Sole Trader vs Company vs Trust: Choosing Your Business Structure

Overview of Business Structures

In Australia, you have several main options for structuring your business. Each has different tax, legal, and administrative implications. The right choice depends on your business size, risk, profits, and goals.

Main structures:

1. Sole Trader
2. Partnership
3. Company
4. Trust (or Family Trust)

Sole Trader

What It Is

You operate the business in your own name as a self-employed person. There’s no legal separation between you and the business.

Advantages

• Simplest to set up — Just start trading, minimal registration required
• Lowest costs — Minimal setup and compliance costs
• Complete control — You make all decisions
• Tax simplicity — Report business income on personal tax return
• Flexible — Can change structure later or close easily
• Keep all profits — Don’t share with other owners

Disadvantages

• Unlimited liability — You’re personally liable for all debts and claims
• Harder to raise capital — Difficult to bring in investors
• Perceived as smaller — May be harder to win major contracts
• No asset protection — Personal assets at risk if sued or in debt
• Limited succession — Harder to transfer business on death or retirement
• Self-employed tax — Must pay Medicare levy and manage own superannuation

Who Should Use This

• Freelancers and consultants
• Small service businesses
• Startups in low-risk industries
• Sole operators without significant assets to protect

Setup Process

1. Choose business name
2. Register business name (optional, but recommended)
3. Get ABN (Australian Business Number) from ATO
4. Register for GST if turnover exceeds $75,000
5. Open business bank account
6. Keep records and declare income on tax return

Partnership

What It Is

Two or more people share ownership, management, and profits. Partners are jointly and severally liable.

Advantages

• Shared responsibility — Multiple people share decisions and work
• Shared capital — Easier to raise startup funds
• Simple setup — Less complex than company
• Tax simplicity — Report on personal tax return

Disadvantages

• Unlimited liability — Each partner liable for all partnership debts
• Joint and several liability — Creditors can pursue any partner for full debt
• Personal disputes — Partnership breakdown can be costly
• Harder to sell — May need agreement to sell your share
• Less formal protection — No legal separation between partners

Partnership Agreement (Essential)

Should cover:

• Capital contributions
• Profit sharing
• Roles and responsibilities
• Decision-making process
• What happens if partner leaves
• Dispute resolution
• Exit procedures

Cost: Get a lawyer to draft — typically $500-2000 depending on complexity

Company

What It Is

A separate legal entity owned by shareholders. Company is responsible for its own debts and liabilities.

Advantages

• Limited liability — Shareholders only lose invested amount (not personal assets)
• Professional perception — “Pty Ltd” suggests stability to customers and creditors
• Easier to raise capital — Can issue shares to investors
• Easier to sell — Can sell shares to new owner
• Asset protection — Personal assets protected if company sued or in debt
• Succession planning — Can transfer to new owner more easily
• Tax planning — More options for tax management
• Credibility — Better for contracts, loans, and partnerships

Disadvantages

• Higher setup costs — Expensive to establish and maintain
• Complex compliance — Must maintain registers, hold meetings, file documents
• Tax complexity — Must lodge company tax return separate from personal
• Regulatory compliance — More rules and obligations
• Less flexibility — Harder to change structure or close quickly
• Double taxation — Company pays tax, then shareholders pay tax on dividends (though franking credits apply)

Company Tax Issues

• Company tax rate: 25% (from 2023-24 for all companies)
• Dividend tax: Shareholders pay tax on dividends received
• Franking credits: Partially offset tax by shareholders
• Trust distribution: Can distribute profits to shareholders and reduce company tax

Setup Process

1. Choose company name and check ASIC register for availability
2. Prepare constitutional documents (or use standard)
3. Lodge incorporation documents with ASIC
4. Pay registration fee (~$250-350)
5. Issue shares to shareholders
6. Register for ABN with ATO
7. Register for GST if turnover exceeds $75,000
8. Open business bank account

Cost: $250-500 with online service, $500-2000 with accountant/lawyer

Trust (Family Trust)

What It Is

An arrangement where someone (trustee) holds assets for the benefit of others (beneficiaries). Not a legal entity itself, but holds assets separately.

