One of the most important goals of conducting a business is safeguarding your assets and investments from creditors and other risks. Business owners and prospective investors need to make informed decisions when finally deciding on the vehicle of their new entity or for the investment of their assets.
The question that most frequently arises is what is the most appropriate legal structure under which to conduct your business? The answer depends mainly on the nature of the business and the desired purpose you would like the vehicle to serve. There are many structures to be considered, however this article will focus on the differences between conducting a business through a trust of private company vehicle.
Companies are governed by the Companies Act, 2008 (“the Companies Act“) and administered through the Companies Intellectual Property Commission (“CIPC“). Whereas trusts are regulated by common law, the Trust Property Control Act,1988 and most importantly, the trust deed. The Companies Act places many stringent requirements on a company whereas a trust deed can be drafted in such a way to place minimal requirements on the trust.
Companies are incorporated and registered with CIPC and must file annual returns yearly and may be required to be audited in terms of the Companies Act. A trust is a legal relationship that has been created in a trust deed which is then registered with the Master of the High Court where there are less administrative costs involved as trusts are not subject to the administrative burdens of a company.
A trust deed grants powers to trustees to manage and protect the trust assets, through which they may conduct business in order to make profits which may be distributed to the beneficiaries.
A company is managed by its directors who derive their power from the Companies Act and the company’s memorandum of incorporation. A company’s profits are distributed to its shareholders by means of dividends declared.
Like a company, a trust is a separate legal entity and the assets held under trust do not form part of the personal estate of the trustee or beneficiary. If a beneficiary or trustee becomes insolvent, the trust assets are protected and not attachable. However during the liquidation process of a company, the assets of the company can be attached by creditors. This is arguably the most crucial advantage that a trust has over a company.
A trust is not liable for estate duty. Whatever happens to the trust or to the trustees has no estate duty implications as the trust property does not form part of the deceased’s estate. Estate duty is taxed at 20% of the dutiable amount of a deceased estate. Estate duty saving can be very beneficial and plays an important part in estate planning.
The main difference in tax rates comes into play when income tax is calculated. A company is taxed at a flat rate 28% on taxable income and trusts at a rate of 40%.
Income tax payable by the trust may be deferred if the income is vested directly in the beneficiary which income would then be taxed in the hands of the beneficiary and not the trust. The profit declared to shareholders from a company is subject to further 15% dividend withholding tax but then is excluded from the taxable income of the shareholder.