Business Structure Guide
Australia’s three most common business structures are sole trader, company (Pty Ltd), and discretionary trust. The one you choose affects how much tax you pay, how well your assets are protected, how much admin you carry, and how easy it is to grow or eventually sell. Getting this right is one of the most consequential financial decisions a small business owner can make.
What is a sole trader?
A sole trader is the simplest and most common business structure in Australia. You operate as an individual. The business isn’t a separate legal entity. You use your personal ABN, lodge a single individual tax return (which includes your business income), and take full personal responsibility for any debts or legal claims.
Advantages of sole trader
- Lowest setup cost. Register for an ABN at no charge, with optional business name registration (~$43/year)
- Minimal ongoing admin. One tax return, no separate ASIC reporting
- Business losses can offset other personal income in the same yea
- Full control. No shareholders, directors, or trustees involved
Disadvantages of sole trader
- Unlimited personal liability. Your home, savings, and car are exposed to business debts
- Taxed at personal income tax rates, up to 47% (45% + 2% Medicare levy) on income above $180,000
- No income splitting. All profit is assessed in your hands
- Harder to raise capital or bring in partners
- The business cannot continue if you die or become incapacitated
Best for: Freelancers, consultants, and tradespeople starting out, or low-risk service businesses with modest income and no employees.
What is a company (Pty Ltd)?
A proprietary limited company (Pty Ltd) is a separate legal entity. It can own property, enter into contracts, employ people, and sue or be sued in its own name. You become a shareholder and (usually) a director. Your personal liability is generally limited to your share capital, though directors can still be held personally liable for insolvent trading or unpaid PAYG and GST obligations.
Advantages of a company
- Limited liability. Personal assets are generally protected from business debts
- Flat company tax rate of 25% (base rate entities) or 30%, compared to up to 47% personally
- Retaining profits in the company allows tax capping at certain rates
- Easier to raise capital by issuing shares to investors or partners
- Perpetual succession. The company continues if an owner leaves or dies
- Greater credibility with clients, banks, and government contracts
Disadvantages of a company
- Higher setup cost
- Ongoing ASIC fees (~$310/year for a small proprietary company as of 2026)
- More administration. Separate tax return, financial statements, director obligations
- Losses cannot be distributed to shareholders; they are carried forward to offset future company profit only
- Distributing profits requires paying dividends (which may be franked), which can be less flexible than a trust
Best for: Growing businesses with employees, businesses carrying liability risk, owners earning over $120,000 from the business, or businesses looking to bring on investors or partners.
What is a discretionary trust?
A discretionary trust (often called a family trust) is a legal arrangement where a trustee holds and manages assets for the benefit of a group of beneficiaries. The trustee, whether a company (known as a corporate trustee) or an individual, decides each year how income is distributed among beneficiaries.
Unlike a company, a trust is not a separate legal entity in the same sense. The trustee (which is best practice to be a company) enters into contracts and owns assets in their capacity as trustee. Income is not retained in the trust. It is distributed to beneficiaries, who pay tax at their own rates.
Advantages of a discretionary trust
- Income splitting. Distribute income each year to beneficiaries in lower tax brackets, such as a spouse, adult children, or related companies
- Strong asset protection. Assets held in trust are generally not available to a beneficiary’s personal creditors
- 50% CGT discount on assets held longer than 12 months (unlike companies, which do not access this discount)
- Flexibility. The trustee decides distributions each year based on each beneficiary’s tax position
- Privacy. Trusts are not registered on a public register like ASIC
Disadvantages of a discretionary trust
- Most complex and expensive to set up, typically $1,500–$3,000 for a proper trust deed
- Losses cannot be distributed. They stay in the trust until offset by future trust income
- ATO scrutiny. Trust distributions must have a genuine commercial basis; artificial income splitting attracts penalties
- Annual tax return required for the trust as a separate entity
- Trustee obligations are significant, covering duty of care, record-keeping, and compliance with the trust deed
Best for: Established business owners with family members on lower incomes, businesses with significant assets to protect, and owners focused on long-term wealth and estate planning.
