Choosing the right business structure is one of the most important decisions an entrepreneur makes. It affects how much tax you pay, your legal liability, access to capital and the way profits are shared. In this guide we explain the four common structures used in Australia—sole trader, partnership, company and trust—along with their tax implications, pros and cons, and when a restructure might benefit you.
Understanding the Main Business Structures
Sole trader
- Registration and tax: You operate the business in your own name and use your personal tax file number (TFN). All business income is reported on your personal tax return. If your annual GST turnover is $75 000 or more, you must register for GST.
- Liability: You have unlimited liability; there is no legal distinction between you and the business.
- Flexibility and cost: Easiest and cheapest structure to set up and maintain; decisions are made by you.
Partnership
- Registration and tax: A partnership must apply for its own TFN and lodge an annual partnership tax return. While the partnership doesn’t pay tax, each partner includes their share of income or loss on their personal return. Partners must register for GST when turnover reaches $75 000. Withdrawals aren’t wages and aren’t deductible.
- Liability: Partners share profits and losses and are jointly liable for debts; a partner’s personal assets may be at risk if the partnership can’t pay.
- Suitable for: Two or more people or entities carrying on a business together with a view to profit.
Company
- Registration and tax: A company is a separate legal entity. It must apply for its own TFN and Australian Business Number (ABN), register for GST if turnover exceeds $75 000, and lodge an annual company tax return. Companies pay tax at a flat rate—25 % for base‑rate entities (aggregated turnover under $50 million) or 30 % for others.
- Liability: Shareholders have limited liability, meaning their personal assets are protected beyond their investment. Directors can be personally liable for some tax debts.
- Growth considerations: Companies can issue shares to raise capital, making them suitable for businesses aiming to expand or attract investors.
Trust
- Registration and tax: A trust must have its own TFN and ABN and register for GST if turnover exceeds $75 000. It must lodge an annual trust tax return. Income is generally distributed to beneficiaries, who pay tax at their marginal rates; the trustee may pay tax on undistributed income.
- Liability: Depends on the type of trust (unit or discretionary) and terms of the trust deed. A corporate trustee can limit liability.
- Flexibility: Trusts can offer asset‑protection benefits and flexible income distribution, making them popular for family businesses and investment projects.
Tax Implications and Growth Considerations
Income tax rates
- Sole traders and partnerships pay tax at individual marginal rates. The small business income tax offset provides a discount of up to $1 000 (16 % of the tax payable on business income) for eligible small businesses.
- Companies pay a flat tax rate. Base‑rate companies (aggregated turnover under $50 million) pay 25 %; other companies pay 30 %. Imputation credits (franking credits) can be attached to dividends to avoid double taxation.
- Trusts generally don’t pay tax if income is distributed to beneficiaries; beneficiaries pay tax on their share.
Cash flow and compliance
Different structures have different reporting obligations and costs. Sole traders can use simplified reporting, while companies must prepare financial statements and meet director duties. Trusts require trust deeds and compliance with trust law. Partnerships must keep partnership agreements and file partnership tax returns.
Asset protection and liability
Companies and trusts provide greater asset protection than sole traders or partnerships. If you’re concerned about personal liability or want to separate business assets from personal assets, a company or trust might be preferable.
Pros and Cons of Each Structure
Sole trader
- Pros: Easy and inexpensive to set up; full control; tax offset available.
- Cons: Unlimited liability; limited access to capital; taxed at personal rates.
Partnership
- Pros: Shared skills and resources; simple administration; flexible profit sharing.
- Cons: Joint liability; potential for disputes; partners taxed individually.
Company
- Pros: Limited liability; flat tax rate; easier to raise capital; perpetual succession.
- Cons: More regulation and compliance costs; director responsibilities; potential 30 % tax rate.
Trust
- Pros: Asset protection; flexible income distribution; potential tax advantages.
- Cons: Complex to set up and administer; requires trust deed; trustee responsibilities.
When Should You Consider Changing Structure?
Changing your structure can help as your business grows or your priorities shift. However, it can incur costs and tax implications. For small businesses, the small business restructure roll‑over allows you to transfer active assets between eligible entities without triggering capital gains tax (CGT). To qualify, each party must be a small business entity or connected to one, with aggregated turnover under $10 million, and the restructure must not change the ultimate economic ownership of the assets. The restructure must be genuine—not for the sole purpose of tax benefits.
Example: A sole trader with growing turnover decides to incorporate to limit personal liability and access investors. They may use the restructure roll‑over to transfer business assets into a company without immediate CGT, provided they meet the eligibility criteria. After incorporation, the business pays tax at 25 % (if a base‑rate entity), which may be lower than the owner’s marginal tax rate. However, there will be extra compliance costs and director responsibilities.
How Carmody Accounting Can Help
Every business is different. The right structure depends on your goals, risk tolerance and growth plans. Carmody Accounting offers personalised structuring advice, tax planning and support through restructures.
Ready to choose or change your business structure? Book a free 15‑minute consultation with our Chartered Accountants today and make a decision that supports your growth and protects your assets.
FAQ
- Q1. Do I need to register for GST as a sole trader? Yes. Once your GST turnover reaches $75 000, you must register for GST. You’ll then need to collect GST on your sales and lodge business activity statements (BAS).
- Q2. How is a partnership different from a company for tax purposes? A partnership lodges its own return but doesn’t pay tax; each partner pays tax on their share of profit. A company is a separate entity that pays tax at the company rate.
- Q3. What’s a small business restructure roll‑over? It allows small businesses to transfer active business assets between eligible entities as part of a genuine restructure, without immediate CGT. Eligible businesses must have aggregated turnover under $10 million and the restructure must not change ultimate economic ownership.