Which business structure is right for my business?

The four options at a glance

• Sole trader — you and the business are the same legal thing. Simplest and cheapest.
• Partnership — two or more people carrying on business together. The partnership lodges a return but pays no tax itself; profit flows to the partners.
• Company — a separate legal entity that you own shares in. It pays its own tax and can hold its own assets and debts.
• Trust — a trustee holds assets and runs the business for the benefit of others. Income is distributed each year to beneficiaries, who pay the tax.

Sole trader

You get an ABN, you trade under your own tax file number, and the business profit simply goes on your personal tax return.

Advantages. Cheapest and quickest to set up. Minimal ongoing compliance. You get the $18,200 tax-free threshold, so early low profits may be taxed lightly or not at all. Business losses can usually be offset against your other income, such as wages, if you meet the non-commercial loss rules — genuinely useful in a startup year. Full control, no partners to consult.

Disadvantages. Unlimited personal liability is the big one: if the business is sued or cannot pay a debt, your house and savings are exposed. All profit is taxed at your marginal rate, which reaches 47% including Medicare — there is no way to cap it. You cannot split income with a spouse simply because you would like to. Selling the business is harder because there is no entity to sell.

Suits. New businesses, side businesses, low-risk service work, and anyone testing whether an idea has legs.

Partnership

Two or more people (up to 20 in most cases) carrying on business together. The partnership lodges its own return showing how profit is split, but it pays no tax. Each partner picks up their share at their own marginal rate.

Advantages. Cheap and simple, only slightly more involved than a sole trader. Profit is naturally split between partners, which can lower the overall tax bill if partners are on different incomes. Shared workload and shared capital.

Disadvantages. Joint and several liability, and this is the one people underestimate: each partner can be held responsible for the whole of a partnership debt, not just their share. If your partner runs up a liability, you can be pursued for all of it. Personal assets are exposed the same way as a sole trader. Disagreements can be commercially fatal, and the profit split is fixed by the partnership agreement rather than chosen each year.

Suits. Genuine 50/50 ventures between people who trust each other completely, professional practices, and family businesses where the relationship is settled. Always get a written partnership agreement — the number of disputes we have seen caused by a handshake arrangement is remarkable.

Company

A company is a separate legal person. It owns its own assets, incurs its own debts and lodges its own return. You control it as a director and own it as a shareholder, but you are not it.

Advantages. Limited liability — the company’s debts are generally its own, which is the main reason people incorporate. A capped tax rate: 25% for a base rate entity (broadly, aggregated turnover under $50 million and no more than 80% passive income), otherwise 30%. That matters enormously if you want to retain profit to reinvest rather than draw it all out, because the alternative is paying up to 47% personally on money you are not actually spending. Franking credits mean profits are not taxed twice when they are eventually paid out as dividends. A company also looks more established to larger customers, and it is far easier to sell or bring an investor into.

Disadvantages. More expensive to set up and run — annual accounts, an ASIC review fee, and higher accounting costs. Directors carry real legal duties, and limited liability is not absolute: banks routinely require personal guarantees, and director penalty notices can make you personally liable for unpaid PAYG and superannuation. Getting money out is more complicated than a sole trader simply drawing on the bank account, and taking it the wrong way triggers Division 7A, which can convert a casual loan into a taxable unfranked dividend. Companies also do not receive the CGT discount, so selling an appreciating asset held in a company can be expensive.

Suits. Businesses with genuine liability exposure — trades, construction, anything with employees or physical risk — and profitable businesses that want to retain earnings.

Trust

A trustee (often a company) holds the business or its assets for beneficiaries, usually a family group. Each year the trustee decides who receives the income.

Advantages. Flexibility is the headline: the trustee can vary who receives income each year, which allows distributions to family members on lower marginal rates where they are genuinely entitled to it. Strong asset protection, because no beneficiary owns the trust assets outright. Capital gains and franked dividends can be streamed to the beneficiaries best placed to use them. Well suited to holding appreciating assets and to passing a business between generations.

Disadvantages. Complexity and cost, similar to a company. Distributions must be resolved before 30 June each year — miss it and the trustee can be assessed at the top marginal rate on the whole amount, which is an expensive administrative slip. Losses are trapped: a trust cannot distribute a loss to beneficiaries, so it sits inside the trust until there is profit to absorb it. Distributions to anyone outside the family group can trigger family trust distributions tax at the top rate. And the flexibility only helps if you actually have family members with spare tax capacity.

Suits. Family businesses, businesses holding appreciating assets, and anyone whose priority is asset protection plus flexibility.

One change coming that affects this decision

From 1 July 2027, the 50% CGT discount is being replaced with an inflation-based calculation plus a minimum 30% tax on gains — and it applies to individuals, trusts and partnerships. Companies are unaffected simply because they never received the discount in the first place, and superannuation funds are excluded entirely.

In practice this narrows one of the traditional advantages of holding appreciating assets in a trust rather than a company. It does not reverse the comparison — trusts still offer flexibility and asset protection a company cannot — but if capital growth was the main reason you were leaning towards a trust, the arithmetic has moved. We cover the detail in our article on the 2026 Budget changes.

What should actually drive the decision

In our experience the choice comes down to four questions, roughly in this order.

How much risk are you carrying? If a bad day could produce a claim larger than your insurance, you want a company or a corporate trustee between the business and your house. This outranks tax.

How much profit will you retain? If you draw everything out to live on, a company’s capped rate buys you nothing — you pay your marginal rate either way. It only helps on money you leave in the business.

Is there anyone to split income with? A trust’s flexibility is worth a great deal if you have a spouse on a low income or adult children studying, and almost nothing if you do not.

What happens when you exit? Selling a company or a business held in a trust is generally cleaner than selling a sole trader business, which is really a sale of assets and goodwill. If you might sell in five years, decide now.

What each one costs to run

Compliance cost is a real part of the decision, so here are our published fees as a guide.

• Sole trader — from $550 for the annual return, plus $275 per quarter if you lodge BAS.
• Partnership — a partnership return plus an individual return for each partner.
• Company or trust — from $1,760 for annual financial statements and the entity return, plus $385 per quarter for BAS, plus each individual’s own return.

So the step up from sole trader to company or trust is meaningful — often $1,500 or more a year once everything is counted. That difference has to be earned back in tax saved or risk avoided, which is precisely why the structure should follow the business rather than the other way round.

The mistakes we see most

Setting up a company too early. A business making $40,000 gains nothing from a 25% company rate, because the owner draws it all out anyway. It just adds cost.

Setting up a trust with nobody to distribute to. The flexibility is the whole point. Without other beneficiaries you have bought complexity for no return.

Partnerships with no written agreement. Cheap to do at the start, extremely expensive to resolve later.

Leaving it too late. Restructuring once the business owns appreciating assets can trigger capital gains tax and stamp duty. Small business restructure rollovers exist and can defer some of it, but they carry conditions. The cheapest time to get the structure right is before there is anything valuable to move.