Key Takeaways
- Choosing between a trust and a company affects tax, asset protection, growth, and long term planning.
- Companies suit trade businesses aiming for growth, scale and potential sale.
- Trusts offer tax distribution flexibility and strong asset protection, especially for family run businesses.
- Each structure has advantages and limitations that become more significant as your trade business expands.
- Many growing trade businesses use a hybrid trust company structure for maximum flexibility and protection.
If you’re running a trade business plumbing, electrical, carpentry, landscaping or any other trade you’ve probably reached a point where your accountant has asked the question: “Should we restructure into a company or a trust?”
For business owners who are growing, hiring more staff or investing in equipment, choosing the right structure matters. It affects your tax bill, your family’s wealth, the level of protection you have from business risks and how easily you can exit or sell your business later on.
Below, we break down the difference between a company and a trust, their advantages and drawbacks, and how to choose the right structure for your trade business.
What Is a Company Structure?
A company (usually a Pty Ltd in Australia) is a separate legal entity. That means:
- The company can own assets, sign contracts and take on debt.
- Directors run the company.
- Shareholders own the company through shareholdings.
Advantages for Trade Businesses
1. Limited liability
Shareholders are usually not personally liable for company debts. For tradies using heavy equipment or working in high risk environments, this protection can be incredibly important.
2. Lower company tax rate
Companies generally pay a flat tax rate of around 25 percent if they qualify as a base rate entity. This can be significantly lower than the top personal tax rate.
3. Easier access to lending and investment
Banks and investors generally prefer companies because the ownership structure is clear, and shares can be easily allocated.
4. Continuity and professionalism
A company continues to exist even if directors or shareholders change, which is helpful when planning for sale or succession.
Potential Drawbacks
- Profit distributions are less flexible.
- More compliance obligations, such as ASIC reporting and director responsibilities.
- Companies cannot usually access the 50 percent capital gains discount when selling long term assets.
What Is a Trust Structure?
A trust is an arrangement where a trustee holds assets for beneficiaries. In trade businesses, this is often a discretionary (family) trust or a unit trust.
Advantages of a Trust for Trade Businesses
1. Income distribution flexibility
Trusts can distribute profit to beneficiaries who may be in lower tax brackets, helping reduce the overall tax paid.
2. Asset protection
If structured properly, trust assets can be protected from personal creditors of business owners.
3. Capital gains tax benefits
Trusts can usually access the 50 percent CGT discount when selling assets that have been held for more than 12 months.
Potential Drawbacks
- Trust income must generally be distributed each year or the trustee may pay tax at the highest marginal rate.
- Borrowing or raising capital can be more difficult due to complexity.
- Some trusts have time limits, such as an 80 year vesting rule.
Which Structure Is Best for a Growing Trade Business?
The right structure depends on your goals, your risk profile and your long term plans. Here are trade specific considerations to help guide your decision:
1. How fast do you plan to grow?
If you want to scale your team, take on larger contracts or potentially bring on investors, a company structure is usually better. It is simpler to manage, more attractive to lenders and easier to sell.
2. Do you want to split income across family members?
If tax efficiency and family wealth management are priorities, a trust may offer more flexibility in distributing profit, which suits many family run trade businesses.
3. How important is asset protection?
Both structures offer protection, but a trust with a corporate trustee provides an additional layer. This is common for tradies who own expensive equipment or commercial vehicles.
4. Do you plan to sell or exit the business one day?
If you foresee selling your trade business, a company offers a clearer path. Buyers understand companies, and transferring shares is more straightforward than transferring trust interests.
However, many trade businesses use a hybrid model, where:
- A company operates the business, and
- A discretionary trust owns the shares in the company.
This combination allows for:
- Lower company tax
- Income distribution flexibility
- Asset protection
- A strong structure for future sale or succession
It is one of the most common setups for successful, growing trade businesses.
Steps to Choosing the Right Structure
1. Clarify your business goals
Are you expanding your team? Planning to sell? Wanting to involve family members? Your goals shape the right structure.
2. Review your risk exposure
Trade businesses often operate in high risk environments with large equipment costs and workplace liability. Structures that protect personal assets become crucial.
3. Model the tax outcomes
Your accountant should show you the tax difference between operating as a company, operating through a trust, and using both together.
4. Consider long term succession
Whether you plan to hand the business to children, sell to a competitor or wind it down, the structure you choose now affects your options.
5. Seek specialist advice
Trade businesses have unique financial and operational demands. Work with an accountant who understands your industry and can tailor the structure to fit.
Final Thoughts
Your business structure is more than a formality. It is a foundation for growth, asset protection and long term success.
If growth, investment and saleability matter, a company is often the right choice. If tax flexibility and family wealth planning matter, a trust may be better. Many trade businesses benefit from combining the two through a hybrid trust company setup.
Whatever you choose, make sure the structure aligns with your long term vision and get professional advice early so you can build the strongest possible foundation for your business.
