Choosing the right business structure is one of the most consequential financial decisions you will make. Get it right and you optimise your tax, protect your assets, and set yourself up for growth. Get it wrong and you could be paying thousands more in tax every year while leaving your personal assets exposed to business risk.
This guide compares the three most common business structures in Australia — sole trader, company, and trust — with real numbers, practical examples, and honest advice about when each one makes sense.
Quick Comparison: Sole Trader vs Company vs Trust
| Feature | Sole Trader | Company (Pty Ltd) | Trust (Discretionary) |
|---|---|---|---|
| Setup cost | $0 – $39 | $1,500 – $3,000 | $2,000 – $4,000 |
| Annual compliance cost | $500 – $2,000 | $2,000 – $5,000 | $2,500 – $6,000 |
| Tax rate | Marginal (up to 45% + 2% Medicare) | 25% flat | Marginal (distributed to beneficiaries) |
| Asset protection | None | Limited liability | Strong (assets held by trust) |
| Income splitting | No | Limited (via dividends) | Yes (flexible distributions) |
| Access to profits | Direct — it is your money | Via salary, dividends, or loans | Via distributions |
| Losses | Offset against other income* | Carried forward in company | Trapped in trust |
| GST registration | Required if turnover > $75k | Same | Same |
| Separate tax return | No (included in individual) | Yes | Yes |
*Non-commercial business loss rules may restrict offset — see your accountant.
Sole Trader: The Simplest Option
A sole trader is not a separate legal entity — it is just you, operating a business under your own name or a registered business name. Your business income goes straight onto your personal tax return.
Advantages of Sole Trader
- Zero setup cost. Register an ABN online (free) and optionally register a business name ($39/year). That is it.
- Lowest compliance burden. No separate tax return, no ASIC fees, no director obligations. Your business income and expenses go straight on your individual return.
- Full control. No board meetings, no corporate minutes, no shareholders to consult. You make every decision.
- Losses offset your other income. If your business makes a loss in its early years, you may be able to offset that loss against your salary or investment income (subject to the non-commercial loss rules).
- Tax-free threshold. The first $18,200 of your total income is tax-free. A company does not have a tax-free threshold.
Disadvantages of Sole Trader
- Unlimited personal liability. Your personal assets — home, car, savings — are exposed to business debts, lawsuits, and claims. There is no separation between you and the business.
- High marginal tax rates. Once your taxable income exceeds roughly $120,000, you are paying 37 cents or more on every additional dollar. At $190,000+, the marginal rate hits 45% plus 2% Medicare levy — that is 47 cents in the dollar.
- No income splitting. All profit is taxed in your hands. You cannot distribute income to a spouse or family member on a lower tax rate.
- Harder to sell. You cannot sell a sole trader business as a going concern as easily as selling shares in a company. The CGT treatment is also less favourable.
Best for: New businesses, side hustles, low-risk service businesses, and anyone earning under $100,000 in business income who does not have significant asset protection concerns.
Company (Pty Ltd): The Growth Structure
A proprietary limited company (Pty Ltd) is a separate legal entity with its own ABN, tax file number, and legal obligations. It is owned by shareholders and run by directors.
Advantages of a Company
- Flat 25% tax rate. If your company qualifies as a base rate entity (aggregated turnover under $50 million and no more than 80% passive income), company profits are taxed at 25% — regardless of how much the company earns. Compare this to a sole trader paying 47% on income above $190,000.
- Limited liability. Your personal assets are protected from most business debts and claims. If the company fails, creditors generally cannot pursue your home or personal savings.
- Easier to bring in partners or investors. You can issue shares, create different share classes, and bring in new shareholders without restructuring.
- Retained earnings. The company can retain profits and reinvest them in the business at the 25% rate, rather than having all profit taxed at your personal marginal rate.
- Professional image. “Pty Ltd” after your business name can improve credibility with larger clients and government contracts.
Disadvantages of a Company
- Higher compliance costs. Annual ASIC fee ($310), separate tax return, financial statements, and potentially audit requirements. Expect $2,000 to $5,000 per year in accounting fees for a small company.
- Accessing profits is restricted. You cannot just take money out of a company like a sole trader. Money must come out as wages (taxed at your marginal rate), dividends (franked or unfranked), or a properly documented loan (Division 7A rules apply). Getting this wrong can create unexpected tax liabilities.
- Division 7A traps. If you or a related party borrow money from the company without a compliant loan agreement, the ATO treats it as an unfranked dividend — taxable at your marginal rate with no franking credit offset.
- Losses stay in the company. Unlike a sole trader, company losses cannot offset your personal income. They carry forward and offset future company profits only.
- No CGT discount. Companies do not get the 50% CGT discount that individuals and trusts enjoy on assets held for more than 12 months.
Best for: Businesses with consistent profits above $120,000, businesses with asset protection concerns (especially those in physical trades), and businesses planning to grow, hire, or eventually sell.
Trust (Discretionary / Family Trust): The Flexible Option
A discretionary trust (commonly called a family trust) is a legal arrangement where a trustee holds assets and distributes income to beneficiaries. The trustee decides each year how to distribute the trust’s income, giving significant flexibility for tax planning.
Advantages of a Trust
- Income splitting. The trustee can distribute income to any beneficiary nominated in the trust deed — typically family members including adult children, spouse, and related entities. By distributing income to beneficiaries on lower tax rates, the overall family tax bill is reduced.
- Asset protection. Assets held in a trust are generally protected from the personal creditors of the beneficiaries. If a beneficiary is sued or goes bankrupt, trust assets are typically not accessible to their creditors.
