One question we often get asked by our clients is what structure they should be operating out of, whether this is for business or investment purposes. This week we'll look at what the main structures are and the pros and cons of each.
What is it? A company is a popular structure for business operations and it stands as its own separate entity.
1. The company tax rate is what applies to this entity rather than an individual tax rate which may be higher. The current company tax rate is 27.5% for small businesses and this may reduce further in the years ahead, depending on government legislation.
2. A company offers a layer of protection for assets.
3. Lenders like dealing with companies as they generally find them simple and easy to understand.
4. The shares in a company can be bequeathed in a Will as part of your estate planning, giving the structure longevity through generations.
1.There is no capital gains tax discount in a company if assets are sold in this structure.
2. Companies can be difficult to take money out of without triggering excessive tax consequences.
What is it? Trusts are widely used for investment and business purposes. A trust is really an obligation imposed on a person or another entity to hold assets for the benefit of beneficiaries.
1. The nominated beneficiaries of a trust can be quite wide-reaching or also quite narrow, giving a lot of flexibility for trustees.
2. As with a company, a trust will allow a good level of asset protection
3. Estate planning can be factored into the longevity of a trust and multiple generations involved.
1. All income a trust makes must be paid out (distributed) to the beneficiaries each year.
2. These are less attractive structures for a lender
3. Money cannot be borrowed from a trust without it needing to be paid back at some stage.
4. Significant changes need to align with the governing document of the trust, known as the trust deed.
In some cases, clients will have the "best of both worlds" where they will use a company structure with a separate trust as the shareholder in the company. That way any income earned in the trust can be paid out to beneficiaries as a distribution. The bottom line though is that the structures you apply need to be the right ones for you, and if you're seeking any advice in this area, please don't hesitate to contact us.