This week a reader asks the panel’s opinion on setting up a business as a company and whether it would be wise for a trust he is part of to own shares in it.
The reader would also like to know what the tax implications of this structure might be.
This is a reasonably complex issue with many aspects to consider, says Rian du Toit from DTS Attorneys in Port Elizabeth.
“It’s quite a common planning technique to run one’s business in a company as opposed to a sole proprietorship, where there’s no separation between the individual and the legal entity, or a close corporation.”
Du Toit says one of the many reasons for this is that a trust can easily be a shareholder of the company.
“Even though a trust can also be a member of a close corporation, there are more restrictive measures to keep in mind in such an instance.”
The recently introduced Companies Act prevents the creation of new close corporations and Du Toit says the reader will have to consider this legislation with respect to a new company too.
“Loosely speaking, the benefit of the ownership of assets in a company ultimately lies with the shareholders.”
Although the shares indicate the proportion of a shareholder’s benefit in the assets, the legal and factual ownership is, strictly speaking, vested in the company itself, says Du Toit.
“Shareholders can share in the profits of the company, but their liability is limited.”
Du Toit says, in many instances, the personal assets of a shareholder will be protected against losses suffered by the company.
“There are, however, exceptions to this as in the instance where a shareholder signs a personal suretyship for the debts of the company.”
While at first glance it may appear to be fine for a trust to hold shares in the company and own the property, being a shareholder may pose a risk to other assets owned by that shareholder, says Charlotte Vermaak from Chas Everitt in PE.
Vermaak says ownership of a property can have far-reaching consequences and one would not necessarily wish to expose a business or business assets to any negative implications.
“Separating the business of owning a property from the business proper may well prove to be advantageous to our reader.”
It may therefore be wise, suggests Vermaak, to house the shares in the company in one trust and acquire ownership of the property in another.
“Tax implications of trusts and companies are vast and complicated. In simple terms, individuals are taxed on a sliding scale on all taxable income and companies and trusts typically pay tax at a fixed rate.”
Certain deductions and exclusions are only available to individuals and are not applicable in other instances, says Vermaak.
“However, the decision to use a company or a trust structure shouldn’t be based merely on tax efficiencies because tax rules change frequently.”
According to Vermaak, other aspects relating to protection of assets and estate and risk planning should also be taken into account when structuring ownership of assets.
“Our reader would be wise to consult his various advisors in this regard.”
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