One of the first — and most consequential — decisions any new business owner makes is choosing a legal structure. It affects how much tax you pay, how exposed your personal assets are, how much paperwork you carry, and how easily you can bring in partners or investors. Get it wrong and the cost of unwinding it can be significant.
What are the four main business structures in Australia?
The four main options are: sole trader, partnership, company, and trust. Each has different tax treatment, liability exposure, compliance obligations, and suitability for different stages of business.
What is a sole trader and what tax do they pay?
A sole trader is the simplest structure — you and the business are legally the same entity. Setup is fast and cheap: an ABN is often all you need to start trading.
- Tax: Business income is added to your personal income and taxed at individual marginal rates, up to 45% plus the Medicare levy. The $18,200 tax-free threshold applies — an advantage at lower income levels.
- Liability: Unlimited — your personal assets (house, car, savings) are exposed to business debts and legal claims.
- Compliance: Minimal — no separate tax return or ASIC filings, just your individual return with a business schedule.
- Best for: Freelancers, tradespeople, and consultants starting out with low risk exposure.
How does a partnership work in Australia?
A partnership involves two or more people (or entities) carrying on a business together and sharing income, losses, and management responsibilities under a partnership agreement.
- Tax: The partnership lodges an information-only tax return; profits flow through to each partner's individual return and are taxed at their personal rate.
- Liability: Generally unlimited and joint — each partner can be personally liable for debts incurred by the others.
- Compliance: A partnership TFN and annual return are required. A well-drafted partnership agreement is essential.
- Best for: Two or more people combining skills or capital, such as professional practices.
What is the tax rate for a company in Australia?
A company is a separate legal entity registered with ASIC. It can own assets, sue and be sued, and continues to exist independently of its owners.
- Tax: 25% for base rate entities with aggregated turnover under $50 million; 30% for larger companies. This flat rate becomes more competitive than individual marginal rates once profits consistently exceed approximately $120,000–$180,000.
- Liability: Limited — shareholders' personal assets are generally protected, though directors can still be personally liable for insolvent trading, unpaid super, and PAYG obligations.
- Compliance: Significant — annual ASIC review fees, a company tax return, director obligations, and stricter record-keeping.
- Best for: Growing businesses, those seeking outside investment, or owners wanting to retain profits at a lower tax rate.
How does a trust save tax for Australian families?
A trust holds assets and runs the business on behalf of beneficiaries, managed by a trustee (an individual or company). Discretionary (family) trusts are the most common structure for small business owners.
- Tax: Trusts don't pay tax on distributed income — profits are allocated to beneficiaries and taxed at each person's individual rate. Distributing to family members in lower tax brackets reduces the overall tax paid by the family group. Distributed income retains its character, including the 50% CGT discount.
- Liability: Depends on the trustee — a corporate trustee provides an extra layer of protection.
- Compliance: Higher — trust deeds, annual distribution resolutions (by 30 June each year), and a separate trust tax return.
- Best for: Family businesses and investors prioritising asset protection and flexible income distribution.
Which business structure is best for my situation?
There is no single "best" structure. Ask yourself:
- How much personal asset protection do I need?
- What is my expected profit, and does a flat corporate tax rate beat my marginal rate?
- How much compliance and cost can I realistically manage?
- Do I plan to bring in partners, investors, or family members in the future?
Can I change my business structure later?
Many businesses start as a sole trader to keep costs low, then restructure into a company or trust as turnover and risk grow. Restructuring is possible but can trigger capital gains tax, stamp duty, and other transition costs — so it pays to think ahead rather than defaulting to the cheapest option today.
The Metier Group works with Perth business owners through our business accounting and trust structuring services. Our registered tax agents can model the tax outcomes of each structure before you commit. Contact us to talk through what fits your business.