6 Benefits of Operating your Business Through a Trust

Operating your Business Through a Trust

You can operate your business in a number of ways to suit your specific needs. However, the most popular business structures are sole proprietorship, partnerships, companies, and trusts. Each of these options has its advantages and disadvantages, but creating a trust can give you more leverage in operating.

What Is A Trust?

In a trust, you appoint a trustee to operate your business assets and distribute the business’ income to select beneficiaries. The three main variations of trusts include:

  • Discretionary Trusts: The income generated is distributed to beneficiaries at the trustee’s discretion. Suppose you have 4 beneficiaries. However, it's not a requirement that each beneficiary receives 25% of the income. One can receive 50%, another with 30%, and the rest with 10% each.
  • Unit Trusts: The business’ income is split among the beneficiaries in fixed units, similar to company dividends. Each beneficiary signs up for a specific number of units that are priced and sold.
  • Self-settled Spendthrift Trusts: In this arrangement, the creator of the trust doubles up as the beneficiary. If your interest is in protecting your funds, self-settled spendthrift trusts are great options. No creditor can access your business assets when settling their debts. The contract limits them to only the released funds.

6 Benefits of Trusts

With the facts stated, you now have an idea why trusts can be advantageous over other business structures. Here are some benefits of operating your business through a trust:

  1. Reduced Taxes

Trusts enable you to minimize income tax. The trustee usually directs the bigger share of the business’s proceeds to those beneficiaries with the lowest incomes. Generally, the lower your income is, the less tax you pay.

If all the beneficiaries already have high incomes, it’s possible to add a corporate beneficiary to the trust. A corporate beneficiary can potentially save up to 15% on tax bills since they’re taxed at the company tax rate. Which is usually lower than the marginal tax rate for high net-worth individuals.

  1. Asset Protection

In case your business runs into financial trouble, your business assets, personal possessions, and various funds will have protection from creditors. Essentially, beneficiaries don’t directly own the business assets. When it comes to paying off debts to creditors, the business assets are not touched.

Additionally, creditors will not come for your house, cars, and other personal investments. The creditors can only access the beneficiaries’ units in the event of bankruptcy. As a business person, this gives you sufficient peace of mind, bearing in mind financial difficulties are sometimes inevitable.

  1. Minimal Regulatory Requirements

Compared to companies, trusts have fewer regulatory requirements. This means less burden on meeting government regulations and more time to focus on the growth of your business.

At the same time, your reporting of items such as debt deductions, tax losses, and franking credits can be significantly simpler. Not many business owners want the usual pile of paperwork associated with complying with the law.

Operating your Business Trust

  1. Flexible Income Distribution

Unlike companies where shareholders have to receive dividends based on their percentage of shares, trusts have greater flexibility in the distribution of income.

The trustee decides how much money goes to each beneficiary. As discussed earlier, the trustee can tweak the profit-sharing formula to save as much money as possible on taxes.

  1. More Privacy

Running a business can always lead you to surprise lawsuits from unhappy customers. Some plaintiffs may want to gain access to your equity, and this is as disastrous as it sounds.

Other business structures like sole proprietorship, partnerships, and unlimited companies may leave your assets at the mercies of those suing you. But with a trust, your personal wealth remains protected from public record.

  1. Variety Of Options

In addition to the three kinds of trusts above, there are several other types you can consider depending on your field and demography. These include:

  • Revocable living trust
  • Grantor trust
  • Irrevocable trust
  • Testamentary trust
  • Minor’s trust
  • Blind trust
  • Intentional defective grantor trust
  • Credit shelter trust
  • Marital trust
  • Qualified terminable interest property trust
  • Generation-skipping trust
  • Crummey trust

You have numerous options to choose from in case you decide to operate your business through a trust. However, ensure to invest in what you think would be suitable for your transactions.

To Wrap It Up

Trusts have unique requirements and implications for your assets. It is important to operate with a trust, so you’ll be ensured your finances are utilized responsibly. Feel free to consult with reliable financial and business advisors, and they’ll help you choose the trust that best fits your needs.

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