Business Entity Structures: Sole Trader vs Company vs Trust

Why Structure Matters

Your business structure is one of the most important decisions you will make, and one of the hardest to change later. It determines how you pay tax, how much personal liability you carry, what compliance obligations you have, and how easy it is to bring in partners or investors.

Many business owners choose a structure without fully understanding the implications, often defaulting to the simplest option. This can cost thousands of dollars in unnecessary tax and expose them to avoidable risk.

Sole Trader

A sole trader is the simplest and most common structure for small businesses in Australia.

How It Works

You and the business are the same legal entity. You operate under your own name (or a registered business name), earn the business income personally, and report it on your individual tax return.

Tax Treatment

All business profit is added to your personal income and taxed at your individual marginal tax rate. For the 2025-26 financial year, the rates are:

• $0 to $18,200: Nil
• $18,201 to $45,000: 16%
• $45,001 to $135,000: 30%
• $135,001 to $190,000: 37%
• Over $190,000: 45%

Plus Medicare levy of 2%.

This means if your business earns $100,000 profit and you have no other income, your tax bill is approximately $22,967 (plus Medicare levy).

Pros

• Simplest and cheapest to set up (just an ABN)
• Minimal compliance requirements
• Full control over business decisions
• Can use the small business tax offset to reduce tax
• Losses can be offset against other personal income (subject to non-commercial loss rules)

Cons

• Unlimited personal liability (your personal assets are at risk)
• Tax rate can be high for profitable businesses
• Difficult to bring in partners or investors
• No separation between personal and business assets

Best For

Businesses just starting out, low-risk service businesses, freelancers, and businesses with modest profits.

Partnership

A partnership involves two or more people (or entities) carrying on a business together.

How It Works

The partnership itself does not pay tax. Instead, the net profit (or loss) is distributed to partners according to the partnership agreement, and each partner reports their share on their individual tax return.

Tax Treatment

Each partner is taxed at their individual marginal rate on their share of the profit. The partnership lodges its own tax return (showing income and expenses) but does not pay tax itself.

Pros

• Simple to set up
• Shared resources and expertise
• Losses flow through to partners
• Flexible profit-sharing arrangements

Cons

• Partners are jointly and severally liable (each partner is personally liable for the partnership's debts, including debts incurred by other partners)
• Disagreements can be difficult to resolve
• A partnership agreement is essential but often overlooked
• Difficult to transfer ownership

Best For

Professional practices (lawyers, accountants, doctors), joint ventures, and businesses where two or more people contribute different skills.

Company (Pty Ltd)

A company is a separate legal entity from its owners (shareholders).

How It Works

The company earns income, pays expenses, and pays tax on its profit at the company tax rate. Profits can be distributed to shareholders as dividends or retained in the company.

Tax Treatment

The base rate entity (small business) company tax rate is 25% for companies with aggregated turnover under $50 million and no more than 80% of income from passive sources.

Dividends paid to shareholders carry franking credits that reduce the shareholder's personal tax on those dividends.

Pros

• Limited liability (shareholders are generally not liable for company debts beyond their share capital)
• Lower tax rate for businesses with profit above $45,000 (where the individual marginal rate exceeds 25%)
• Easier to bring in investors or partners (issue new shares)
• Perpetual existence (the company continues regardless of ownership changes)
• Greater credibility with some clients and suppliers

Cons

• More expensive to set up and maintain
• More compliance requirements (ASIC annual review, company tax return, director obligations)
• Profits trapped in the company are taxed at the company rate but must be distributed as dividends to be accessed personally
• Cannot distribute losses to shareholders
• Division 7A rules prevent shareholders from borrowing from the company without proper loan agreements

Best For

Businesses with profit above $45,000-$50,000, businesses with significant liability risk, businesses that plan to bring in investors, and businesses that intend to retain profits for growth.

Trust

A trust is a legal arrangement where a trustee holds assets for the benefit of beneficiaries.

How It Works

The most common business trust is a discretionary (family) trust. The trustee (often a company) carries on the business and distributes the income to beneficiaries each year. Beneficiaries pay tax on their share of the distributed income at their individual rates.

Tax Treatment

Trust income distributed to adult beneficiaries is taxed at their individual marginal rates. If income is distributed to beneficiaries on lower tax rates (a spouse, adult children, or other entities), the overall tax can be lower than earning the income personally.

Any income not distributed is taxed at the top marginal rate (47%), so trusts generally distribute all income each year.

Pros

• Flexibility to distribute income to beneficiaries on lower tax rates
• Asset protection (trust assets are not owned by the beneficiaries personally)
• Can accumulate assets for succession planning
• Beneficial for families with members on different tax rates

Cons

• More expensive and complex to set up
• Requires a trust deed and ongoing compliance
• Cannot distribute losses to beneficiaries (losses are trapped in the trust)
• Annual distribution requirements
• Subject to anti-avoidance rules

Best For

Family businesses with multiple family members on different tax rates, businesses with significant assets to protect, and businesses planning for succession.

Making Your Decision

There is no one-size-fits-all answer. The right structure depends on:

• Your expected profit level
• Your personal tax situation
• Your risk exposure
• Whether you plan to bring in partners or investors
• Your long-term goals (including exit strategy)
• The cost of setup and ongoing compliance

The Rule of Thumb

• Under $45,000 profit: Sole trader is usually simplest and cheapest
• $45,000-$100,000 profit: Company starts to become tax-advantageous
• Above $100,000 profit: Company or trust structures can provide significant tax savings
• Family involvement: Trust structures offer income splitting opportunities
• High liability risk: Company or trust for asset protection

Get Professional Advice

This is one of those decisions where professional advice pays for itself many times over. A good accountant will model the tax implications of each structure for your specific situation and recommend the best option.

The cost of restructuring later (including potential capital gains tax and stamp duty) is far higher than getting it right from the start.

Keep your books clean and accurate regardless of structure. SortBooks automates your transaction categorisation so your financial data supports whatever structure you choose.