The moment the choice arrives
You are past the idea stage. The product works, the first few customers pay, and someone is about to join you, or a fund has asked to see your cap table. This is when the structure question stops being theoretical. The business needs a legal home, and the choice you make will shape how you pay yourself, how you bring on co-founders, employees and investors, and what happens to the business if something goes wrong or someone leaves. The decision is not permanent, but restructuring later is expensive and can trigger tax. It is worth getting right the first time.
The options in front of you
Three structures will do most of the work for a tech startup: operating as a sole trader, through a company, or through a trust. A sole trader structure has no separate legal identity. You and the business are the same person, you keep all the profit, and you are personally liable for everything the business does. It works at the very earliest stage, but it is rarely the right long-term home for a growing business. A partnership spreads the same personal liability across the partners, which is why it is uncommon in tech.
The real question for most founders is trust versus company. A company is a separate legal entity owned by shareholders and run by directors. A trust is not an entity at all. It is a relationship in which a trustee holds and manages assets for the benefit of beneficiaries. The most common business trust is the discretionary trust, where the trustee decides each year how to divide the trust's income among a class of beneficiaries. Under s 101 of the Income Tax Assessment Act 1936 (Cth), a beneficiary is treated as presently entitled to income only once the trustee exercises that discretion. Unit trusts divide entitlement by the units each beneficiary holds, and hybrid trusts combine the features of both.
Two options you might assume are available need a closer look. First, a trust cannot issue shares. If investors want equity, they must take units or hold shares in a related company instead. Second, many businesses described as trust structures are actually combinations: a discretionary trust holding shares in an operating company, often with a company acting as the trustee. That combined structure tries to get the tax flexibility of a trust and the investor-friendly shape of a company at once. It is also the most expensive option to set up and run, so it needs to earn its keep.
Weighing the factors that should drive the decision
Who pays tax on the profits
The biggest reason businesses choose trusts is tax flexibility. Where a beneficiary is presently entitled to a share of a trust's income, that share is included in the beneficiary's assessable income under s 97 of the Income Tax Assessment Act 1936 (Cth). The trust itself is not taxed on that income. A trustee can therefore distribute profit to beneficiaries in lower tax brackets, such as a spouse or adult children, and can stream different kinds of income, such as franked dividends or capital gains, to the beneficiaries who can use them best. Capital gains distributed to individuals can also attract the 50% CGT discount where the asset has been held for more than 12 months, something a company cannot offer.
The flexibility has hard edges. If income is not distributed to a beneficiary, the trustee is taxed on it at the top marginal rate: 45% under s 12(9) of the Income Tax Rates Act 1986 (Cth), which becomes 47% once the Medicare levy is added. That is the default outcome under s 99A of the Income Tax Assessment Act 1936 (Cth), and it makes retaining profit inside a trust a very expensive strategy. Section 100A adds a further layer. If a beneficiary's present entitlement arises out of a reimbursement agreement, an arrangement under which the economic benefit ends up elsewhere, often back with the founder, the beneficiary is deemed never to have been presently entitled and the trustee is assessed at the top rate. These arrangements are a known focus of ATO compliance activity.
A company works differently. Profit retained in the company is taxed at the corporate rate, as low as 25% for a base rate entity with turnover under $50 million that meets the passive income test. Dividends paid out are franked, so the tax the company has already paid is credited against the shareholder's own tax bill. The trade-off is that a company cannot split income between family members the way a discretionary trust can. Dividends go to shareholders in proportion to their shareholdings, and everyone is taxed at their own rate.
What happens to early losses
Tech startups typically lose money for the first few years, and the ability to use those losses later matters. A company carries losses forward as a matter of course, subject to the continuity of ownership test, or the same business test where ownership has changed. Trusts are different. Schedule 2F of the Income Tax Assessment Act 1936 (Cth) contains special trust loss rules that can stop a trust from deducting past losses where there has been a change in the ownership or control of the trust, unless the trust can pass tests such as the pattern of distributions test or the same business test. A startup whose beneficiaries, unit holders and distributions change from year to year can fail those tests without anyone noticing until a loss carry-forward claim is reviewed. For a business that expects to burn cash early, the company is usually the safer vehicle for banking losses.
Asset protection and personal liability
A trust separates ownership from benefit. The trustee holds the assets, and the personal creditors of a beneficiary generally cannot reach them. If a creditor is pursuing you personally, it is hard to force a distribution from a discretionary trust, because no beneficiary has a fixed entitlement until the trustee resolves to distribute. That is real protection during the risky early years, when product liability claims and failed contracts are the threats that keep founders awake.
The protection has limits. A trust does not protect the business's own assets from the business's own creditors. If the trust cannot pay its debts, those assets can be pursued. And if the trustee is an individual, that person is personally liable for the trust's debts in the ordinary course of running the business. The usual fix is a corporate trustee, a company that acts as trustee, which gives the familiar limited liability shield. The shield is not absolute. Under s 197 of the Corporations Act 2001 (Cth), a director of a corporate trustee can be personally liable for the trust's debts where the company cannot pay them and has lost its right to be indemnified out of trust assets because of a breach of trust, acting outside its powers as trustee, or a trust deed term that denies the indemnity. The section makes clear the director is not liable merely because trust assets are insufficient. A well-drafted deed, and a trustee that follows it, keeps directors inside that protection. Sloppy administration puts them outside it.
