovering the gap after a creditor does.
Once the choice is made, the lawyer drafts what the structure needs: a trust deed or unit trust deed that authorises the trading activity, a company constitution, the corporate trustee's appointment and its minutes, and the resolutions that keep distributions valid from year to year. If you are moving an existing business into a new structure, the lawyer also maps the restructuring triggers first, because transferring assets into a trust or company can itself create CGT events, stamp duty and land tax consequences that need to be planned around.
What to remember when you choose
The detail people forget is that a trust protects you only if the corporate trustee is real. Choosing a trust is not the protective step. The protective step is making sure the trustee company is properly appointed, that it owns the assets, signs the contracts and holds its own bank account, and that the trust deed authorises everything the business does. That is administrative rather than strategic, so it is the part that gets skimped on, and it is the part that decides whether the structure works when it is tested.
To summarise what this article has covered: a company is a separate legal entity with limited liability, a 25 or 30 per cent tax rate on its profits, no CGT discount on sale, and the structure investors and lenders expect. A trust is not a separate legal entity, so it only protects you with a corporate trustee; in return it offers tax flexibility through distributions to beneficiaries' marginal rates, access to the 50 per cent CGT discount, and small business concessions, at the cost of heavier administration, top-rate tax on undistributed income, and the managed investment scheme threshold if a unit trust grows beyond 20 members. Neither choice is right in the abstract, so the practical step is to have your accountant model the numbers and a lawyer check the deed and the paperwork before you commit.