CHAPTER 3 Business structures 101liability of companies can also be a negative characteristic. It can preclude certain suppliers and finan-
ciers from entering into business contracts with the company, because the individuals involved in the
company are not personally responsible for the company’s debts. This drawback, however, can be over-
come by personal guarantees from the company directors.
Public companies can also be disadvantaged by the separation of ownership and control of the com-
pany. The owners of the company (the shareholders) have little say in the day-to-day operation of the
company — this responsibility lies with the board of directors of the company. In certain situations, the
company directors can be held personally responsible for the company’s debts.
VALUE TO BUSINESS• A company is a form of business structure characterised by the limited liability of its shareholders.
• Most companies cost more and take more time to set up than sole traders or partnerships. However,
small private companies can be set up for as little as $1000.
• A company is an independent legal entity that can own and lease assets on its own behalf. The
company can also sue and be sued by other parties. Companies do not dissolve if owners sell
their shares, and they continue to operate if there is a change in share ownership. A company pays
income tax on its profits.
• The main advantages of the company structure are the limited liability of shareholders for business
debts, and the access to additional capital from the shareholders for business expansion.
• The main disadvantages of setting up business as a company are the time and money needed to
establish the business, and the complex regulatory requirements imposed on the company.3.9 Definition and features of a trust
LEARNING OBJECTIVE 3.9 Define the term ‘trust’.
A trust is a common form of business structure in Australia that involves a special entity (trustee)
holding a sum of money or other assets for the benefit of others. The assets of the trust could be invested
in a range of investments, such as shares and property. These investments will earn income that is then
distributed to the beneficiaries of the trust in a tax-effective way, according to the tax status of each ben-
eficiary. There are two common types of trust in Australia: family or discretionary trusts, and unit trusts.
A family or discretionary trust is usually established for the benefit of one family and its members.
The trustee can distribute income and assets among the various family members, who will then be taxed
individually. A unit trust holds a collection of assets on behalf of various parties rather than family
members. Income is distributed to the parties according to their respective unit holdings in the trust. Unit
trusts usually concentrate on a particular investment such as equity, property or cash management.
3.10 Advantages and disadvantages of a trust
LEARNING OBJECTIVE 3.10 Discuss the advantages and disadvantages of a trust.
The main advantage of the trust form of business structure is that trusts minimise tax payments. The trust
itself does not pay tax on income earned. Instead, the beneficiaries pay tax on the amount of income
distributed to them. Trusts are also characterised by limited liability. They are relatively simple to form,
and are subject to little government regulation unless they are a trust (such as a property trust) listed on
the ASX.
Additional laws apply to trusts, however, and these laws can be quite complex. A trust should be
administered by a suitably qualified accountant with an up-to-date knowledge of the tax and legal impli-
cations of trusts. The reality check ‘Is it time to get tough on the tax benefits of family trusts?’ discusses
some of the tax issues associated with family trusts.