Choosing between a family trust and a company is one of the most consequential structural decisions under Australian law for families and business owners. Each structure determines how assets are controlled, how income is taxed, and how liability is managed. The optimal choice depends on one’s commercial intent, family succession goals, and exposure to legal and financial risk.
Legal Nature of Each Structure
Before comparing outcomes, it is essential to understand the legal foundations of each structure. Both a family trust and a company operate within distinct statutory and equitable frameworks that define how assets are owned, controlled, and taxed. The following section explains these underlying legal mechanics and their implications under Australian law.
Family Trust (Discretionary Trust) under Australian Law
A family trust is not a separate legal entity. It is a legal relationship governed by equity, created when a settler transfers property to a trustee under a trust deed for the benefit of nominated beneficiaries.
Under Australian trust law (as developed through equity and cases such as Commissioner of Stamp Duties (Qld) v Livingston [1965] AC 694), the trustee holds legal title, while beneficiaries hold equitable interests.
Key legal characteristics:
- Governance instrument: The trust deed is the governing document defining the trustee’s powers, distribution methods, and duration of the trust (often capped at 80 years under state perpetuity laws).
- Trustee obligations: Trustees owe fiduciary duties — including the duty to act in good faith, maintain impartiality, and comply strictly with the trust deed.
- Beneficiaries’ rights: Beneficiaries have equitable rights to compel the proper administration of the trust but no proprietary right to trust property until distribution.
Advantages under Australian context:
- Tax flexibility: Trustees can distribute income to beneficiaries in lower tax brackets, subject to Division 6 of the Income Tax Assessment Act 1936 (Cth).
- Capital gains relief: Where trust assets are held for more than 12 months, beneficiaries may receive the 50% CGT discount (s.115-25 Income Tax Assessment Act 1997).
- Asset segregation: Properly structured trusts (especially with a corporate trustee) can protect family assets from personal liabilities of beneficiaries.
- Succession control: The appointor or trustee role can be used to maintain control of the trust across generations.
Limitations:
- Not a legal person: The trust itself cannot sue, be sued, or contract; all acts must be done in the trustee’s name.
- Finite duration: Trusts are subject to the rule against perpetuities, typically 80 years.
- ATO scrutiny: Improper income streaming or non-arm’s-length distributions may attract anti-avoidance rules under Part IVA of the Income Tax Assessment Act 1936.
- Limited fundraising potential: Trusts cannot issue shares or easily attract outside investors.
Company under the Corporations Act 2001 (Cth)
A company is a statutory creation — a separate legal entity incorporated under the Corporations Act 2001 (Cth). It can hold property, enter contracts, and bear rights and obligations distinct from its shareholders and directors.
Key legal characteristics:
- Separate personality: As confirmed in Salomon v A Salomon & Co Ltd [1897] AC 22, a company is a distinct legal person.
- Limited liability: Shareholders’ liability is limited to their unpaid share capital.
- Corporate governance: Directors owe statutory and fiduciary duties (ss.180-184 Corporations Act 2001), including care, diligence, and good faith.
- Continuity of existence: A company has perpetual succession and is unaffected by changes in ownership.
Advantages:
- Limited liability: Protects personal assets of shareholders.
- Ease of capital raising: Companies can issue shares, attract investors, or borrow funds in their own name.
- Tax certainty: Company profits are taxed at a flat corporate rate (currently 25% for base rate entities).
- Perpetual life: The company continues despite death or withdrawal of shareholders.
Limitations:
- Double taxation: Profits are taxed at the corporate level and again when distributed as dividends (though mitigated by the imputation system).
- Less flexible profit distribution: Dividends must align with shareholdings, unlike discretionary trust distributions.
- Regulatory compliance: Directors’ duties, ASIC filings, financial statements, and company minutes are mandatory.
- Public disclosure: Companies must maintain transparency under ASIC and taxation reporting obligations.
