Which business structure should I choose?
Starting a business in Australia can be an exciting venture, but it's crucial to understand the legal structures available to determine which best suits your needs. This guide compares the four main structures (sole trader, partnership, company and trust), including how each is taxed, who is liable for its debts and what it costs to run, so you can make an informed decision.
What You'll Learn
- Sole trader
- Partnership
- Company
- Trust
- Choosing the right structure
- Registering your business
- Compliance and ongoing obligations
- Changing your legal structure
Section 1: Introduction to Legal Structures
When starting a business in Australia, one of the first decisions you'll need to make is choosing the right legal structure. The legal structure you select will impact various aspects of your business, including tax obligations, liability, and regulatory requirements. Let's explore the four main types of legal structures in Australia:
Section 2: Sole Trader
A sole trader is the simplest form of business structure and is owned and operated by a single individual. As a sole trader, you have complete control over your business and its operations. However, it's essential to note that as a sole trader, you are personally liable for any debts or obligations of the business.
- Advantages: easy and inexpensive to set up, full control and minimal reporting. Profits are taxed at your personal rates, and you can access the CGT discount and the small business CGT concessions (from 1 July 2027 the 50% discount is replaced by cost-base indexation and a 30% minimum tax for growth from that date; see the CGT changes from 1 July 2027).
- Disadvantages: unlimited personal liability for business debts, all profit is taxed in your name (so there's no way to split income with family), and it's harder to bring in investors or sell the business.
Section 3: Partnership
A partnership involves two or more individuals (or entities) who carry on a business together to make a profit. In a partnership, all partners share in the profits and losses of the business. It's crucial to have a legally binding partnership agreement in place to outline each partner's rights and responsibilities.
- Advantages: relatively easy and inexpensive to set up, and partners can pool skills, capital and workload. The partnership lodges its own tax return but doesn't pay tax itself; each partner pays tax on their share at their own rates.
- Disadvantages: in a general partnership, each partner has unlimited liability for the partnership's debts, including debts incurred by the other partners. Disagreements can stall decisions, and without a written agreement, income and losses are split equally.
Section 4: Company
A company is a separate legal entity from its owners (shareholders) and is regulated by the Australian Securities and Investments Commission (ASIC). One of the key advantages of a company structure is limited liability, which means that shareholders are not personally liable for the company's debts. Setting up a company involves more administrative requirements compared to other structures.
- Advantages: shareholders aren't liable for the company's debts (although directors can be personally liable if they breach their duties, and under the director penalty regime for unpaid PAYG withholding, GST and super guarantee). Base rate entities pay 25% company tax (30% otherwise), and franking credits pass the tax already paid on to shareholders. It's also easier to bring in investors or transfer ownership.
- Disadvantages: higher set-up and running costs (ASIC charges $636 to register a proprietary company and $342 for the annual review from 1 July 2026), and directors' duties and reporting obligations (each director also needs a director ID). The company's money isn't yours: taking it out means wages, dividends or a loan that complies with Division 7A. Companies also can't use the 50% CGT discount, and losses stay in the company.
Section 5: Trust
A trust is a legal arrangement where a trustee holds and manages assets on behalf of beneficiaries. Trusts are commonly used for asset protection, estate planning, and tax minimisation purposes. There are different types of trusts, including discretionary trusts, unit trusts, and hybrid trusts, each with its own set of rules and regulations.
- Advantages: a discretionary trust lets the trustee decide each year how income is split among beneficiaries, it can help protect assets, and individual beneficiaries can still use the CGT discount on capital gains distributed to them (replaced by indexation and a 30% minimum tax for growth from 1 July 2027).
- Disadvantages: more complex and costly to set up and run (a trust deed, a trustee and distribution resolutions each year), and losses are trapped in the trust: they can't be passed out to beneficiaries to offset their other income. Income the trustee doesn't distribute is taxed at 47%, and distributions to children under 18 are taxed at penalty rates. The Government also plans a 30% minimum tax on discretionary trusts from 1 July 2028 (paid by the trustee, with a non-refundable credit for beneficiaries); this is not yet law.
