An appropriate business structure can set your business up for long-term success. Out of four business structures in Australia, you must choose one that suits your business requirements the best. So, you must consider your decision before settling on a business structure.
Every business has advantages and disadvantages. Based on these, you can differentiate between any two business structures. This article discusses the pros and cons of a company and trust (the two most popular business structures).
First of all, it is a separate legal entity. The company’s owner is the shareholder, whereas the director operates it. A company, just like a person, is subjected to debt. It can also sue someone and can be sued by someone.
Advantages
- Because of being a distinct legal entity from you, there is limited legal liability. Simply put, the debts a company is subjected to do not create personal liabilities for any shareholder.
- Unless it is dissolved, the company continues to run indefinitely. So, if you want a business structure that can ensure long-term wealth generation, the company would be perfect.
- Companies usually pay a considerably lower tax on profits than individuals have to.
- Under this business structure, you can sell shares or transfer them rather than selling the entire business.
- It attracts customers, investors and suppliers more than other business structures. Expanding the business is also easier with this structure.
Disadvantages
- The cost of establishing a company is a major disadvantage. This business structure has the most complex management than the rest of the business structures. As a result, the set-up costs and administration costs are much higher.
- Since other people are involved, like the directors and shareholders, one gets less personal control over the business. All the shareholders have to agree on any business structure.
- The taxes can be confusing as the ATO has set specific regulations. However, hiring a good tax accountant can easily tackle this issue. You can reach out to Clear Tax Accountants to know more about this.
- The ongoing compliance and the paperwork can be too much.
Now, let’s move on to trust. Trust is a legal arrangement in which a trustee holds assets for the beneficiaries’ benefit. It is not a distinct legal entity. A formal trust deed is necessary for setting up a trust. If a business is operated under a trust, the whole responsibility related to operation falls on the shoulders of the trustee.
Advantages
- Income from the trust can be distributed with the lowest possible marginal tax rates. The beneficiaries have to pay taxes only on the income they receive, and that too at their own marginal rate. You can take the help of tax accountants to learn more.
- It offers privacy in operating the business.
- In a particular type of trust, Discretionary trust, the trustee distributes income at his discretion.
- By appointing a corporate trust, you can benefit from limited liabilities.
Disadvantages
- A trust can be too complex, like a company, and extra cost for establishment and administration is required.
- The trust deed restricts the power of the trustees to take decisions.
- The losses are not distributed in trust, so any profit earned will be subjected to increased tax rates.
Disclaimer: The information on this website is for general purposes only and should not be relied upon for making legal or other decisions. The advice provided in this article is general in nature and is not subject to the personal financial situation and needs of any individual. Clear Tax tries to keep the information accurate and up-to-date; however, you should bear in mind with changing circumstances, the accuracy and reliability of the information will not necessarily remain the same. The information is by no means a substitute for financial advice.
