Company vs Trust: What's the Difference for a Small Business?

Choosing a business structure is one of the most important decisions a small business owner makes. Beyond the sole trader starting point, the two most common structures for growing businesses are a company and a trust — and understanding the difference between them is essential before deciding.

This article explains the key differences in plain English. It's general information, not a recommendation — the right structure depends entirely on your circumstances. For tailored advice, business structuring services in Burleigh Heads can help.

The Basic Difference

Company

A company is a separate legal entity — it can own assets, enter contracts, and incur liabilities in its own name. The owners (shareholders) own shares in the company, and the company owns the business assets. Directors manage the company and owe legal duties to it.

Trust

A trust is not a separate legal entity in the same way. It's a relationship where a trustee (which can be an individual or a company) holds and manages assets for the benefit of beneficiaries. The trustee legally owns the assets, but must manage them according to the trust deed for the beneficiaries' benefit.

Ownership

In a company, ownership is through shares. Shareholders own a percentage of the company, and that ownership is easily transferable. This makes companies suitable for businesses with multiple owners or those planning to sell part of the business.

In a trust, the beneficiaries don't "own" the trust in the same way shareholders own a company. The trustee holds and controls the assets. In a discretionary trust, the trustee has discretion about how to distribute income among beneficiaries. This flexibility can be useful for tax planning within families, but it also means beneficiaries don't have a fixed entitlement.

Control

In a company, control is exercised by directors (who may also be shareholders). Directors make day-to-day decisions and are bound by corporate law duties.

In a trust, control is with the trustee. If the trustee is an individual, that person controls the trust. If the trustee is a company, the directors of that company control the trust. A common structure is a corporate trustee (a company you control) acting as trustee of a discretionary trust — this gives you control while providing a layer of limited liability.

Tax Considerations

Tax is often the key factor, but it's also the most complex. Key differences include:

• Company tax rate: a flat rate (currently 25 per cent for base rate entities) on all profits. Simple and predictable.
• Trust distributions: a discretionary trust can distribute income to beneficiaries, who are then taxed at their individual rates. This can be advantageous if beneficiaries have different marginal rates — for example, distributing to a spouse on a lower income.
• Retained profits: a company can retain profits at the company tax rate. A trust generally must distribute all income each year; undistributed income can be taxed at the top marginal rate.
• Capital gains: trusts may be eligible for the 50 per cent CGT discount if assets are held longer than 12 months and distributed to individual beneficiaries. Companies are not eligible for this discount.
• Accessing profits: extracting money from a company (as wages or dividends) has tax implications. Extracting money from a trust is through distributions, which also have tax implications.

Neither structure is universally more tax-effective. The right choice depends on your profit level, family situation, and long-term plans. For more on the sole trader to company question, see our article on when to change from a sole trader to a company.

Asset Protection Considerations

Asset protection is another key difference:

• Company: provides limited liability for shareholders. The company's debts are generally not the shareholders' personal debts. But directors can be personally liable in certain circumstances (unpaid tax, insolvent trading).
• Discretionary trust: can provide a degree of asset protection because beneficiaries don't have a fixed entitlement to assets. If a beneficiary is sued or goes bankrupt, assets in the trust may be protected — but this depends on the trust structure and how it's operated.

Asset protection is a complex area and should be discussed with both an accountant and a lawyer. The protection isn't automatic — it depends on the trust deed, how the trust is operated, and the specific circumstances of any claim.

Administration

Both structures have ongoing administrative obligations, but they differ:

• Company: annual ASIC review and fee, corporate tax return, director ID, maintaining company records.
• Trust: trust tax return, maintaining trust records, potential need for a corporate trustee (with its own ASIC obligations), trust deed review. Trusts can be more complex to administer, especially if the trustee is a company.

The combined structure — a discretionary trust with a corporate trustee — is common but involves running both a company and a trust, with the associated costs of each.

Situations Where Each Structure May Be Considered

A company may be suitable when:

• Profits are retained in the business for growth
• There are multiple unrelated owners or investors
• The business plans to sell shares or bring in external investors
• Limited liability is a priority

A trust may be suitable when:

• Income can be distributed flexibly among family members
• Asset protection for family assets is a priority
• The business is family-owned and long-term
• Capital gains tax treatment is important

The Importance of Professional Advice

Choosing between a company and a trust — or using both — is a decision with long-term legal, tax, and financial consequences. Getting it wrong can be expensive to fix, and restructuring between entities can trigger capital gains tax, stamp duty, and other costs.

The right approach is to get advice before choosing — not after. For Burleigh Heads business owners, accounting services in Burleigh Heads can help you understand the options and make an informed decision based on your specific circumstances.

Frequently Asked Questions

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