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When starting a business for the first time, a common question is whether to operate through a trust or company structure. For certain businesses, trusts can offer huge advantages, with a flexible structure and the ability to distribute gains and income in a way that is sometimes more tax efficient. On the other hand, operating as a company has the advantage of being the most common and understood means of carrying out operations. This article sets out the advantages and disadvantages of operating through a trust, and then the same considerations of operating as a company.

Operating Through a Trust

Advantages

The key benefit of operating a trust structure stems from its flexibility. Many different investors can contribute to the trust, and trusts can accordingly accumulate a lot of capital. The trust structure itself is also flexible, providing for the option of income-splitting and the distribution of capital gains to people involved in your business. 

You are able to treat the trust’s income differently than if you were to structure your business as a company. Likewise, there can be tax efficiencies as a result. However, this is not necessarily the case, and you should consult a lawyer about whether this would indeed be the case for your business’ specific circumstances.

Family and community businesses commonly operate their businesses through a trust. Difficulties with borrowing, as discussed below, can be less of a problem for these businesses than other businesses more focused on growth. 

Disadvantages

On the other hand, operating through a trust means you must comply with trust law. Trust law can be onerous and more complicated to comply with than company law, depending on how complex your trust structure might be. 

Additionally, while trusts can obtain loans, there can often be issues with banks and lenders regarding what they may be seeking as a security or other guarantee from the trust. A disadvantage of running your business through a trust is that financial institutions may not wholly and adequately understand your business. This can make borrowing difficult, or at least more complicated than operating as a company. 

Operating as a Company

Advantages

A limited liability company is a well-known and well-understood business structure. It is the most common way for medium-to-large businesses in New Zealand to operate. There is a range of advantages associated with operating your business in this way. 

Company structures are typically understood by financial institutions, suppliers and customers alike, offering serious advantages to your business. It can be easier to borrow money and seek further investment in your business to accelerate growth. Likewise, it can be easier to find suppliers and other businesses willing to work with your company. 

If your company is planning to have more than one shareholder, you can split company income between the shareholders in proportion to their shareholdings. From a tax perspective, operating a business as a company means that the company tax rate will apply. There may be other advantages to be aware of, such as imputation credits on dividends. However, whether structuring as a company will maximise tax efficiency for your business depends on the circumstances of your business. Sometimes, the flat company rate may result in higher tax liability than applying individual rates. 

Disadvantages

When running your business as a company, one disadvantage involves the cost. You need to be prepared to pay fees when establishing the company and the ongoing compliance costs. Also, if you operate your business as a company, you must comply with the various legal and regulatory requirements that apply to companies. These requirements can be both complicated and resource-intensive. For this reason, many small businesses choose not to incorporate and operate as a company. This way, they can reduce their costs and retain some flexibility while they are still small and growing. 

Key Takeaways

There can be no conclusive answer about whether you should operate your business through a trust or a company. The answer to this question depends on the specific circumstances of your business. The advantages of a trust include:

  • flexibility; 
  • potentially some tax efficiencies; and 
  • suitability for family and community businesses. 

Companies, alternatively, are well-understood by the business and finance community and can help you grow your business. Both trust and company arrangements can involve significant costs in terms of both establishment and compliance. If you want to know more about structuring your business, contact LegalVision’s business lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

What are the benefits of operating a business through a trust?

Trusts offer a significant amount of flexibility to businesses, allowing them to structure their operations, affairs and profit distribution how they like.

What are the benefits of operating a business as a company?

Companies are well understood and can make it easier to borrow money and get future investment. Companies can also offer protection and certainty to shareholders.

Can businesses save money and pay less tax by operating through a trust?

Sometimes businesses can maximise tax efficiencies by operating through a trust, but this is not necessarily the case. It depends on the nature of the income and how the trust is structured. You should check with a lawyer to see what the case might be for your business.

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