Advantages

• Asset protection — Assets held in trust, protected from creditors
• Liability protection — Trustee has limited liability (if corporate trustee)
• Tax planning — Distribute income to lower-income beneficiaries
• Estate planning — Manages assets across generations
• Succession planning — Clear succession arrangements
• Privacy — More privacy than company (fewer public records)

Disadvantages

• Complex setup — Requires professional legal advice
• Ongoing administration — Must hold meetings, keep records, file documents
• Cost — Expensive to establish and maintain
• Tax complexity — Complex tax planning required
• Beneficiary conflicts — Disputes between beneficiaries
• Trustee liability — If personal trustee, could face unlimited liability
• Limited financing — Harder to raise capital
• Disclosure requirements — More disclosure to beneficiaries

Trust Taxation

• Trust doesn’t pay tax — Passes income to beneficiaries
• Beneficiaries pay tax — At their individual rates
• Distributable income — Trustee decides who gets what income
• Capital gains — Can distribute capital gains separately
• Trust losses — Can offset against gains, then distribute remainder

Family Trust Setup

1. Prepare trust deed (must use lawyer — typically $800-2000)
2. Choose trustee (usually corporate trustee — a Pty Ltd)
3. Setup corporate trustee (see Company setup)
4. Fund trust with initial assets (settlement)
5. Register for ABN with ATO
6. Register for GST if applicable
7. Maintain trust records and hold annual meetings

Cost: $1500-4000 for full setup with professional advice

Comparison Table

Factor	Sole Trader	Partnership	Company	Trust
Setup cost	$100-200	$300-500	$500-2000	$1500-4000
Liability	Unlimited	Unlimited	Limited	Limited (corporate trustee)
Tax rate	Personal rates	Personal rates	25% company + dividend tax	Beneficiary rates
Complexity	Simple	Moderate	High	High
Asset protection	None	None	Good	Excellent
Raising capital	Difficult	Moderate	Easy	Difficult
Succession	Difficult	Difficult	Easy	Easy
Privacy	Good	Good	Lower	Good

Tax Considerations

Sole Trader

• Profits taxed at personal marginal rate (up to 45%)
• Can deduct all legitimate expenses
• No franking credits
• Medicare levy applies

Partnership

• Profits taxed at personal marginal rates
• Can deduct all legitimate expenses
• No franking credits
• Medicare levy applies

Company

• Company taxed at 25%
• Dividends taxed at beneficiary rates
• Franking credits available
• Lower effective tax rate for lower-income beneficiaries

Trust

• No tax at trust level
• Beneficiaries pay tax at their own rates
• Can distribute to lower-income beneficiaries
• Potential savings through splitting income

How to Choose

Choose Sole Trader if:

• Starting small business with minimal assets
• Operating in low-risk area
• Don’t expect to earn high profits
• Want maximum simplicity
• Plan to expand later

Choose Partnership if:

• Business with trusted partners
• Sharing capital and responsibility
• Don’t need limited liability
• Want simple structure
• All parties share income equally or near-equally

Choose Company if:

• Concerned about liability protection
• Expect significant profits
• Want to build business for sale
• Need to raise capital
• Want to employ others
• Tax rate advantage applies

Choose Trust if:

• Want maximum asset protection
• Have significant assets to protect
• Want to distribute income to multiple beneficiaries
• Planning long-term succession
• Have substantial income to distribute
• Have family business to manage

Changing Structure Later

You can change business structure, but there are tax and cost implications:

• Sole trader to company: May trigger capital gains tax on assets transferred
• Company to trust: Possible capital gains tax
• Changes require registrations, deregistrations, and potentially tax registration changes
• Seek professional advice before changing structure

When to Get Professional Help

Consult an accountant or lawyer before deciding on structure. They can:

• Analyze your specific situation
• Model different structures and tax implications
• Draft necessary documents
• Handle registrations
• Setup record-keeping systems

Typical costs:

• Accountant consultation: $200-400 per hour
• Lawyer for documents: $500-2000 depending on complexity
• Full setup with all services: $2000-5000

Key Takeaway

There’s no single “best” business structure — the right choice depends on your specific situation, risk tolerance, and business goals. Start simple (sole trader), but plan for growth. As your business expands, changing to a company or trust can provide liability protection and tax benefits.

Further Reading

• ATO Business Structure Guide: www.ato.gov.au
• ASIC: www.asic.gov.au (company registration info)
• Australian Small Business Loans: www.australiansmallbusiness.com.au
• Law Society: Find lawyer recommendations for business setup