Sole trader, partnership, company or trust? Choosing a business structure

The structure you trade through affects how much tax you pay, how well your personal assets are protected, and how much it costs to run your business. There is no single best option. The right choice depends on your income, your risk, your family situation and your plans.

Sole trader

The simplest and cheapest structure. You trade under your own ABN and report business income in your personal tax return.

• Profits are taxed at your individual marginal rates
• You are personally responsible for all business debts
• Low set-up and running costs, with minimal paperwork
• Limited ability to split income with family members

Sole trader structures suit new and lower-risk businesses, or where profits are modest.

Partnership

Two or more people carrying on business together and sharing profits. A partnership lodges its own return, but does not pay tax itself. Each partner is taxed on their share.

• Each partner can be liable for the debts of the whole partnership
• A written partnership agreement is strongly recommended
• Useful for couples or family members running a business together

Company

A company is a separate legal entity. It pays tax on its own profits, and owners receive income through wages, director fees or dividends.

• Companies that qualify as base rate entities pay a lower company tax rate than the general rate
• Shareholders generally have limited liability, although directors can be personally liable in some situations, such as unpaid super and PAYG
• Higher costs, ASIC obligations and stricter rules about taking money out
• Money withdrawn from a company outside proper wages or dividends can trigger Division 7A, which treats loans and payments to shareholders as unfranked dividends

Trust

A discretionary (family) trust is a common way to hold a business or investments. The trustee, often a company, decides each year how income is distributed among beneficiaries.

• Flexibility to distribute income to family members on lower tax rates
• Assets can be better protected from business risk
• Trustee resolutions must generally be made by 30 June each year
• More complex and more expensive to run, with strict rules on distributions

Questions to ask before choosing

• How much profit do you expect, now and in three years?
• What would happen to your home and savings if the business were sued?
• Do you want to share income with a spouse or family members?
• Will you bring in partners or investors, or sell the business one day?
• Are you prepared for the extra administration a company or trust requires?

Changing structure later

Many businesses start as sole traders and restructure as they grow. Restructuring can trigger capital gains tax and stamp duty if not planned carefully, although small business concessions and rollovers may help.

Our business advisory service covers structuring and restructuring. Talk to us before you register, or before a big change, and we will model the options with your actual numbers.