This is Amal.
She's launching her new business,
a food delivery service using drones.
She's structuring her business as a company
where she will own some of the shares.
But before she can go any further,
she needs to think about how she's going
to own the shares in her company.
How she owns her shares is important
because it will affect how much tax she needs to pay
and whether she can protect her shares
if something goes wrong.
Amal could own her shares in two ways.
She can own them as an individual,
or she can own them through a discretionary trust.
We're going to look at why and how
Amal might own her shares through a trust.
But first, what is a trust?
A trust is a legal relationship
where one person or organisation,
called the trustee,
holds assets for the benefit of someone else.
These assets might be property, income,
or, in this case, shares.
This means that instead of you personally owning the shares,
the trustee will own them.
You can set up your own separate trust
to own your shares.
This means that if you have a business partner,
they can have their own trust to hold their shares.
Owning your shares through a trust
makes sense for a couple of reasons.
Firstly, the trust can help you manage
how much tax you need to pay as an individual.
When Amal's company makes a profit,
she can then choose to give shareholders
some of the profit, known as dividends.
If Amal personally owns her shares,
she will also receive these dividends as a shareholder,
and they will be considered part of her personal income.
It would be added onto any other income
that she is earning such as her salary.
As a result, she will be taxed
at her individual marginal tax rate,
which will likely be higher.
But if Amal owns the shares
in her company through a trust,
the dividends will be paid through the trust.
As the trustee, she can then distribute
the money from the trust to herself
or other people, such as her family.
The trust doesn't pay tax;
instead, Amal will pay tax
only on the amount of money
that's distributed to her through the trust.
In this case, as a trustee,
Amal gives some of the money
coming through the trust to her partner, Maya,
which helps with their tax planning.
Secondly, a trust can also help protect
your shares if something goes wrong.
For example, Amal is a director of her company.
She enters into a contract
to supply her business with drones.
But when the delivery arrives,
she realises that she doesn't have
enough money to pay the bill.
Operating your business when it can't pay its debts
is a breach of directors’ duties.
If you reach your directors’ duties,
you may be personally responsible
for paying off your company's debts.
This means that the supplier can sue Amal
and take her personal assets,
such as her car, to pay off the company's debts.
The supplier cannot take Amal's shares
as the trust protects them.
So a trust may be a great way
for Amal to own her shares in her company,
but how does a trust actually work?
Firstly, there is a trustee.
The trustee is the person who manages the trust
and distributes the funds.
It's a good idea to create a corporate trustee,
which is a company that acts as the trustee.
Legally, the company is in control of the trust,
but in reality, you are the person making decisions -
going to the bank and signing documents
as director of the trustee company.
Secondly, there are beneficiaries in a trust.
The beneficiaries are the people
that can receive money or assets from the trust.
The beneficiaries will likely be you
and your family members,
or anyone else you choose to give money to.
Setting up a trust is a complex process,
but it can be an effective financial strategy
to consider as a business owner.
If you have any questions about setting up a trust,
call LegalVision today.