Legal Comparison: Family Trust vs Company
The key legal distinctions between a family trust and a company under Australian law can be understood across several core dimensions:
1. Governing Law and Legal Framework
- Family Trust: Governed primarily by state-based trust law and principles of equity, alongside the Income Tax Assessment Acts 1936 and 1997 (Cth).
- Company: Created and regulated under the Corporations Act 2001 (Cth), with additional obligations under the Income Tax Assessment Acts and ASIC’s corporate compliance framework.
2. Legal Status and Entity Structure
- Family Trust: Not a separate legal entity. It exists as a fiduciary relationship between the trustee (legal owner) and beneficiaries (equitable owners).
- Company: A separate legal person in law, capable of owning property, contracting, suing, and being sued independently of its shareholders.
3. Tax Treatment
- Family Trust:
- Income is distributed to beneficiaries, who are taxed at their individual marginal tax rates under Division 6 of the ITAA 1936.
- Eligible beneficiaries may access the 50% CGT discount on long-term asset disposals.
- Company:
- Taxed at a fixed corporate rate (currently 25% for base rate entities).
- Profits distributed as dividends are subject to further taxation at the shareholder level, offset by franking credits.
4. Control and Management
- Family Trust:
- Control rests with the trustee, guided by the trust deed.
- The appointor often holds the ultimate power to remove or appoint trustees.
- Decision-making flexibility allows for bespoke management and income streaming.
- Company:
- Managed by directors who owe statutory and fiduciary duties under ss.180–184 of the Corporations Act 2001 (Cth).
- Shareholders hold voting rights and residual ownership but do not manage day-to-day affairs.
5. Liability and Legal Risk
- Family Trust:
- The trustee bears personal liability for trust debts but can seek indemnity from trust assets.
- Using a corporate trustee limits exposure to the company’s capital and enhances asset protection.
- Company:
- Shareholders’ liability is limited to unpaid share capital.
- Directors may face personal exposure for breaches of statutory duties or insolvent trading.
6. Duration and Continuity
- Family Trust: Subject to the rule against perpetuities, typically limited to 80 years.
- Company: Has perpetual succession and continues indefinitely, even after shareholder or director changes.
7. Succession and Control Transfer
- Family Trust:
- Control can be passed by appointing new trustees or replacing the appointor in accordance with the trust deed.
- Provides strong continuity for intergenerational wealth planning.
- Company:
- Ownership and control are transferred through share transfers.
- While legally simpler, it offers less customisation for family-based succession control.
8. Fundraising and Capital Access
- Family Trust:
- Restricted to private or family capital contributions.
- Cannot issue shares or easily invite outside investors without complex restructuring.
- Company:
- Can raise capital through share issues or debt financing.
- Attractive to investors due to limited liability and transparent governance.
9. Compliance and Administrative Burden
- Family Trust:
- Requires preparation of annual distribution minutes, compliance with trust deed terms, and trustee resolutions.
- Subject to ATO review for income streaming and anti-avoidance (Part IVA).
- Company:
- Must file annual statements with ASIC, maintain registers, hold meetings, and lodge company tax returns.
Higher ongoing administrative and accounting costs.
- Must file annual statements with ASIC, maintain registers, hold meetings, and lodge company tax returns.
10. Practical Legal Summary
- A family trust prioritises flexibility, asset protection, and succession control, making it ideal for private wealth and family asset holding.
- A company prioritises limited liability, regulatory certainty, and growth potential, making it better suited for trading, investment, and expansion.
Deciding Which Structure Fits Your Legal Strategy
Having examined the legal framework and comparative features of each structure, the next consideration is strategic alignment. The appropriate choice depends on whether one’s objectives lean toward asset protection, tax efficiency, intergenerational control, or business scalability. This section outlines when each structure is legally and commercially preferable.
When a Family Trust Is Legally Preferable?
- When income streaming and tax optimisation within a family group are priorities.
