Setting Up A Business! Unit Trust vs Company Explained!

Thinking about establishing a business?  In my opinion there are two main entities which you may look to utilize. You can either trade via a “Unit Trust” structure or a “Company Pty Ltd” structure.

What is a Unit Trust?

A Unit Trust is similar to a Family Trust but is generally used for business purposes rather than a family. The Unit Trust is simply the extension of a Family Trust into the field of commerce.

One or two people, usually a husband and wife, control a Family Trust. The husband and wife have complete discretion to whom they distribute income each financial year. As such a “trust” is not usually shared outside a family and hence the need for a Unit Trust emerges. As such, the Unit Trust structure will distribute the “profit” within the business to the unit holders, whereas the profit in the Family Trust can be distributed at ‘discretion’ to the beneficiaries.

How does a Unit Trust work?

At the end of each year, income is distributed to the Unit Holders in proportion to the units each beneficiary holds. The Trustee has no discretion. The units can either be held by individuals, a Family Trust or Company. One of the major advantages of a Unit Trust verus a Family Trust is the ability to ‘negotiate’, buy / sell units within the Unit Trust entity.

As such, this ability is a reason why the Unit Trust is a preferred structure for individuals who carry business along with non family members.

What is a Company?

A Company structure is another preferred method for your business structure and would generally be more suitable for businesses with greater turnover and staff members. This structure involves all key staff and employees to have a salary package and ensures that the appropriate superannuation is allocated to the staff members. For business operations, receiving income and paying expenses and any profits at the end of the financial year would be subject to the company tax of 30%.

These profits or “dividends” are usually transferred to the shareholders in the form of a franked dividend, and these dividends form a part of the individual tax returns.