Company owned by Multiple Discretionary Trusts

Overview

A start-up might choose to take the form of a company owned by multiple discretionary trusts if they value security or if they see the business growing in the future. A company is treated as a separate entity than its founders. This creates a ‘corporate veil’ between the company and the individuals, which protects them from legal consequences if the company suffers debts. Furthermore, the flow of capital derived from a company stays within the business. This allows for simple reinvestment towards company growth. Finally, if the company is owned by multiple discretionary trusts, it allows individuals to minimize their tax paid through distribution of funds or streaming to family members.

The Director

The director is the individual that founded the company and consented to be named director. They are also the first shareholder of the company when shares are issued upon the creation of the company. They are ultimately responsible for the running of the company.

The Shareholders

Shareholders are those who own shares in the company. A beginning company, such as a small proprietary company, may wish to have all the shares owned by a single person; often the director. In the case where there are multiple founders, shares can still be owned by the founder and divided according to their wishes.

Formal Requirements

There are a few formal requirements for individuals wanting to start a company that is set up to be owned by multiple discretionary trusts. Firstly, each founder needs to establish their own discretionary trust. This is done through completion of a trust deed. At this time the trustees and beneficiaries can also be named. Secondly, the founder needs to establish what kind of company they want to create. The most likely choice for the establishment of new companies is a small proprietary company. This means that the company only needs one director and does not have to hold an annual general meeting of members. Thirdly, the founder must register the company with ASIC and obtain an ACN or Australian Company number. At this time, the founder may also wish to register the business name with ASIC. Once the company has been registered with ASIC, the officers of the company must be appointed such as the director and secretary.

Laws pertaining to the business field

Individuals participating in the business will need to follow laws relating to their business field. For example, an electrician carrying on a business will need to be licensed. It is important that before starting any business, the founders are aware of these stipulations to avoid disputes later.

Business name

If the business is being carried on under any name other than that of the full name of its founders, then the name needs to be registered with ASIC. This is a simple and inexpensive process but still required in Australia.

Tax File Number (TFN)

An Australian Tax File Number (TFN) is a personal reference number for taxation purposes. While a TFN is not required for personal use, but the tax fees are substantially higher without one. Furthermore, without a TFN it becomes impossible to obtain an Australian Business Number.

Australian Business Number (ABN)

Every business after July 2000 is required to have an Australian Business Number (ABN) [Link to a ABN Application page], which can be attained through the Australian Taxation Office (ATO).

Register for Good and Service Tax (GST)

If the business has a GST turnover of $75,000 or more a year in income, the they are required to register their business for GST.

Examples Scenario of a Company owned by multiple Discretionary Trusts

Example 1:

Mark, Julie, and David are in the process of starting a company that makes and distributes beverages. They expect the business to eventually be largely profitable and wish to distribute their products nationally at some point in the future. They have elected to proceed using a company that is to be owned by multiple discretionary trusts as their business model. All three founders have established discretionary trusts and together they have successfully applied for a business name, which has been registered with ASIC. They named each person as a director of the company and have distributed shares to each individual. Mark and David each receive twenty five percent of the shares and Julie receives fifty percent as this reflects the capital that each founder invested in the business. If the directors wish to redistribute the shares at a later date, they are still able to do so. This structure enables the company to grow larger as capital is reinvested into the business, making it simpler for Mark, Julie. and David to reach their goal of national distribution. Furthermore, if a customer were to claim that they became sick after consuming one of the company’s beverages, the founders do not share liability for any damages that might be awarded to the customer

Example 2:

Jacob and Leslie have a company that they jointly own through their individual discretionary trusts. The company sells designer sporting shoes to specialty stores across Adelaide and a few surrounding areas. Jacob designs the shoes while Leslie is primarily responsible for distribution. The business is currently fairly small, however Jacob’s work was recently featured in a popular magazine and Leslie has noticed an uptake in the amount of shoes being ordered through their partnered retailers. Together, Jacob and Leslie decide to further invest in their company to branch out further and increase production of Jacob’s shoes. As their business is structured for growth, it is a far simpler matter for them to expand their production to meet the increased demand by employing more people and reinvesting the revenue produced through the company.