Unlike a company, a trust is not a separate legal entity. Trusts are often used in connection with running a business for the benefit of others.

A trust is a structure where a trustee (an individual or company) carries out the business on behalf of the members (or beneficiaries) of the trust.

Family businesses are often set up as a trust so that each family member can be made a beneficiary without having any involvement in how the business is run.

Discretionary and unit trusts

A trust is set up through a trust deed and there are two main types:

Discretionary Trusts

The trustee has discretion in the distribution of funds to each beneficiary. The most common example is the family trust.

Unit Trusts

Unit trusts are recommended when more than one family is involved. The interest in the trust is divided into units, similar to shares. Each unit holder may have a number of units in the trust. Distribution from the trust is determined according to the number of units held.

Importantly, trustees are legally liable for the debts of the trust. They can use the assets of the trust to meet those debts. However, if there's a shortfall, they are responsible for covering the difference from their own resources.

A trust must use its own Tax File Number (TFN) when lodging its annual income tax return, and may also require an Australian Company Number (ACN).

• Learn more about the tax requirements of an Australian trust at the ATO website

Advantages and disadvantages of a trust

Advantages

• Limited liability for each beneficiary.
• Opportunities for tax minimisation among beneficiaries.

Disadvantages

• Can be expensive and complex to establish and administer.
• Difficult to dissolve or dismantle, particularly where children are involved.

Back to top

What's next...

• Register a business name
• How feasible is your business idea?
• Get started on your business plan

Back to top