Sole Trader vs Company vs Trust: Choosing Your Australian Business Structure

Choosing the correct business structure is one of the most consequential early decisions for an Australian business owner or contractor. Your structure determines your tax rate, your personal exposure to liability, the cost and complexity of compliance, and how profits are eventually distributed. Structures can be restructured later, but doing so usually triggers a CGT event and may incur stamp duty — so the right choice up front saves both money and friction.

1. Sole trader: simplicity with unlimited liability

Operating as a sole trader is the simplest and least expensive structure. You trade under your individual Tax File Number (TFN) and register an Australian Business Number (ABN). Business profits are taxed as your personal income using the individual marginal rates, starting at 0% on the tax-free threshold and rising to 45% at $190,001.

The trade-off is unlimited personal liability: there is no legal separation between you and the business, so business debts, claims, and contractual obligations attach to your personal assets — including the family home. Sole traders are also personally liable for GST, PAYG withholding, and super guarantee obligations, and cannot easily bring in external investors.

2. Proprietary limited company (Pty Ltd): the 25% base rate

A Pty Ltd company is a distinct legal entity, giving shareholders limited liability and protecting personal assets from business debts in most circumstances. Base rate entities — companies with aggregated annual turnover below $50 million where 80% or less of assessable income is passive — pay a flat 25% company tax rate. Other companies pay 30%.

Company compliance obligations

• Annual review and lodgement fees payable to ASIC
• A director identification number (director ID) is mandatory for every director
• Corporate tax return and, where applicable, a BAS and PAYG withholding schedule
• A solvency resolution signed by directors each financial year
• Loans to shareholders and associates governed by Division 7A minimum repayments

3. Discretionary family trust: flexibility and asset protection

A discretionary trust holds assets for the benefit of a class of beneficiaries, with the trustee deciding how income and capital are distributed each year. Distributions can be directed to adult family members in lower marginal tax brackets, and the trust qualifies for the 50% CGT discount on assets held over 12 months. Because beneficiaries do not have a fixed entitlement until the trustee resolves to distribute, trust assets enjoy meaningful protection from a beneficiary's personal creditors.

The flexibility has limits: trust losses cannot be distributed and must be quarantined, the ATO's Section 100A compliance approach governs distributions to adult children, and an unpaid present entitlement or beneficiary loan account must be properly managed. Trusts must also resolve in writing how income will be distributed by 30 June each year.

4. Partnerships: shared profit, shared liability

A partnership is inexpensive to establish and distributes profit to partners in proportion to their agreement, each of whom is taxed on their share individually. The drawback is joint and several liability — every partner is personally liable for the partnership's debts — and partnerships cannot retain income internally. Partnerships suit professional firms and co-owned ventures where partners accept mutual risk, but rarely suit capital-intensive or high-liability trading businesses.

Which structure is right for you?

The optimal structure depends on your expected turnover, industry risk profile, number of owners, and long-term wealth and succession goals. At Freedom Taxation, we model each option against your projections before you incorporate, and review the structure annually as your business matures. Where a restructure is warranted — for example, introducing a holding company or converting to a corporate trustee — we plan it to minimise CGT, stamp duty, and disruption.