That’s great advice from Mark Twain, so if you are sure that you are cut out for the exciting, hurly-burly life of an entrepreneur, and if you have a viable business concept, take advice now on how to get started.
In our previous article in the series “Choosing the right legal entity for your business” we looked at the private company option. In our final article in this series we consider the plusses and minuses of trading in a business trust.
What is a business trust?
In summary, a trust is a contractual arrangement that allows trustees to hold assets (without owning them) for the benefit of the trust beneficiaries.
Most trusts are not “business trusts” – they are just used to hold assets. In the case of “living” trusts (the type of trust most likely to be encountered in this context) assets are initially provided by a “founder”, “settlor” or “donor”, and then owned, controlled and managed by trustees in their capacities as such (not in their personal capacities), for the benefit of beneficiaries. The trustees can, and usually do, acquire more assets for the trust thereafter, again just to hold/control/manage.
With a business trust the trustees go one step further – they trade for profit, again for the benefit of the beneficiaries.
Strictly speaking, trusts aren’t separate legal entities like partnerships and companies, but in practice they are often treated as though they were, and some legislation (tax in particular) specifically defines them as such.
5 advantages of business trusts…
… and 3 disadvantages
The tax angle
As with all the other possible trading entities you can choose from, it is impossible to give general advice here. But as an overall comment, trusts have lost a lot of favour in recent years as a result of various government “attacks” on trusts, and they are now highly taxed compared to individuals, partnerships and companies. Apart from generally being subject to higher rates of tax, they are also denied the various tax exemptions and rebates available to individuals.
There are a host of factors to be considered here, and you need to seek advice tailored to your particular circumstances. For instance, it may or may not affect your business trust that the primary residence CGT exemption isn’t available to trusts.
Moreover government has given out strong signals that this “hostile” trend will continue. In 2017 already, interest-free and low-interest loans to trusts have become subject to the risk of being taxed as donations. Now the “conduit principle”, whereby income can be taxed at personal rates in the hands of beneficiaries rather than in the trust at a flat rate of 45%, is reportedly under threat.
Even more so than with other types of trading entity, it is essential to get specific guidance on whether a business trust is the most tax-efficient entity for your particular situation.
The bottom line is this – take full professional advice on both the legal and the tax implications of using each type of entity (or any combination of entities) before you start trading.
This is the fifth and final article in our series “Choosing the right legal entity for your business”. We hope you have found these articles a useful introduction to a most important subject.
And if you ever wonder why your business is so important to you, read “Entrepreneurs love their companies like parents love their children: study” on MedicalXpress
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)