Sole trader, company or trust: which structure is right?

Choosing a structure is one of the first real decisions you make in business, and one of the most consequential. It affects your tax, your personal risk, your paperwork, and how easily you can bring in partners or sell later. This guide compares the main options in plain English.

The three main structures

Most small businesses in Australia run as a sole trader, a company, or through a trust. Each suits a different situation, and the right answer depends on what you are doing, what you own, and who else is involved.

In our experience the mistake that costs the most is choosing a structure to save a few hundred dollars at the start, then having to unwind it a year later when the business grows or a second owner comes in. Restructuring is possible, but it takes time and can trigger tax and duty. It is worth getting this right at the outset.

Sole trader

A sole trader is the simplest structure. You trade in your own name, under your own tax file number, with an ABN. There is no separation between you and the business.

It is cheap to set up and simple to run. The downside is the one that matters most. There is no limit on your personal liability. If the business is sued or cannot pay its debts, your personal assets, including your home, are exposed. All the profit is taxed at your personal marginal rate, which can be high once the business does well.

A sole trader structure often suits a new, low-risk venture that is testing an idea. We usually suggest revisiting it the moment the business takes on real liability, employs people, or starts to make serious profit.

Company

A company is a separate legal entity. It can own assets, enter contracts, and sue or be sued in its own name. You control it as a director and own it as a shareholder, but the company is legally distinct from you.

The two big advantages are liability and tax. A company gives you limited liability, so in most cases your personal assets are protected if the business fails, provided you have not given personal guarantees and have met your director duties. The company tax rate is also flat. A base rate entity, broadly a company with aggregated turnover under $50 million and no more than 80 per cent passive income, is taxed at 25 per cent. Other companies are taxed at 30 per cent. That can be well below the top personal marginal rate, which helps if you want to reinvest profit in the business.

The trade-offs are cost and formality. A company costs more to set up and maintain, has an annual review fee to ASIC, and brings director duties that are taken seriously. Directors can be personally liable where they breach those duties or where the company trades while insolvent. This is the area where we see owners come unstuck, usually because they treated the company bank account as their own. Keep the company's money and your money separate, and keep proper records.

Trust

A trust is an arrangement where a trustee holds and runs the business for the benefit of the beneficiaries. In business, the most common form is a discretionary trust, often called a family trust, usually with a company acting as trustee.

The appeal of a discretionary trust is flexibility and asset protection. The trustee can decide each year how to distribute income among the beneficiaries, which can be used to manage tax across a family group. Assets held in trust can also sit outside the reach of a beneficiary's personal creditors, which is why trusts feature so often in asset protection planning.

Trusts are more complex and more expensive to run. They need a properly drafted deed, careful administration, and annual distribution decisions made correctly and on time. A distribution resolution missed or done poorly can have real tax consequences. Our view is that a trust earns its keep where there is a family group, meaningful income to split, or assets worth protecting, and is often overkill for a simple one-person operation.

How the structures compare

	Sole trader	Company	Trust
Setup cost	Low	Moderate	Higher
Ongoing admin	Low	Moderate	Higher
Personal liability	Unlimited	Limited (usually)	Limited via corporate trustee
Tax	Your marginal rate	25% or 30%	Flows to beneficiaries
Asset protection	Weak	Moderate	Strong
Bringing in owners	Hard	Easy (shares)	Possible but complex

How we approach the choice

There is no single best structure. The right one depends on your risk, your expected profit, whether you have a family or partners to involve, and your plans to sell or raise money. We often see businesses use a combination, for example a trust that owns the shares in a trading company, to get both protection and flexibility.

The tax treatment of each structure is genuinely complex, and it interacts with your personal position. We work alongside your accountant on this, because the legal structure and the tax outcome have to be decided together. Get advice before you commit, not after.

Frequently asked questions

Which structure pays the least tax? It depends on your income and your situation. A company has a flat rate of 25 or 30 per cent, while a sole trader pays their marginal rate. A trust can distribute income to lower-taxed beneficiaries. There is no universal answer, which is why the choice should be made with your accountant.

Can I change structure later? Yes, but it can trigger tax and duty, and it takes work. It is cheaper to choose well at the start.

Does a company always protect my personal assets? Not always. Personal guarantees, breaches of director duties, and insolvent trading can all expose you personally. Limited liability is strong but not absolute.

Do I need a trust? Often not, for a simple one-person business. A trust earns its place where there is a family group, income to split, or assets to protect.

Keep reading

• Business structures and start-ups
• How to set up a company in Australia: step by step
• What is a family trust and how does it protect assets?

This article contains general information only and is not legal advice. For advice about your situation, please contact us. Liability limited by a scheme approved under Professional Standards Legislation.