Introduction

One of the most common questions business owners ask when setting up or restructuring a business is whether a company or a trust provides the better tax outcome.

The answer depends on several factors, including profit levels, how income will be distributed, asset protection needs, and long-term business plans. Both structures can be effective when used correctly, but they serve different purposes.

Understanding the key differences can help business owners make better decisions before starting a business or investment.

Company Structure

A company is a separate legal entity that pays tax on its own profits.

Tax Rates

Companies generally pay a corporate tax rate of 25% if they qualify as a base rate entity (which most small businesses do). Otherwise, the tax rate is 30%.

When profits are distributed to shareholders as dividends, those dividends may include franking credits, representing tax already paid by the company.

Advantages of a Company

• Lower tax rate compared with high individual marginal tax rates
• Ability to retain profits in the business for reinvestment
• Clear ownership structure through shareholding

Limitations

• Less flexibility in distributing profits
• Dividends must generally follow share ownership
• Incorrect withdrawals may create Division 7A issues

Companies are commonly used for operating businesses intending to grow and reinvest profits.

Trust Structure

A discretionary trust is a structure where a trustee holds assets on behalf of beneficiaries.

Instead of paying tax itself, the trust generally distributes income to beneficiaries each year, and those beneficiaries pay tax on their share of the income.

Tax Flexibility

One of the key advantages of a trust is the ability to distribute income among beneficiaries in a tax-effective way.

This flexibility can allow families to manage overall tax outcomes by distributing income to beneficiaries on lower tax rates.

Advantages of a Trust

• Flexible income distribution
• Potential tax planning opportunities
• Often stronger asset protection when structured properly

Limitations

• More complex administration and compliance
• Annual distribution decisions required
• Professional setup and ongoing costs

Trusts are often used for family businesses and investment structures.

Asset Protection Considerations

Asset protection is another important factor when choosing a structure.

• Companies limit liability to the company itself, protecting shareholders personally.
• Trusts can help separate business risks from personal assets when combined with a corporate trustee.

Many business structures combine both, such as a company acting as trustee of a discretionary trust.

Long-Term Planning

Choosing a structure is not just about immediate tax savings. Business owners should consider:

• expected profit levels
• future investors or partners
• succession planning
• asset protection
• long-term investment activities

Changing structures later can be complex and may trigger tax consequences, so planning early is important.

Which Structure Is Better?

There is no single structure that works for every business. The right choice depends on your individual circumstances and long-term goals.

Many successful business groups use a combination of trusts and companies to balance tax efficiency, flexibility, and asset protection.

Final Thoughts

Choosing the right structure can significantly impact your tax position, risk exposure, and long-term growth opportunities.

Before setting up a business or investment structure, it is worth obtaining professional advice to ensure the structure aligns with your financial objectives.

Call to Action

If you are starting a business or reviewing your current structure, Linix Accountants can help you assess the best structure for your situation and long-term tax strategy.

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