Trust vs Company: What’s Best for Your Carpentry Business?

• A discretionary trust gives the trustee complete control over how trust assets and income are distributed among beneficiaries. This structure provides exceptional flexibility for family businesses where you want to distribute income based on the lowest marginal tax rates among family members. The trustee’s powers allow annual adjustments to distributions, making it ideal for managing variable income typical in carpentry work.

• A company business structure creates a separate legal entity that can own business assets, enter contracts, and incur debt independently from you as the owner. This separate legal structure provides limited liability protection, meaning your personal assets typically remain protected from business obligations and financial responsibilities that might arise from your carpentry operations.

• Unit trusts represent another option where beneficiaries hold units in fixed proportions, similar to company shareholders. However, discretionary trusts remain more popular for family businesses because they offer greater flexibility in income distribution without the rigid structure of unit ownership.

The key factors influencing your choice include your family’s tax situation, the level of asset protection required, and whether you need the flexibility to adjust income distributions based on changing circumstances. Understanding these foundational differences helps you evaluate which structure aligns with your specific business needs and financial objectives.

Tax Implications and Benefits

The tax benefits and obligations differ significantly between trust and company structures, directly impacting your carpentry business’s profitability and your family’s overall tax position.

Company Tax Advantages

Companies that qualify as base rate entities enjoy a lower corporate tax rate of 25% on business profits. Most carpentry businesses with aggregated turnover under $50 million and no more than 80% passive income qualify for this reduced rate, compared to the standard 30% corporate tax rate that applies to other companies.

This tax effective structure allows you to retain business profits within the company at the lower corporate tax rate, providing flexibility for equipment purchases, working capital, and business expansion. When you need personal income, the company can pay fully franked dividends, which include tax credits that reduce your personal tax obligations.

The company structure also provides predictable tax planning opportunities. Unlike trusts, which must distribute income annually, companies can accumulate profits and distribute them as dividends when it’s most tax efficient for your personal situation.

Trust Tax Treatment and Income Distribution

Discretionary trusts don’t pay tax themselves – instead, beneficiaries pay tax on distributed income at their individual marginal tax rates. This creates powerful opportunities for tax minimisation when you have family members in different tax brackets.

Trust income distributed to beneficiaries is taxed at marginal rates ranging from 0% (within the tax-free threshold) to 45% (highest marginal rate). This flexibility allows you to distribute income to family members with lower tax rates, potentially creating significant tax savings for your overall family group.

However, any trust income that isn’t distributed to beneficiaries faces punitive taxation. The trustee must pay tax on undistributed income at the highest marginal rate of 45% plus Medicare levy, making it crucial to distribute all trust income each financial year.

Capital Gains Tax Considerations

Trust structures can access the 50% Capital Gains Tax discount when selling business assets held for more than twelve months. This discount isn’t available to companies, which pay full corporate tax rates on capital gains.

For carpentry businesses planning to sell equipment, vehicles, or eventually the business itself, this capital gains treatment can result in substantial tax savings. The discount effectively reduces the tax rate on capital gains for trust beneficiaries, providing another advantage for long-term wealth building.

Asset Protection and Limited Liability

Protecting your personal assets from business risks represents a fundamental consideration when choosing between trust and company structures, particularly important for carpentry businesses facing potential workplace accidents, professional liability claims, or supplier disputes.

Company Limited Liability Protection

Companies provide limited liability protection by creating a separate legal entity distinct from you as the owner. This means your personal assets – including your family home, savings, and investments – generally remain protected from business debts and legal claims against the company.

This protection becomes especially valuable for carpentry businesses where accidents, defective work claims, or unpaid supplier invoices could result in significant financial liability. The company structure creates a legal barrier between your business operations and personal wealth, providing peace of mind when managing business risks.

However, limited liability protection has important limitations. Directors can become personally liable for certain company obligations, including insolvent trading or breaches of director duties. Additionally, banks and major suppliers often require personal guarantees for loans and credit facilities, which can expose your personal assets despite the company structure.

Trust Asset Protection Features

Discretionary trusts offer different but potentially superior asset protection for beneficiaries. Since beneficiaries don’t legally own trust assets, creditors pursuing personal claims against you typically cannot access trust property held by the trustee.

This protection works because the trustee holds legal ownership of trust assets while beneficiaries have only a right to be considered for distributions. If you face personal financial difficulties or legal claims, trust assets generally remain protected for your family’s benefit, subject to the trust deed terms and trustee’s powers.

For maximum protection, many carpentry businesses use a corporate trustee – a company that acts as the trustee of the discretionary trust. This combination provides both the asset protection benefits of the trust structure and the limited liability advantages of having a company as the trustee.

Business Assets vs Personal Assets

The distinction between business assets and personal assets becomes crucial when evaluating protection strategies. Company structures clearly separate business assets from personal assets, making it easier to protect personal wealth from business liabilities.

