Summary
If you are starting a business or looking to take your business to the next level, you may feel bombarded with many options available for structuring a business. Unit trusts and companies are the most common structures, but to many, are abstract and intangible concepts. This insight intends to demystify these structures. This insight will examine in detail what a unit trust is, what a company is and compare the two. If you are wondering which is better for your business, look no further than this insight. Standard Law Co is here to help you choose.
Unit Trusts
A trust is an obligation enforceable in equity whereby one or more persons (trustee) holding proprietary rights in respect of certain assets undertake to account for the said trust property or to deal with it exclusively in the best interests of a defined class of beneficiaries. A unit trust is a type of trust where the beneficiaries, known as unitholders, subscribe for units in the trust in exchange for a payment of capital to the trustee. This relationship is comparable to shareholders subscribing for shares in a company.
Unitholders have a proprietary interest in the property of the trust. The practical effect of this is that if one of the unitholders becomes bankrupt, this asset can be sold to repay creditors.
There are different classes of units. Some units may only have rights to income of the trust, capital of the trust, or both. Unitholders have a fixed right to the class of unit they hold and receive income/capital proportionate to the units they hold, out of all units issued.
Like all trusts, a unit trust is not a separate legal entity. The trust does not pay tax, rather unitholders will pay tax on the income they receive from the trust. Income held in a trust must be distributed each year. A trust will ordinarily vest (conclude) within 80 years of being established, however some may need to vest sooner.
Company
A company is a separate legal entity. A company is made up of shareholders. A shareholder is a person who has put capital into a company and received a share. Similar to the trust discussed above, shares can be divided by classes. One type of share may entitle a shareholder to greater voting rights within the company whereas another may give a shareholder first preference to a dividend.
The shareholders do not own the assets of the company, and consequently are not liable for the company’s debts. Any debts owed by the company will be paid through its own resources. The day-to-day management of the company is performed by directors. The shareholders cannot dictate how a company should be managed, but they do have the right to elect directors at the general meeting of the company. Directors have duties to their shareholders, as provided for in the Corporations Act 2001 (Cth). An example of a duty is the duty to prevent insolvent trading.
A company does pay tax on its income. The full company tax rate is 30% and the lower company tax rate is 27.5%. The lower company tax rate applies to base rate entities who have an aggregated turnover of less than $50 million. Dividends issued by a company are treated as assessable income in the hands of taxpaying shareholders.
The differences between a Unit Trust and Company
| Company | Trust |
|---|---|
| A company is a separate legal entity; therefore, shareholders and directors are generally not liable for its debts. | A trust is not a separate legal entity, unitholders have a proprietary interest in the property of the trust and a trustee can be sued personally. |
| There is a registration fee payable to ASIC to set up a company, and ongoing registration fees for renewal as well as accountancy fees for preparation of tax returns. | The creation of a trust may incur stamp duty and there will be ongoing accountancy fees for preparation of tax returns. |
| The company is highly regulated by ASIC. There are obligations under the Corporations Act that a company and directors must abide by. Any changes to the company must be lodged to ASIC. | A trust is created through a private agreement and therefore does not require registration through ASIC. Changes to a trust deed are not governed by ASIC and can be made by a deed of amendment. |
| A company can be wound up voluntarily or by ASIC or court order. | A trust is wound up upon its vesting date or termination date. |
| A company can exist in perpetuity. | A trust can only exist for 80 years. |
| A company can retain income and is not required to distribute it. | A unit trust must distribute its income to unitholders. |
| The company tax rate is quite low, at around 30%. Shareholders can apply franked credits to dividends that the company has already paid tax on. | Unitholders pay tax on income received from the trust. Undistributed trust income is taxed at the highest marginal rate. |
Which structure is best for you?
So, which structure is better? In general, neither is better than the other. The answer to which structure is best will entirely depend on your circumstances. At Standard Law Co, we can present you with the pros and cons of each structure tailored to your circumstances. We will examine the nature of your business, the present stage of your business and your future goals for the business to assist you in answering this question. Standard Law Co also offers services in setting up trusts and companies. If you would like to take your business to the next level, please do not hesitate to get in touch with one of our lawyers.