What Is a Bucket Company?

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A Bucket Company is a type of company often used in tax planning and income distribution strategies, especially in family businesses or small enterprises. It helps manage profits more effectively by reducing the overall tax burden and improving cash flow.

Meaning of a Bucket Company

In simple terms, a bucket company is a private company set up to receive income distributions from a trust. The name “bucket” comes from the idea that it collects or “catches” income, similar to how a bucket holds water. This income is then taxed at the company tax rate, which is generally lower than individual tax rates.

Why Businesses Use a Bucket Company

Tax Efficiency: One of the main reasons for creating a bucket company is to minimize tax liabilities by distributing trust income to an entity with a lower tax rate.

Income Retention: It allows profits to stay within the company for reinvestment instead of distributing them to individuals immediately.

Asset Protection: It can secure business assets by separating them from personal ownership.

Strategic Planning: A bucket company provides flexibility for future investments, acquisitions, or business expansion.

How It Works

When a family trust earns income, instead of distributing it directly to individuals who might fall into higher tax brackets, the trust distributes part of it to the bucket company. The company then pays tax at the corporate rate, usually lower than personal rates. The retained earnings can later be used for business growth or investment.

Conclusion

If you're wondering “What Is a Bucket Company?”, think of it as a smart financial tool for managing trust income efficiently. However, it's important to get professional advice before setting one up, as tax and legal rules vary depending on your situation.