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