Section 6: Choosing the Right Structure for Your Business
When deciding on the most suitable legal structure for your business, consider factors such as the nature of your business, your long-term goals, tax implications, and liability concerns. It's advisable to seek professional advice from a lawyer or accountant to ensure you make an informed decision that aligns with your business objectives.
Section 7: Registering Your Business
Whatever structure you choose, you'll generally need an Australian Business Number (ABN) from the Australian Business Register (ABR) to carry on your business, and partnerships, companies and trusts each need their own tax file number. A company must also be registered with ASIC, and you need to register a business name with ASIC if you trade under a name other than your own (or the company's). You must register for goods and services tax (GST) once your GST turnover reaches $75,000, and you may also need licences and permits for your industry or location.
Section 8: Compliance and Ongoing Obligations
Once your business is up and running, it's essential to stay compliant with regulatory requirements and meet your ongoing obligations. This includes maintaining accurate financial records, lodging annual tax returns, and fulfilling any reporting requirements specific to your business structure.
Section 9: Changing Your Legal Structure
As your business grows and evolves, you may find it necessary to change your legal structure to better suit your needs. Whether you're looking to restructure as a company, establish a trust, or transition from a sole trader to a partnership, seek professional advice first. Things to plan for:
- A new ABN: an ABN can't move to a new entity, so the new structure generally needs its own ABN, and its own GST and PAYG withholding registrations.
- No direct conversion: a partnership can't simply turn into a company; you set up the new company and then wind up the partnership.
- CGT on transferred assets: moving business assets such as goodwill or equipment to the new entity is generally a CGT event, but the small business restructure roll-over (aggregated turnover under $10 million, and no change in who ultimately owns the assets) may let you defer the gain.
- Admin: transfer your business name, licences, contracts and bank accounts, and tell customers, suppliers and employees about the change.
Section 10: Conclusion
Understanding the legal structures available for businesses in Australia is fundamental to establishing a strong foundation for your venture. Whether you choose to operate as a sole trader, partnership, company or trust, each structure has different tax, liability and running-cost consequences. Weigh them against your own business needs and seek professional advice before you decide.
What are the main business structures in Australia?
The four main structures are sole trader, partnership, company, and trust. A sole trader is simplest and cheapest but offers no liability protection. A company provides limited liability at a flat tax rate but costs more to run. A trust offers tax flexibility and asset protection but is complex to administer. The right choice depends on income, risk profile, and growth plans.
What is the company tax rate in Australia for 2026–27?
Base rate entities — companies with aggregated turnover under $50 million that derive no more than 80% of income from passive sources — pay 25%. All other companies pay 30%. Shareholders pay income tax on dividends, potentially offset by franking credits for tax already paid at the corporate level.
When should I consider switching from sole trader to a company?
Consider a company when your profit is more than you need to live on, so some of it can be kept in the company at the 25% rate instead of your marginal rate (tax is topped up when it's later paid out as dividends, and money you take out must be wages, dividends or a loan that complies with Division 7A). A company is also worth considering when you need liability protection from business creditors or plan to bring in investors. If most of your income comes from your own personal skills or effort, the personal services income rules can stop a company saving tax, so get advice on your figures before switching.
What is a family trust and how does it work for tax purposes?
A family trust (discretionary trust) holds assets for a class of beneficiaries. The trustee decides each year how much income to distribute to each beneficiary. Distributing income to adult family members on lower tax rates can reduce the overall family tax bill, but distributions to children under 18 are taxed at penalty rates, and income retained in the trust is taxed at the top marginal rate plus the Medicare levy (47%). From 1 July 2028 the Government plans a 30% minimum tax on discretionary trust income; this isn't law yet.
What are the ongoing costs of running a company in Australia?
Ongoing costs include the ASIC annual review fee ($342 for a proprietary company from 1 July 2026), the company tax return, accounting fees for financial statements, and potentially payroll and BAS compliance. How much you'll pay in total depends on how active the company is and how complex its affairs are.