Side-by-side comparison
The table below compares sole trader, company, and trust structures across the criteria most important to Australian small business owners.
| Feature | Sole Trader | Company (Pty Ltd) | Trust (Discretionary) | Best For |
|---|---|---|---|---|
| Setup cost | ~$50–$100 | ~$800–$3,000 | ~$2,500–$5,000 | Sole trader |
| Ongoing admin | Very low | Medium–High | Medium–High | Sole trader |
| Tax rate | Personal rate (up to 45%) | Flat 25–30% | Distributed to beneficiaries | Company or Trust |
| Income splitting | No | Limited | Yes, flexible | Trust |
| Asset protection | None | Moderate | Strong | Trust or Company |
| Raising capital | Very difficult | Easier (shares) | Difficult | Company |
| Losses | Offset personal income | Carried forward | Carried forward | Sole trader |
| Succession | Cannot transfer | Shares transferable | Flexible | Company or Trust |
| GST obligations | Once >$75k turnover | Once >$75k turnover | Once >$75k turnover | Same for all |
| Complexity | Simple | High | High | Sole trader or Company |
| Privacy | Public | ASIC-registered | Private | Trust |
| Ideal stage | Solo | Growth phase | Established/family | Depends on goals |
How Each Structure Is Taxed in Australia
Sole Trader Tax
Sole traders pay tax at individual marginal rates. In 2025–26:
- $0–$18,200: 0% (tax-free threshold)
- $18,201–$45,000: 16%
- $45,001–$135,000: 30%
- $135,001–$190,000: 37%
- $190,001+: 45%
These rates do not include the 2% Medicare levy. A sole trader earning $200,000 in business profit pays approximately $60,138 in income tax plus Medicare levy, assuming they are an Australian resident for tax purposes and no offsets, deductions beyond profit calculation, or levy reductions apply.
Company Tax
Base rate entities (most small businesses with aggregated turnover of less than $50 million and at least 80% passive income) pay 25% company tax. All other companies pay 30%. That same $200,000 profit retained in a company is taxed at $50,000, saving roughly $20,000–$23,000 compared to a sole trader at the top rate.
Keep in mind, profits eventually need to be distributed to shareholders as dividends (which come with franking credits). The shareholder then pays tax on the grossed-up dividend minus the franking credit. There is no free tax advantage here, just deferral and rate differences.
Trust Tax
In most circumstances, a trust itself does not pay tax. The trustee distributes income to beneficiaries, who pay tax at their own marginal rates. Distributing $200,000 strategically across two adults, each earning $40,000 could result in a combined tax bill of roughly $16,000 to $20,000, a meaningful saving compared to a sole trader at the top rate.
The ATO’s trust anti-avoidance rules (including the much-discussed section 100A provisions) mean distributions must reflect genuine economic entitlements. Work with a specialist accountant to make sure your distributions are defensible.
Which structure is right for your business?
Choose sole trader if:
- Your income will be below $80,000–$100,000 and you have no employees
- Your business carries minimal liability risk
- Simplicity is your priority
- You have no plans to scale your business
Choose the company if:
- Your profit exceeds $100,000–$120,000 and the tax saving justifies the admin
- You employ staff or take on contracts with legal liability exposure
- You want to bring in investors, partners, or eventually sell the business
- You operate in a higher-risk industry such as construction, trades, or professional services
Choose trust if:
- You have a spouse or family members on lower incomes
- You own significant business or investment assets worth protecting
- You earn well above $120,000 and want flexible income distribution
- You’re thinking ahead to estate planning and intergenerational wealth transfer
Important note: These are general guidelines. The right structure depends on your income, assets, family situation, industry, and growth goals. A qualified accountant who knows your business will give you advice tailored to your circumstances, not a generic tick-box recommendation.
Common Structuring Mistakes (and how to avoid them)
- Staying as a sole trader for too long. Many business owners stick with the simplest structure well past the point where it makes sense. Once you’re consistently earning $100,000+ or taking on liability risk, you’re likely overpaying tax and leaving your assets exposed.
- Setting up a trust without the right trustee. Using an individual as a trustee means the trust assets are exposed if the trustee is personally sued. A corporate trustee (a company set up solely to act as trustee) adds an extra layer of protection.
- Mixing personal and business assets. Running personal expenses through the business, or holding personal assets inside the business entity, creates tax problems and weakens asset protection. Keep your structures clean and separate.
- Using DIY trust deeds. Online templates are cheap upfront and costly later. A poorly drafted trust deed can limit your distributions, create unintended tax consequences, or fail to achieve the asset protection you intended. Use a solicitor.
- Structuring without a plan. Your business structure should be reviewed at every significant milestone: $100k profit, first employee, major asset acquisition, or a business partnership. Don’t wait until a problem forces the conversation.
- Setting up a company without a trust shareholder. If you don’t have a trust in place at the start, you will likely need to pay Capital Gains Tax to get one in place.
Simon Burke, CA
Simon Burke is a Chartered Accountant (CAANZ), Registered Tax Agent and Co-Founder of Acctivate Business Accountants, with a decade of experience in accounting and business advisory. Holding dual degrees in Business Management and Commerce and a Xero Advisor certification, Simon specialises in helping businesses build stronger foundations through smarter structures, cash flow strategy, and operational efficiency.
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