- When asset protection through equitable ownership separation is essential.
- When succession planning is central — trust deeds allow tailored generational control.
- When private asset holding is more important than business expansion or fundraising.
When a Company Is Legally Preferable?
- When limited liability and clear statutory governance are paramount.
- When external capital or new investors are required.
- When continuity of business operations matters more than individual control.
- When retaining profits under a stable corporate tax rate supports growth.
Combining Legal Structures
Australian practitioners often recommend hybrid models: a corporate trustee managing a family trust, or a family trust holding shares in an operating company. This approach merges flexibility with liability protection but demands expert guidance to avoid breaching fiduciary or anti-avoidance rules.
If unsure where to start, LegalFinda provides practical resources for understanding these models and expert assistance on finding family lawyer advice suited to your business or estate.
Legal Process of Establishing Each
Once a preferred structure is identified, it must be correctly established to ensure compliance and validity. The procedural steps below outline how to form a family trust or incorporate a company under Australian law, highlighting the key documents, registrations, and statutory obligations required.
Family Trust setup:
- Draft a trust deed in compliance with state laws
- Nominate the trustee (often a Pty Ltd company).
- Appoint an appointor to retain ultimate control.
- Settle initial trust property (usually a nominal amount).
- Register for an ABN and TFN.
Company setup:
- Incorporate under the Corporations Act 2001 via ASIC.
- Adopt a constitution or rely on replaceable rules.
- Issue shares and appoint directors.
- Register for an ABN and TFN.
- Maintain statutory registers, minutes, and annual filings.
FAQs of Family Trust vs Company
Even with a clear understanding of both structures, several recurring questions arise regarding their operation, compliance, and long-term effectiveness. The following FAQs address the most common legal and practical considerations drawn from client queries and regulatory guidance.
What are the key legal differences between a family trust and a company?
A family trust is an equitable relationship with fiduciary obligations; a company is a statutory entity with separate legal personality. The trust is governed by a deed and trust law; the company by the Corporations Act 2001.
Family trust vs company for tax purposes
Family trusts allocate taxable income to beneficiaries under Division 6 ITAA 1936, allowing personal rate advantages. Companies pay a flat corporate tax rate and frank dividends under the imputation system.
When is a family trust legally superior to a company?
Where flexible distributions, asset protection, and succession control are central, and there is no need to raise capital.
When is a company structure preferable?
When the entity needs perpetual existence, statutory certainty, and protection through limited liability.
Benefits of a family trust for asset protection
Equitable ownership separates assets from personal liabilities. If the trustee is a company, exposure is limited to the corporate level, providing an additional layer of protection.
Disadvantages of using a company for private wealth management
Companies face double taxation and rigid distribution rules, making them less efficient for private asset management compared to trusts.
Different types of family trusts
Australia recognises discretionary, unit, hybrid, and fixed trusts. The choice depends on whether control or fixed entitlements are preferred.
Common company structures for family businesses
Most family operations use a proprietary limited (Pty Ltd) company — flexible for governance yet shielded by limited liability.
Best legal structure for asset protection in small business
A family trust with a corporate trustee often provides the best balance between flexibility and liability protection.
Control and flexibility
Trusts are governed by deed and equity — highly adaptable. Companies operate under statutory frameworks — predictable but rigid.
Legal Summary
Both structures are legitimate vehicles recognised under Australian law.
- A family trust prioritises control, flexibility, and intergenerational planning.
- A company prioritises liability protection, scalability, and legal certainty.
The decisive factor lies in the client’s intent:
- Asset holding & family planning → Trust
- Trading & growth operations → Company
Professional advice from a solicitor and tax adviser is critical before establishment to ensure compliance with trust law, corporate law, and ATO regulations. For those seeking expert guidance or verified legal practitioners, LegalFinda provides a trusted platform to connect with experienced family trust and corporate law specialists across Australia.
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