Published: October 2025

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When starting or restructuring a business in Australia, selecting the right legal structure is crucial. It affects taxation, liability, asset protection, and growth potential. Two common options are trusts and companies. This article explores the key differences, advantages, and disadvantages to help you decide. Remember, every business is unique, so professional advice is essential.

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Understanding Business Structures

Your choice of structure influences how income is taxed, how assets are protected, and how easily you can raise capital. For instance, trusts often provide flexibility in distributing income, while companies offer a more formal framework suitable for expansion. According to the Australian Taxation Office (ATO), the structure must align with your business goals, and changes can involve costs like stamp duty or capital gains tax.

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What is a Company?

A company is a separate legal entity under the Corporations Act 2001, registered with the Australian Securities and Investments Commission (ASIC). It can own property, enter contracts, and incur debts independently of its owners. Ownership is through shares, and management is typically handled by directors.

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Benefits of a Company

• Limited Liability: Shareholders' personal assets are generally protected from company debts, except in cases of director misconduct.
• Tax Rates: Eligible base rate entities pay 25% corporate tax, while others pay 30%. Retained profits can be reinvested at these rates.
• Funding Opportunities: Easier to attract investors through share issues, and banks often prefer lending to companies.
• Perpetual Existence: The company continues even if owners or directors change.

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Drawbacks of a Company

• Compliance Costs: Annual ASIC fees, plus accounting and legal expenses for setup and maintenance.
• Governance Requirements: Strict rules on reporting, meetings, and disclosures.
• Loss Restrictions: Losses stay within the company and cannot offset personal income.
• Public Disclosure: Some information, like director details, is publicly available.

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What is a Trust?

A trust is not a separate legal entity but an arrangement where a trustee holds assets for beneficiaries, governed by a trust deed. Common types include discretionary trusts (flexible distributions) and unit trusts (fixed units like shares). Trusts are popular for family businesses and must distribute income annually.

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Benefits of a Trust

• Tax Flexibility: Income is distributed to beneficiaries and taxed at their marginal rates, potentially reducing overall tax through income splitting.
• Asset Protection: Beneficiaries do not own assets directly, offering protection from personal creditors (enhanced with a corporate trustee).
• Capital Gains Tax (CGT) Concessions: Eligible for a 50% CGT discount on assets held over 12 months, plus small business concessions.
• Privacy: Beneficiary details are not publicly disclosed.

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Drawbacks of a Trust

• Mandatory Distributions: Undistributed income is taxed at the top marginal rate (up to 47% including Medicare levy).
• Limited Lifespan: Typically up to 80 years, unless specified otherwise.
• Borrowing Challenges: Lenders may require personal guarantees due to the trust's non-entity status.
• Setup and Ongoing Costs: Trust deeds, tax file numbers (TFNs), and annual returns add expenses.

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Key Differences Between Trusts and Companies

To compare, consider these aspects:

Trusts suit businesses focused on tax minimisation and family involvement, while companies are ideal for scaling and external investment.

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Making the Right Choice

Decide based on your needs: opt for a trust if flexibility and protection are priorities, or a company for stability and growth. Review your structure regularly, as business changes may warrant a switch. Always seek expert guidance to navigate ATO rules and avoid pitfalls like family trust elections or public trading trust issues.

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Frequently Asked Questions (FAQ)

What is the main difference between a trust and a company in Australia?‍

A trust is an arrangement where a trustee holds assets for beneficiaries, offering tax flexibility but no separate legal status. A company is a distinct legal entity with limited liability for owners, suitable for growth and investment.

When should I choose a trust for my business structure?

‍Choose a trust if you prioritise income splitting for tax savings, asset protection, and privacy, especially for family-run businesses or those with variable income distributions.

What are the tax advantages of a company over a trust?

‍Companies benefit from a flat tax rate of 25% or 30%, allowing profits to be retained and reinvested at lower rates, whereas trusts distribute income annually, taxed at beneficiaries' individual rates.

Can I change from a trust to a company later?

‍Yes, but it may trigger capital gains tax, stamp duty, or other costs. Consult a professional to assess the implications for your specific situation.

Is a trust or company better for asset protection in Australia?

‍Trusts often provide stronger asset protection as beneficiaries do not directly own assets, but using a corporate trustee can limit liability. Companies offer limited liability for shareholders but require careful management to avoid personal guarantees.

How much does it cost to set up a trust or company?

‍Setup costs vary: companies start from around $500 for ASIC registration plus legal fees, while trusts involve drafting a deed (often $1,000-$2,000). Ongoing compliance adds annual expenses.