A trust can be used to run a business. But because it is not a legal entity, the trustee undertakes the business activities on behalf of the trust. A trustee can be an individual or a company — we recommend a corporate trustee. You should review the trust deed to ensure the trustee has the power to enter into business transactions.
How the trustee distributes the income the business generates will depend on whether its a discretionary trust or unit trust.
|Type of Trust||Distribution|
|Discretionary Trust||Beneficiaries of the trust will distribute income at the trustee’s discretion|
|Unit Trust||Income will be distributed among unitholders per their unitholdings. The trustee has no discretion to change this.|
It’s likely that you will operate your business through a unit trust as business partners will want to make sure they receive their fair share of the business’ profits. If you are running a business through a trust, you will need to apply for an ABN and a TFN for the trust. You should also consider whether you are required to register for GST and PAYG.
What Documents Do I Need?
When operating a business through a trust, you need the appropriate documents in place. A trust is a complex structure and complications could arise if you don’t set up the trust properly. This includes a trust deed that allows the trustee to conduct the business. Make sure that the trust deed doesn’t prevent the trustee from undertaking the relevant business activities.
If you have a discretionary trust with a corporate trustee, and the corporate trustee has many shareholders, it’s sensible to have a shareholders agreement in place. A shareholders agreement will set out the decision making process.
It’s important to know who controls the trustee as the trustee is the entity that enters into transactions and distributes income to the beneficiaries of the trust.
Where you have a unit trust with a corporate trustee, you should consider having a combined unitholders and shareholders agreement.
This agreement sets out the rights and obligations of the shareholders in the corporate trustee and the unitholders in the unit trust. It also covers how to issue and transfer more shares/units.
In addition to the documents relating to the trust, you will need documents connected to operating your business. The types of documents you will need depends on:
- the type of product or service you are providing;
- the industry you are in; and
- your customers, suppliers, employees and contractors.
What About Set-Up and Ongoing Costs?
If you’re setting up a company to act as a corporate trustee, there are ASIC fees that you will need to pay along with annual review fees. You will also need to factor in the costs to draft the trust documents (for example, the trust deed and shareholders agreement) as well as to prepare the accounts.
When used correctly, a trust can be an effective way to operate your business. Consider what agreements you need in place as well as whether you should register the trust for an ABN, TFN, GST or PAYG.