Decision to make during setup
An SMSF is required to have a trustee. This trustee can be individuals or a company. A company acting as trustee is known as corporate trustee, instead of being individual trustees, members are directors of the corporate trustee. It costs less and is relatively easy to have individual trustees, which is probably why individual trustees have been a popular option. However, it is widely accepted by professionals that a corporate trustee is superior in the long term.
Reasons people choose to have a corporate trustee
At some stage, there might be membership changes to the fund. A new member may join the fund or an existing member may leave the fund. A coporate trustee makes this change a smooth process.
The assets of an SMSF are registered under the name of the trustee. For individual trustees, change of membership means change of trustee. All registries, bank etc must be informed of this change. A solicitor is engaged to prepare relevant documents to formally add the new trustee or remove the departing trustee. In the case of a corporate trustee, no update on titles is required because the trustee stays the same. Only ASIC is notified for the change of directorship.
For a two-member fund with individual trustees, a replacement trustee must be appointed when one member leaves the fund, as there must be at least two individual trustees. An SMSF with corporate trustee can have a single director and therefore does not have to look for another trustee.
Trustees must keep the assets of the fund separate from their own assets. With a corporate trustee, it is easier to manage this requirement. The corporate trustee is the legal owner of the fund assets, there is a clear line between which assets are held in the name of the fund, and which assets are held under the name of the individuals as personal assets.
Company has limited liability and could be used as a tool for asset protection. Having a corporate trustee also ensures litigation against the fund is limited to the assets held in the name of the company, your personal assets such as family home are not being threatened.
A company is an indefinitely continuing entity. Corporate trustee would have an SMSF passed on from generation to generations.
Although less seen as an issue in practice, technically speaking, a fund with individual trustees is not able to pay lump sum benefit unless their trust deed allows. As the majority of us will not draft the trust deed by ourselves, having a corporate trustee would provide more certainty and flexibility.