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When you are deciding how to structure your business, you have many options to choose from. You can tailor these options to your specific needs. One such option is incorporating a trust into your business structure. In New Zealand, it is not common to run your business solely through a trust. However, you can use it as a part of your business. One size does not fit all, so before you register a trust, you should do some research. It is also a good idea to get legal advice on whether this structure is right for your business. This article will discuss the advantages of using a trust in your business structure, as well as some possible ways you could do so.

Creating a Trust

You create a trust when you (the settlor) give something of value to another person (the trustee). For example, something of value might include the commercial premises of your business, or your family home. The trustee holds and maintains it for the benefit of someone else (the beneficiary). 

Holding your assets separately in a trust means that you do not own them. Instead, the trustee has them in their name on behalf of the trust. This can provide you with a number of advantages. 

Advantages of Having a Trust in Your Business Structure

Because of its special placement in the law, trusts can be useful for a variety of reasons. 

Asset Protection

When you place assets in a trust, this means that you do not legally own them anymore. However, you may name yourself as a beneficiary of the trust. This allows you to enjoy the benefits of those assets.

In addition, if something goes wrong and you are in debt, your assets will be protected. Your creditors cannot claim the assets in trust to pay back that debt. This is because you do not legally own them. This can be useful in the context of your business.

For example, your business is not doing well and it goes under. If your commercial premises are in a trust, creditors cannot claim the property to pay back any debt. This gives you some security and means that you have less to lose in the event of a business failure. However, there are some exceptions to this. This is mainly where companies have operated with deliberate misconduct.

Tax Efficiency

There are tax advantages to having a trust in your business structure. It usually means that you may be able to split income more efficiently. 

For example, you are using the revenue of your business as part of the trust’s distribution to each of its beneficiaries, your family members. In that case, that income is taxed according to the tax rate of each of your family members. So, if one beneficiary has a different tax code and is charged at a lower rate, this means that the income overall is taxed more efficiently as to who is actually using it.

Possible Ways to Use a Trust in Your Business

1. Holding Personal Assets Separately

One way you can use a trust is to put your personal or family assets into it. For example, by placing the family home into your trust.

If you have set your family home in a trust, this generally means that business creditors cannot claim your family home for paying back your debts. By keeping your business assets and personal assets separate, you protect your personal assets against claims against your business.

2. Trust as a Shareholder

Another way you can use a trust in your business is to name its trustees as shareholders in your business. This means that any dividends you dispense go to those trustees as shareholders, and the trustees then distribute that income to its beneficiaries. This can be useful because it means that the trust has greater control over the split of income for the beneficiaries.

3. Trading Trusts

Trading Trusts are a kind of trust in New Zealand where you have a company acting as the trustee for your trust. This is otherwise known as a corporate trustee.

The company’s sole purpose is to serve as the trustee, and the settlor is usually the sole director and shareholder of the company. There are tax benefits to this structure, but this also means that you are scrutinised more by Inland Revenue. The trust has to earn the income itself – usually through investment. 

Key Considerations of Running Your Business Through a Trust

If you do decide to run your business through a trust as a business trust, you have to let the Companies Office know. This means that you have to register (incorporate) it with the Companies Office, where it will then go on the Societies and Trusts Register. You can complete this process online. Here, you will need to: 

Running your business as a company also has its own protections and limited liability, so you should consider all potential business structures when considering how to take the next step with your business. 

Key Takeaways

Running your business through a trust has some advantages because of the particular way that trusts function under the law. Trusts offer greater protection of your assets if your business goes under, and income can be taxed more efficiently through the trust’s distribution of income to its beneficiaries. But, you should take care as to how you use a trust in your business. Trust structures, in general, are complex and have strict legal requirements that you need to be aware of, so getting legal advice is a good idea. If you would like more information or help with your business, contact LegalVision’s business structuring lawyers on 0800 005 570 or fill out the form on this page.

FAQs

What is a trust?

A trust is a legal relationship that forms when you (the settlor) gives assets (such as your business premises or your family home) to someone else (the trustee) to hold and maintain for someone else (the beneficiary).

What are the benefits of using a trust in my business?

Trusts can offer protection of your assets against claims by creditors for paying back debt. This means that if your family home is held in a trust, it cannot be claimed to pay back debts owed by your business because you do not legally own it – the trust does.

What is a trading trust?

A trading trust arises when you have a company as a trustee, called a corporate trustee. This company’s sole purpose is to be the trustee of your trust, an income is earned by the trust itself.

How do I run my business through a trust?

You can incorporate at trust into your business structure in a variety of ways. A trust can hep you keep your personal assets and business assets separate. You can also name the trust as a shareholder in your business.

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