ENTITIES AVAILABLE TO OPERATE A BUSINESS COMPANY
A company is a separate legal entity whereby ownership and management of it are separated. The company is owned by the shareholders and management is vested in the board of directors.
Shareholders will generally not be able to interfere with the decision making of the directors as regards the running of the company. However, the role of the shareholders is important, especially when it comes to reviewing actions of directors, and in assessing how the directors have behaved in the light of their responsibilities and the law and they can also remove directors.
The Board of Directors is the group of people appointed to run the company on a day-to-day basis and to supervise or initiate the activities carried on by persons employed by or in the company’s name.
The commercial risk of any enterprise carried on is taken by the company and not the owners/shareholders and the enterprise is said to be incorporated. This is called Limited liability because the liability of the shareholders is limited.
An enterprise may diversify and set up as a group of several companies, with each company’s risks isolated from the others.
A very high percentage of businesses today are incorporated. There are many advantages to be gained by using a company instead of a partnership or some other structure. There are some tax benefits available from operating as a company over and above trading as an individual or partnership.
In particular, and as mentioned above, a company offers limited liability, and also ownership of any enterprise carried on by the company can be changed simply by way of transferring shares.
As the vast majority of businesses are operated by companies, it is appropriate here to highlight some of the more important features of companies and their operation.
TRUSTS
There are a variety of trusts which may or may not be suitable in particular circumstances.
There are three basic components of a trust;
The trustee is desirably a company and conducts all dealings on behalf of the trust and is;
Directly liable for all dealings of the trust albeit that it is entitled to be indemnified from (and can call upon to be recompensed from) the trust assets in respect thereof.
The Trust Estate which to explain it another way is the totality of the trust assets.
The beneficiaries; are those who benefit from the trust income
There are Fixed trusts (some time known as unit trusts) which in some respects can be likened to companies as the beneficiaries are issued units (much like shares in a company) and are generally entitled to receive a fixed share of the trust income proportionate to the number of units held.
Then there are Discretionary trusts whereby under the terms of the trust deed the trustee allocates income or shares of income to one or other of the beneficiaries at the trustee’s discretion.
They are invariably regulated by the terms of a trust deed and the trustee is bound to operate the trust according to the terms of that Deed.
Historically discretionary trusts have been used as an income splitting device for Tax purposes.