Trust structures can hold both business and personal assets, potentially providing broader protection but requiring careful management to maintain the separation necessary for effective asset protection. The key is ensuring that trust assets remain clearly distinct from your personal assets and that the trustee exercises proper control over trust property.

Income Distribution and Cash Flow Management

How you extract money from your business structure significantly impacts both tax efficiency and cash flow management – particularly important for carpentry businesses dealing with seasonal variations and project-based income.

Trust Distribution Flexibility

Discretionary trusts provide unmatched flexibility in distributing income among family members. Each year, the trustee can decide how much income each beneficiary receives, allowing you to respond to changing family circumstances and improve tax outcomes.

This flexibility proves especially valuable for carpentry businesses with fluctuating income. During profitable years, you can distribute more income to family members in lower tax brackets. In challenging years, you might distribute less to preserve the family’s overall tax position.

The trustee must make distribution decisions by June 30 each year, and beneficiaries become entitled to their allocated income regardless of whether cash is actually paid. This requirement creates important cash flow planning considerations, as you need sufficient funds available to meet distribution obligations.

Company Cash Flow Advantages

Companies offer different cash flow benefits through profit retention and dividend timing. Business profits can accumulate in the company at the corporate tax rate, creating a pool of funds for equipment purchases, working capital, or business expansion without immediate personal tax consequences.

When you need personal income, the company can pay dividends with attached franking credits, which reduce your personal tax liability. This system allows you to control the timing of personal income while potentially reducing overall tax through the franking credit system.

Unlike trusts, companies aren’t required to distribute all profits annually. This flexibility supports better cash flow management for carpentry businesses that need to retain funds for equipment replacement, seasonal fluctuations, or business growth opportunities.

Succession Planning and Family Business Transfer

Planning for the future of your carpentry business becomes more manageable with the right structure supporting your long-term goals and family circumstances.

Trust Succession Benefits

Discretionary trusts excel at intergenerational wealth transfer because they’re designed to benefit multiple family members over extended periods. The trust can continue operating for up to 80 years, providing a long-term vehicle for family wealth accumulation and business succession.

Trust succession doesn’t require asset transfers when bringing family members into the business. The trustee simply adjusts distributions to include new beneficiaries, such as adult children joining the carpentry business. This approach allows gradual transition without triggering capital gains tax events or complex asset transfers.

Company Succession Through Share Transfer

Companies facilitate succession through share transfers, allowing gradual ownership transition over time. You can gift shares to family members, sell shares at market value, or implement employee share schemes to transfer ownership to key workers.

Share transfers may trigger capital gains tax, but various small business concessions can provide significant relief. The separate legal entity structure also makes it easier to sell the business to external buyers while maintaining ongoing relationships or consulting arrangements.

Administrative Requirements and Compliance

The ongoing administrative burden varies significantly between structures, affecting both your time commitments and ongoing professional service costs.

Company Compliance Obligations

Companies face substantial regulatory requirements through ASIC registration and ongoing compliance obligations. Annual review fees, company detail updates, and proper record keeping represent ongoing administrative responsibilities that increase operational costs.

Companies must prepare annual financial statements, hold annual general meetings, and maintain detailed minute books documenting major decisions. These requirements typically result in higher accounting and legal costs compared to trust structures.

Trust Administration Simplicity

Trusts generally require less formal administration than companies, with no ASIC registration or annual review fees. However, trusts must maintain proper distribution records and ensure compliance with trust deed requirements.

The trustee must lodge annual trust tax returns and prepare distribution minutes documenting all income allocation decisions. While simpler than company compliance, trusts still require professional advice to ensure proper operation and tax compliance.

Making the Right Choice for Your Carpentry Business

Choosing between trust and company structures depends on balancing tax efficiency, asset protection, operational flexibility, and your family’s specific circumstances.

• Income level and tax planning represent primary considerations. Carpentry businesses earning over $120,000 annually often benefit from company structures due to the lower corporate tax rate, while those with variable income and family members in different tax brackets might prefer trust distribution flexibility.

• Asset protection requirements should reflect your business’s risk profile and personal circumstances. Companies provide straightforward limited liability protection, while trusts offer more sophisticated asset protection strategies for family wealth preservation.

• Family circumstances play a crucial role in structure selection. Families with members in different tax brackets can achieve significant tax savings through trust distributions, while single operators might find company structures more suitable for their situation.

• Business growth plans should influence your decision. Companies generally provide better access to funding and investment opportunities, while trusts might limit growth capital options but excel at family wealth management.

Deciding the right business structure for your carpentry business—whether it’s a trust or company—can be complicated, and getting professional advice is key to understanding both the tax benefits and asset protection available for your specific situation; an experienced accountant can help you compare trust vs company options, model different scenarios, and guide you toward the structure that will best support your business growth and protect your family’s financial future, so you can move forward with confidence knowing your carpentry business is set up for long-term success.