Raising capital and rewarding employees
For a startup that expects to raise venture capital, the company has a structural advantage that is hard to argue with. Investors take shares, which give them clear ownership, voting rights and governance through a board and a constitution. A trust cannot issue shares at all, and funds that specialise in early-stage technology deals generally prefer the clean equity of a company. The cap table, the term sheet and the eventual exit all assume shares exist, which is where the two structures diverge:
- Company: investors take shares, and the cap table and governance are standard; employees can be granted tax-advantaged shares or options.
- Trust: there are no shares to issue; investors must take units or invest in an associated company, and their rights need bespoke drafting.
Employee equity is a second, quieter reason to prefer the company. A company can grant employees shares or options under an employee share scheme, with the discount taxed under Division 83A of the Income Tax Assessment Act 1997 (Cth), including deferred taxation for eligible schemes. A trust operating the business directly has no shares to offer. The best it can do is units, which are a poor fit for most employees and carry no equivalent tax framework.
Government incentives point the same way. The R&D Tax Incentive, the most valuable tax concession for many tech businesses, operates through Division 355 of the Income Tax Assessment Act 1997 (Cth) and is available to entities that register as R&D entities under the Industry Research and Development Act 1986 (Cth), in practice companies. The early stage investor incentives in Division 360 of the Income Tax Assessment Act 1997 (Cth) are likewise built around investments in innovation companies. A trust operating the business directly generally cannot access these. If your business is genuinely doing research and development, this single factor can outweigh every advantage of a trust.
Succession, control and estate planning
Trusts are often chosen for longevity and control. A trust is not owned by anyone, so it does not die with its founder. It can keep operating for years after you step back, pass away or fall out with a co-founder. Control sits with the appointor, the person named in the trust deed who can remove and replace the trustee. That makes a discretionary trust a powerful estate-planning tool. Assets can be held for children and grandchildren, and distributions can be tailored to their circumstances, without the assets forming part of your estate in the usual way.
The flip side is that the trust is only as stable as its trustee. If you are the individual trustee and you die or lose capacity, the trust loses its manager and a new trustee must be appointed. That is why the corporate trustee is so common: a company has perpetual succession and keeps operating regardless of what happens to the people behind it. A company offers continuity in its own way too. Shares are transferable, directors can be replaced, and the business carries on through changes of ownership.
The paperwork and running costs
Both structures carry compliance obligations, but a trust adds a layer. A trust must lodge a trust tax return every year and formally resolve how the year's income is distributed, and the tax treatment depends on the paper trail: trustee resolutions, minutes and records for every distribution. A company must file annual financial reports and returns with ASIC, keep registers and hold director meetings. Add the one-off cost of drafting a trust deed and the ongoing cost of a corporate trustee, its own ASIC fees, tax return and bank account, and a trust structure is simply more expensive to run than a comparable single company. That overhead is worth paying only if the tax flexibility and asset protection deliver real value for your particular business.
How an Artificer Legal lawyer can help you choose
The structure decision is a legal decision that is often made as if it were only a tax decision. A lawyer's job is to stress-test the assumptions the choice rests on and to build the documents the chosen path needs. An Artificer Legal commercial lawyer would start by mapping your actual situation: your funding timeline, whether you will claim the R&D Tax Incentive, who the beneficiaries or shareholders will be, and what assets need protecting. That mapping often changes the answer. A founder who is certain they need a trust can discover that the R&D incentive and employee equity plans make a company the better spine, with a trust added later as a shareholder.
We would then model the downside so the decision is made with eyes open: what happens to losses if the trust fails the Schedule 2F tests, what the 47% default rate means if income cannot be distributed, whether a reimbursement arrangement under s 100A is lurking in the plan, and how much director exposure s 197 of the Corporations Act leaves in a corporate trustee structure. Where a trust is the right call, the deed is where the value sits. The drafting of the appointor clause, the beneficiary class, the trustee's powers and the indemnity provisions determines whether the structure survives a founder's death, a divorce or a dispute. A template deed downloaded from the internet will not do that work, and restructuring later is a costly fix: moving assets between structures can trigger capital gains tax and stamp duty.
We work with your accountant on the tax modelling rather than duplicating it, then draft what the chosen structure needs: a trust deed and corporate trustee constitution, a shareholders' agreement and constitution for a company, unit trust documents, or the employee share plan that makes the company version attractive to your first engineers.
The funding question decides the structure
The factor that most often decides this question is not tax, and it is not asset protection. It is how you plan to fund the business and reward the people who build it. A tech startup that will raise venture capital, offer employee equity and claim the R&D Tax Incentive keeps coming back to the limits of a trust: no shares to issue, no employee share scheme, no R&D offset for the operating entity. For that business, the company is the spine, and a trust, if it earns its keep, sits above it as a shareholder. A founder who plans to distribute steady profits to family beneficiaries, with no outside capital on the horizon, may find the trust's tax flexibility worth the compliance cost.
Whichever way the balance tips, the structure should be chosen before the first serious funding round, the first employee grant or the first loss year, because those events lock the options in. The core of the decision is simple. A trust lets you choose who is taxed on the profit and protects the assets from the personal creditors of its beneficiaries, but it cannot issue shares, carries a punishing default tax rate on undistributed income and adds a layer of administration. A company is simpler, investor-friendly and the vehicle through which the main tech incentives flow, at the cost of less flexibility in who pays tax on the profits. A commercial lawyer, working with your accountant, can stress-test both against your actual plan and put the chosen structure in place before the business grows past it.