In brief
- A sole trader and their business are legally the same, so the owner is personally responsible for the business’s debts.
- A company is a separate legal entity. Base rate entities pay 25% company tax; other companies pay 30%.
- A trust’s income is generally taxed in the hands of the beneficiaries it’s distributed to; income no beneficiary is entitled to is taxed to the trustee at the top rate.
- Changing structure later can trigger capital gains tax and stamp duty, so get advice before you set up and before you grow.
Why your structure matters
Many people start as a sole trader because it’s quick and cheap, and plan to change later. That can work, but moving a business with assets and goodwill into a new structure can trigger capital gains tax and state stamp duty. Some relief exists, such as the small business restructure roll-over, but it comes with conditions.
Your structure affects four things: who is responsible for the business’s debts, how its profit is taxed, how much it costs to set up and run, and how easily you can bring in partners or investors, or sell. You can change structure during the life of a business, but it’s cheaper to choose well at the start.
The four main structures compared
Sole trader, partnership, company and trust are the four main structures in Australia. In short:
| Structure | Responsible for debts | How profit is taxed | Cost and paperwork |
|---|---|---|---|
| Sole trader | You, personally | At your individual rates: from 0% to 45% in 2026–27, plus the 2% Medicare levy | Low |
| Partnership | You and your partners | The partnership lodges a return; each partner pays tax on their share | Medium |
| Company (Pty Ltd) | Generally the company, as a separate legal entity | 25% for base rate entities, otherwise 30% | Medium to high |
| Trust | The trustee, which is often a company | Beneficiaries pay tax on income distributed to them; undistributed income is taxed at the top rate | High |
A company and a trust together
Some growing businesses use two entities: a company that trades, employs staff and signs contracts, with its shares owned by a family trust that has a company as its trustee. The company pays tax on its profit and can pay dividends to the trust, with franking credits for the tax already paid. The trust can then distribute that income to its beneficiaries.
This can keep the business’s risks inside the trading company and give some choice over who receives income each year. It also means two entities, two tax returns, more fees and more rules, so it suits some businesses and not others. Points to weigh up:
- Business debts and claims generally stay with the company, although directors have legal duties of their own
- When an asset held for at least 12 months is sold, individuals and trusts may be able to reduce the capital gain by 50%; companies can’t
- Money taken out of a private company as a loan or payment can be taxed as an unfranked dividend under Division 7A, unless it’s repaid or put on a complying loan agreement in time
- A personal guarantee for a loan or lease makes you personally liable, whatever your structure
The right structure depends on your risk, your income, your family and your plans. Get advice before you set up, and again before you grow.
When to review your structure
Review your structure when the business changes, not only at tax time. In 2026–27, individuals pay 30% on taxable income from $45,001 to $135,000 and 37% from $135,001 to $190,000, plus the Medicare levy, while a base rate entity company pays 25%. The company rate isn’t the whole story, though: dividends you receive from the company are taxed at your own rate, with a credit for the company tax already paid.
Other signs it’s time for a review:
- Your profit is growing and you’re leaving more of it in the business
- You’re about to hire staff, sign a lease or borrow
- You want to bring in a partner or an investor
- You plan to sell the business or hand it on to family
What to do next
No one structure suits every business. The right one depends on your risk, how much the business earns, your family and where you want the business to go, and it can change as the business grows.
Talk to Business Mantra before you set up or change your structure. Its accountants can explain the tax, costs and paperwork of each option for your situation.
