Should I use a Trust when setting up a new business?
There are a number of ways you can set up the structure for a new business. Trusts are one of the options, however it is important to understand how Trust’s work, and whether this structure is the most suitable for your business.
Trusts are a complex structure that can have a number of benefits for businesses. However, specific advice is necessary before choosing to use a trust for your business.
That said, in simple terms, a trust is an arrangement where a person (the settlor) provides an asset (usually cash) to another (the trustee) to hold for the benefit of a third person or group of people (the beneficiaries).
For example, John (the settlor) may transfer a house to his daughter, Louise (the trustee), to hold on trust for his granddaughters, Kate and Mell (the beneficiaries). Whilst Louise would be the legal owner of the house, she could only use it for the benefit of Kate and Mell. This may be by renting it out and then using the rent to pay for their school fees.
Other than gifting an asset to the trustee to establish the trust, which can be as little as $10, the settlor generally plays no further role in the trust.
In a business context, a trust can be set up to run a business, for example a café. It would borrow money, either from the bank or from you and then use this money to open a bank account, enter into the franchise agreement, purchase the business assets, and lease a shopfront.
At the end of the year, assuming the café has made a profit, the trustee would need to distribute the profits to the beneficiaries of the trust. It depends of the type of trust – unit trust or discretionary trust – as to how the profits are distributed.
There are a number of different benefits to establishing a trust and different trusts have different benefits, dependent upon your circumstances.
It is a very complex topic, so I would strongly encourage you speak to your Findex adviser before making such an important decision.