Company or trust: how to think about your business structure

One of the first decisions a business owner makes is also one of the most consequential: the structure the business will run through. Sole trader, partnership, company, trust, or a combination each carry different consequences for your liability, your tax flexibility, and how easily you can bring in partners or sell later. There is no single right answer, only the structure that fits your situation.

The company.

A company is a separate legal entity under the Corporations Act 2001 (Cth). It can own assets, enter contracts and sue in its own name, and its shareholders generally are not personally liable for its debts beyond what they have agreed to pay for their shares. That limited liability is the main attraction. The trade off is ongoing compliance with the Australian Securities and Investments Commission, director duties, and a more formal way of getting profits into your hands.

The trust.

A trust is not a separate legal person. It is a relationship where a trustee, often a company, holds assets for the benefit of others. A discretionary or family trust gives the trustee discretion over how income is distributed among beneficiaries each year, which can be useful for flexibility and asset protection. A unit trust divides entitlements into fixed units, which suits unrelated parties going into business together.

The factors that decide it.

• Liability, and how much you want to separate business risk from your personal assets
• Flexibility in how income and profits are distributed
• Asset protection, both for the business and for the people behind it
• Succession, and how the business will pass on or be sold in future
• Cost and complexity, because more protection usually means more administration
• Raising capital, because bringing in investors is generally easier with a company

The practical takeaway.

Structure is best chosen with both a lawyer and your accountant in the room, because the legal and tax consequences are intertwined. It is also worth getting right early, since restructuring later can trigger cost and tax that a well chosen structure would have avoided. We regularly set up companies and trusts alongside our clients' accountants so the pieces fit together from day one.