The choice between a trust and a company.

Connie Bruwer from PC Bruwer and Partners give advice on this important subject.

Question:  What is the best business structure for a family business – a trust or a company?

Connie:  I get asked this question quite often in practice and my answer is usually that a company is better.

Question:  Why do you say that Connie?

Connie:  Nothing prevents you to operate a trust for business-use. I just wonder why one would want to do it. I think in any case that it is not a question of whether one or the other works. The two can complement each other. The main reason for a company or a trust, if I have to summarize this in one sentence, is to remove the risk of the business and the growth of your assets out of your personal estate. The decision about a company or trust, therefore, in the first place, will rest on estate planning.

Question:  What mistakes do people make?

Connie:  A mistake I often see people make, is to transfer the enterprise to a trust, and then to keep all of its other assets in the same trust. In short, all an individual’s assets is still in one basket and true to the myth of a trust, such people live in a fool’s paradise because they believe that everything is safe in a trust. Do not believe this. If something goes wrong with the trust and creditors start looking at your assets, all the assets in the trust is subject to risk, even if it has nothing to do with the enterprise itself. If you employ such trusts, use more than one trust for individual assets.

Question:  What is important from a business point of view?

Connie:  The important thing from a business point of view for me is the issue of control. With a company I want to make a profit – I believe it is everyone’s purpose. If I was taking a risk to make a profit, I want to have control over how the business operates and how the profits are distributed from the company. This is in direct conflict with the intent and the legal requirements of a trust.

Question:  What do you mean, Connie?

Connie:  For a trust to be recognized, the promoter of the trust must loosen him/herself from the trust property. I am aware of many proponents of trusts’ arguments about ways that this can be done and still remain a trust establishment, but not all of these arguments will be waterproof in a court case. It does in any case not make sense to put arguments forward for court cases if you think that there are easier ways that you can do this from the beginning in the right way. If the promoter of the trust regards the trust assets as his own and operates enterprise in his own interest, chances are that the trust will be seen as an extension of yourself.

Question:  What will be best to do?

Connie:  I think it would be better to establish a free-standing trust and then to operate the family business as a company. The company then issues preference as well as ordinary shares. The ordinary shares are transferred to the trust and the preference shares, a few more than the total of the ordinary shares, are transferred to the business owner.

The preference shares gives the owner a greater degree of control over the company, whilst all the growth in the ordinary shares and other assets occurs in the trust and not in his personal estate.

Question:  What is the advantage?

Connie:  He does not, as in the case of a alone trust, have to think of every questionable way to exercise control over the trustees of the trust in order to keep his company profitable and operate the company to his advantage. Because he controls the company through its preference shares, it also controls the underlying assets, and thus the profit of the enterprise. This structure also creates opportunities for the continuation of the company after the death of the owner and at the same time caring for relatives of the trust.

Question:  Would you suggest that readers that are considering such a structure, first discuss this with a planner?

Connie:  Definitely yes, because it has additional costs to be taken into account. There are also tax implications – not all negative – that needs to be considered within your circumstances to make sure that you do not give away more than you win. I think, however, that the structure for most business owners can add value, but it should preferably be incorporated as part of comprehensive planning rather than a single solution.