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This week a reader asks the panel\u2019s 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.<\/p>\n
The reader would also like to know what the tax implications of this structure might be.<\/p>\n
This is a reasonably complex issue with many aspects to consider, says Rian du Toit from DTS Attorneys<\/a> in Port Elizabeth.<\/p>\n \u201cIt\u2019s quite a common planning technique to run one\u2019s business in a company as opposed to a sole proprietorship, where there\u2019s no separation between the individual and the legal entity, or a close corporation.\u201d<\/p>\n Du Toit says one of the many reasons for this is that a trust can easily be a shareholder of the company.<\/p>\n \u201cEven 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.\u201d<\/p>\n 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.<\/p>\n \u201cLoosely speaking, the benefit of the ownership of assets in a company ultimately lies with the shareholders.\u201d<\/p>\n Although the shares indicate the proportion of a shareholder\u2019s benefit in the assets, the legal and factual ownership is, strictly speaking, vested in the company itself, says Du Toit.<\/p>\n \u201cShareholders can share in the profits of the company, but their liability is limited.\u201d<\/p>\n Du Toit says, in many instances, the personal assets of a shareholder will be protected against losses suffered by the company.<\/p>\n \u201cThere are, however, exceptions to this as in the instance where a shareholder signs a personal suretyship for the debts of the company.\u201d<\/p>\n 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<\/a> in PE.<\/p>\n 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.<\/p>\n \u201cSeparating the business of owning a property from the business proper may well prove to be advantageous to our reader.\u201d<\/p>\n 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.<\/p>\n \u201cTax 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.\u201d<\/p>\n Certain deductions and exclusions are only available to individuals and are not applicable in other instances, says Vermaak.<\/p>\n \u201cHowever, the decision to use a company or a trust structure shouldn\u2019t be based merely on tax efficiencies because tax rules change frequently.\u201d<\/p>\n 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.<\/p>\n \u201cOur reader would be wise to consult his various advisors in this regard.\u201d<\/p>\n