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Protecting Your Plumbing Business Assets: Trust vs Company

Protecting Your Plumbing Business Assets: Trust vs Company is a fundamental decision that every successful plumber in the ACT must face when their business starts growing beyond the initial startup phase. The choice between these two separate legal entities can significantly impact your asset protection, tax obligations, and long-term business goals.

Understanding the Basics of Business Structures

Before choosing between a trust or company structure, it’s crucial to understand what each business structure represents. A company is a separate legal entity that can own assets, enter contracts, and be held liable for debts independently from its directors and shareholders. In contrast, a trust is a legal arrangement where a trustee holds assets for the benefit of beneficiaries, providing a different type of asset protection and tax effective way to distribute income among family members.

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The Key Differences Between Trust and Company Structures

The main distinction lies in how each structure handles ownership and control. Company structures provide shareholders with clear ownership rights through shares, while trust structures give trustees the power to make decisions about income distribution and asset management. This fundamental difference affects everything from your ability to raise capital to how you pay tax on business profits.

Asset Protection: Your Business’s Safety Net

Asset protection is often the primary concern for plumbers operating in high-risk environments. Both business structures offer different levels of protection, but understanding their limitations is essential for making an informed decision.

Limited Liability Protection in Company Structures

A company business structure provides limited liability protection, meaning that shareholders are generally not personally liable for company debts beyond their investment. This separate legal entity status protects your personal assets from business liabilities. However, directors may still be personally liable for certain statutory obligations, including unpaid PAYG tax, superannuation contributions, and GST liabilities.

Trust Asset Protection Benefits

Trust assets are held by the trustee, not the beneficiaries, which can provide asset protection from the personal creditors of individual beneficiaries. When you establish a corporate trustee (a company acting as trustee), you combine the asset protection benefits of both structures. This arrangement can be particularly effective for family business operations where multiple family members are involved.

Tax Implications: The Financial Game Changer

The tax treatment of each structure differs significantly and can impact your business’s financial performance over time.

Company Tax Rates and Benefits

For the 2024-25 financial year, companies that qualify as base rate entities pay a lower corporate tax rate of 25% on their profits, while other companies pay 30%. To qualify for the 25% rate, your company must have an aggregated turnover of less than $50 million and derive no more than 80% of its income from passive sources. Companies can retain profits at these tax rates without distributing them to shareholders, making them ideal for businesses that need to reinvest earnings for growth.

Trust Income Distribution Flexibility

Trusts provide significant tax advantages through their ability to distribute income among beneficiaries at different marginal tax rates. The trust itself doesn’t pay tax on distributed income, but beneficiaries are taxed at their individual rates. This income distribution flexibility allows families to minimise their overall tax burden by directing income to family members in lower tax brackets.

Comparing Key Features

Here’s a quick comparison that breaks down how each structure handles the key concerns most plumbers face when protecting their business assets:

Feature

Company Structure

Trust Structure

Legal Status

Separate legal entity

Legal relationship, not entity

Asset Protection

Limited liability for shareholders

Trust assets protected from beneficiary creditors

Tax Treatment

25% or 30% company tax rate

Beneficiaries taxed at marginal rates

Capital Gains

No CGT discount available

50% CGT discount after 12 months

Income Retention

Can retain profits at company tax rates

Must distribute income annually

Raising Capital

Can issue shares to attract investors

Limited options for external investment

Succession Planning

Share transfers for ownership changes

Appointor changes for control transfer

Sole Trader vs More Complex Structures

Many plumbers start as sole traders, which is the simplest business structure but offers no asset protection. As a sole trader, you’re personally liable for all business debts and obligations, putting your personal assets at risk. Unlike companies and trusts, sole traders cannot provide any separation between business and personal liability.

The Role of Professional Advice

Given the complexity of these business structures, seeking professional advice is crucial. Qualified accountants and lawyers can assess your personal circumstances, business goals, and risk tolerance to recommend the most appropriate business structure. They can also help you understand the key differences between structures and their long-term implications.

Capital Gains Tax Considerations

One significant advantage of trust structures is their eligibility for the 50% capital gains tax discount on assets held for more than 12 months. This can result in substantial tax savings when selling business assets or the business itself. Companies, being separate legal entities, don’t qualify for this discount, making trusts more tax effective for asset disposal.