- CGT discount. Trusts can access the 50% CGT discount on assets held for more than 12 months, which companies cannot.
- Estate planning. Trust assets pass according to the trust deed, not the deceased’s will. This can simplify succession and protect assets from estate challenges.
- Flexibility. The trustee’s discretion to vary distributions each year allows you to adapt to changing family circumstances and tax rates.
Disadvantages of a Trust
- Highest setup and compliance costs. Trust deed ($500 to $2,000), corporate trustee registration ($576), and annual accounting fees ($2,500 to $6,000). A trust with a corporate trustee typically costs $3,000 to $5,000 to establish.
- Trust losses are trapped. If the trust makes a loss, that loss stays in the trust — it cannot be distributed to beneficiaries or offset against their personal income. The loss carries forward and offsets future trust income only.
- All income must be distributed. Undistributed trust income is taxed at the top marginal rate (currently 45% plus Medicare levy). You must decide and minute distributions before 30 June each year.
- Complexity. Trusts are more complex to administer than sole traders or companies. You need annual trustee resolutions, careful record-keeping, and a trust deed that is properly drafted.
- ATO scrutiny. The ATO actively targets trust distribution arrangements that it considers artificial or contrived, particularly distributions to adult children who do not actually benefit from the money (so-called “bucket companies” and “reimbursement agreements” under section 100A).
Best for: Family businesses with multiple adult family members, businesses with significant assets to protect, investment structures, and established businesses earning enough to benefit from income splitting.
Real-World Tax Comparison
Let us compare the tax outcome for a business earning $200,000 profit under each structure (2025-26 rates, assuming the owner has no other income).
| Structure | Business Profit | Tax Payable | After-Tax Cash |
|---|---|---|---|
| Sole trader | $200,000 | $60,667 + $4,000 Medicare = $64,667 | $135,333 |
| Company (salary $120k + retain $80k) | $200,000 | $31,267 PAYG + $20,000 company tax = $51,267 | $148,733* |
| Trust (split $100k + $100k to spouse) | $200,000 | $24,967 × 2 = $49,934 | $150,066 |
*Company scenario: $80k retained in company is taxed at 25% but not yet available personally. The franking credit offsets personal tax when eventually paid as a dividend.
At $200,000, the trust saves roughly $15,000 per year compared to operating as a sole trader. A company saves roughly $13,000. The gap widens as income increases.
When Should You Change Structure?
Restructuring is not free — there are setup costs, potential CGT and stamp duty implications, and ongoing higher compliance costs. The tax savings need to outweigh these costs within two to three years to justify the change.
General guidelines for when to consider restructuring:
- Sole trader to company: When taxable business income consistently exceeds $120,000 to $150,000, or when asset protection is critical
- Sole trader to trust: When you have a spouse or adult family members on lower tax rates and business income exceeds $100,000
- Company to trust: Rare, but may suit if income splitting benefits exceed the cost of restructuring and you do not need to retain earnings
We work primarily with trade businesses including arborists, landscapers, and construction operators — industries where asset protection is particularly important because of the physical nature of the work. A tree falling on a client’s property can generate a liability claim that exceeds your insurance. In these situations, operating through a company or trust is not just a tax decision — it is a risk management decision.
Next Steps
The right structure depends on your income level, family situation, risk profile, and growth plans. There is no one-size-fits-all answer, and the wrong choice costs real money every year.
If you are unsure whether your current structure is optimal, book a free 30-minute consultation with George Morice. We will review your situation, run the numbers, and tell you whether a change would save you money — and if so, how much. Call 02 8378 2421 or book online.
Frequently Asked Questions
What is the cheapest business structure to set up in Australia?
A sole trader is the cheapest structure to set up. It costs nothing beyond your ABN registration (free via the ATO) and any business name registration ($39 for one year or $92 for three years via ASIC). There is no separate entity to register and no annual compliance fees. A company costs $576 for ASIC registration plus $800 to $2,000 in accounting and legal fees. A trust costs $500 to $2,000 for the trust deed plus ASIC company registration if using a corporate trustee.
At what income level should I change from sole trader to company?
As a general guideline, when your taxable business income consistently exceeds $120,000 to $150,000 per year, a company structure becomes more tax efficient. Below this threshold, the sole trader marginal tax rate may be similar to or lower than the company rate plus the cost of extracting profits. However, asset protection and other factors may justify incorporating at lower income levels. Always get specific advice for your situation.
Does a company protect my personal assets?
Yes, a company provides limited liability — your personal assets (home, savings, investments) are generally protected from business debts and claims. However, this protection has limits. Directors can be personally liable for PAYG withholding, superannuation guarantee, GST in some cases, and trading while insolvent. Banks also typically require personal guarantees for business loans, which bypasses the limited liability protection for that specific debt.
What is a family trust and why do accountants recommend them?
A family trust (discretionary trust) is a legal structure that holds business or investment income and allows the trustee to distribute profits to beneficiaries (typically family members) each year. Accountants recommend them because they offer income splitting — distributing income to family members on lower tax rates — plus asset protection and estate planning benefits. The trade-off is higher setup and compliance costs, and losses cannot be distributed to beneficiaries.
Can I change my business structure without starting a new business?
Yes, you can restructure from sole trader to company or trust without starting a new business from scratch. The process involves transferring assets, contracts, and registrations to the new entity. However, there may be CGT, GST, and stamp duty implications. The ATO provides rollover relief in some cases. Restructuring should be planned with your accountant and ideally timed to coincide with 1 July to simplify the transition.
