Companies, partnerships and discretionary trusts – an outline of basic structures

Companies

A company is regarded by the law as a legal entity (i.e. it has legal personality which means amongst other things it can own property, and sue and be sued in its own right just like a natural person) whereas partnerships and discretionary trust do not have legal personality. For this reason a partnership is not legally distinct from the partners that comprise it, and a trust is not legally distinct from the trustee and the beneficiaries.

Partnerships

Partnerships are in some respects treated for tax law purposes as separate entities, however for all other legal purposes partnerships and discretionary trusts are regarded by law as relationships. In the case of a partnership, the relationship is between the partners under a contract. In the case of a trust the relationship is between the trustee and the beneficiaries of the trust under a trust deed.

In the case if a partnership, a business may be conducted by all the partners as a group. Alternatively, for ease of operation the partnership business may be conducted through a company which acts as an agent and nominee for the partners. In the latter case, the use of the company does not change the liability exposure of the partners to creditors or other parties (see further below).

Discretionary trusts

In the case of a discretionary trust, all relevant dealings are undertaken by a trustee on behalf of the members of class of beneficiaries identified in the trust deed. It is the trustee which is the legal owner of the assets of the trust and it is the trustee which undertakes all transactions on behalf of the trust. However (subject to rights of indemnity by the trustee against assets of the trust for liabilities properly incurred by the trustee) everything which the trustee owns and all income which it derives from those assets are held and derived beneficially for the benefit of the beneficiaries. The trustee of a discretionary trust can be an individual or group of individuals or it can be a company. Because trustees are personally liable on any contracts entered into while acting as trustee (see below), it is common for trustees to be companies.

Partnership of trusts

A “partnership of trusts” as it is colloquially referred to, embodies all of the above elements within its structure.

Distinguishing characteristics

Some important aspects distinguishing companies, partnerships and trusts as structures for the operation of a business are as follows:

  • property of a company is owned beneficially by the company itself. Members have rights to dividends and to share in the proceeds of a winding up, but they do not have any direct ownership interest in the company’s assets. Therefore on a change of members in a company no transfer of its assets occurs or is otherwise needed.
  • property of a partnership is owned by the partners personally, but no partner can claim individual ownership of any specific asset.
  • property of a trust is beneficially owned by the beneficiaries. However in the case of discretionary trusts the class of beneficiaries is very wide and no individual beneficiary has an interest in the trust assets until the trustee exercises its discretion in favour of that beneficiary.
  • creditors of a company can enforce a judgment only against the company they cannot enforce it against the shareholders (also called members) of the company.
  • creditors of a partnership are creditors of the partners personally. A creditor who obtains judgment against a partnership can therefore enforce the judgment against all the partners or any partner. Where a nominee company is used to conduct the partnership business, the partners will usually continue to be personally liable for all liabilities incurred on behalf of the partnership. The nominee becomes an additional contributory.
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