Unit Trust vs Discretionary Trust Options

Within trust structures, you can choose between unit trusts and discretionary trusts. Unit trusts provide fixed proportions of income and capital to unit holders, similar to shares in a company. Discretionary trusts offer more flexibility, allowing trustees to decide how to distribute income and capital among beneficiaries based on their changing circumstances and tax positions.

Financial Responsibilities and Maintenance Costs

Both structures involve ongoing compliance costs and financial responsibilities. Companies must lodge annual returns with ASIC, maintain proper accounting records, and satisfy various regulatory requirements. The maintenance costs for a company typically include ASIC fees, accounting costs, and potential audit requirements for larger companies.

Trusts also require annual tax returns and proper documentation of trustee decisions and income distributions. The maintenance costs for trusts often include accounting fees, legal costs for deed amendments, and potential costs for corporate trustees.

Business Profits and Income Distribution

How each structure handles business profits affects your tax obligations and cash flow. Companies can retain profits at the corporate tax rate, providing a tax effective way to fund business growth. However, when profits are distributed as dividends, they may be subject to additional tax in the hands of shareholders.

Trusts must distribute their income annually to beneficiaries, but this provides opportunities for tax effective income distribution among family members. The trustee’s powers under the trust deed determine how income can be distributed and to whom.

Personal Liability Considerations

Personal liability varies significantly between structures. Company structures generally protect shareholders from personal liability for company debts, though directors may still face personal liability for certain statutory obligations. Trust structures can protect beneficiaries from personal liability for trust debts when properly structured with a corporate trustee.

Key Factors in Decision Making

When choosing between trust and company structures, consider these key factors:

  • Risk Level: High-risk businesses may benefit more from company structures with limited liability protection

  • Family Involvement: Family businesses often benefit from the income distribution flexibility of trusts

  • Growth Plans: Companies may be better for businesses planning to attract investors or raise capital

  • Asset Protection Needs: Both structures offer different types of asset protection

  • Tax Minimisation Goals: Consider whether you want to retain profits or distribute them for tax efficiency

The Corporate Trustee Option

A corporate trustee combines the benefits of both structures. The company acts as trustee of the trust, providing limited liability protection while maintaining the trust’s tax advantages and income distribution flexibility. This hybrid approach is often recommended for family businesses seeking both asset protection and tax efficiency.

Regulatory Requirements and Compliance

Companies face fewer regulatory requirements than public companies but still must comply with Corporations Act obligations. These include maintaining proper books and records, holding annual general meetings, and filing annual returns with ASIC within statutory time limits.

Trusts have different compliance requirements, including annual tax returns and proper documentation of trustee decisions. The trust deed governs the trust’s operation and must be followed to maintain the trust’s validity and tax benefits.

Practical Considerations for Plumbers

For plumbing businesses, practical considerations include:

  • Licensing Requirements: Ensure your chosen structure doesn’t interfere with professional licensing

  • Insurance Needs: Both structures require appropriate insurance coverage

  • Supplier Relationships: Some suppliers may prefer dealing with company structures

  • Banking Arrangements: Each structure requires separate banking arrangements and tax file numbers

  • Employee Considerations: Consider how the structure affects employee entitlements and obligations

Long-term Business Planning

Your choice of business structure should align with your long-term business goals. Companies may be more suitable for businesses planning significant growth, while trusts might be better for family businesses focused on wealth preservation and tax efficiency. Consider your succession plans, as the chosen structure will affect how ownership transfers to the next generation.

Making the Right Choice

The decision between trust and company structures depends on your specific circumstances, including your risk tolerance, family situation, business goals, and tax objectives. Many successful plumbing businesses use hybrid structures that combine elements of both, such as a discretionary trust with a corporate trustee operating through a trading company.

Implementation and Setup

Once you’ve chosen your structure, proper implementation is crucial. This includes drafting appropriate documentation, obtaining necessary registrations, setting up banking arrangements, and ensuring compliance with all regulatory requirements. Working with qualified professionals during the setup phase can prevent costly mistakes and ensure your structure operates as intended.

The choice between trust and company structures is one of the most important decisions you’ll make for your plumbing business. Each structure offers unique advantages and disadvantages that must be carefully weighed against your specific circumstances and objectives. By understanding the key differences and seeking appropriate professional advice, you can make an informed decision that supports your business’s long-term success and provides the right combination of asset protection, tax efficiency, and operational flexibility.

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