Choosing a business structure is one of the most important decisions you will make when starting or growing a business.
Your structure affects:
This is not a decision you should make based only on which structure appears to pay the lowest tax.
The right structure needs to suit the type of work you do, the risks you face, the amount of profit you expect to earn and your plans for the future.
For example, the structure that suits an electrician starting out alone may not suit a larger contracting business with employees, vehicles and commercial clients.
A combination of these structures may also be used in some circumstances, this allows the business to take advantage of the benefits of multiple structures.
Australian tax and company rules generally apply nationally. However, businesses also need to consider state rules covering workers compensation, land tax and transfer duty.
A sole trader is an individual running a business in their own name.
You can register a business name, but that does not create a separate legal entity.
For example, if John Smith registers the business name Smith’s Plumbing, John is still personally operating the business. The business name does not separate John from the debts or responsibilities of the business.
A sole trader structure is generally:
Business income is included in the owner’s individual tax return. A separate business tax return is not required.
A business loss may sometimes be offset against other personal income, but conditions apply.
The main disadvantage is personal liability.
There is no legal separation between you and the business. If the business cannot pay a debt or has a significant claim made against it, assets held in your personal name may be at risk.
All business profit is also treated as the owner’s personal income. You cannot leave part of the profit in a separate business entity and choose to take it out in a later year.
As the business is in your personal name, you cannot add or change owners and the business ceases on the death of the owner. Moving the business into another structure may have capital gains tax and stamp duty consequences.
A carpenter might start as a sole trader because the business is small and the structure is simple.
Several years later, the carpenter may employ an apprentice, purchase more vehicles and begin working on larger commercial projects. At that point, it would be sensible to review whether operating as a sole trader stillsuits the level of risk and the owner’s personal circumstances.
A sole trader is generally not personally covered by workers compensation insurance.
However, a sole trader who employs workers may still need a workers compensation policy. Personal accident, illness or income protection insurance may also need to be considered for the owner.
A partnership may be used where two or more people operate a business together and share its income or losses.
The partnership normally has its own Australian Business Number and tax file number. It lodges a partnership tax return, and the partners report their individual share of the partnership income in their own tax returns.
A partnership can be:
In a general partnership, the partners have unlimited liability for the debts and obligations of the partnership.
This means similar to a sole trader, that a partners personal assets can be affected by liabilities of the partnership. However additionally, the partners are joint and severally liable for debts of the partnership, meaning that one partner may be affected by a debt or commitment created by another partner.
If partners are added or removed from the partnership a new partnership is created, meaning that ownership cannot easily be transferred and that the partnership ceases on the death of any of the partners.
A written partnership agreement should cover:
Two landscapers starting a business together need to decide more than how they will divide the weekly profit.
They should also decide what happens if one person stops working, wants to sell their share or signs the business up for finance without first consulting the other partner.
A clear written agreement can prevent a disagreement from becoming an expensive business dispute.
A company is a separate legal entity from its directors and shareholders.
The company can own assets, enter contracts, borrow money, employ staff and be responsible for business debts.
Directors manage the company. Shareholders own it.
A person can be both the sole director and sole shareholder, but the company’s money still belongs to the company. It is not simply the owner’s personal money.
A company can provide:
At the time of writing, companies that are operating as a trading entity qualify as base rate entities and may pay company tax at 25%. Other companies generally pay tax at 30%.
As the company is a separate legal entity to its owners, shares can easily be transferred between owners and the company continues to exist upon the death of any of the Directors.
A company normally costs more to establish and administer than a sole trader business.
It will generally have:
Directors must understand the company’s financial position, keep proper records and make sure the company does not continue taking on debts when it cannot pay them.
Directors can also become personally liable in some circumstances. Banks, landlords and suppliers may require personal guarantees, which can place the director’s personal assets at risk despite the company structure. The Australian Taxation Office (ATO) can also issue Director Penalty Notices making the Directors personally liable for ATO debt in some circumstances.
An earthmoving company may want to leave some profit in the business to replace machinery, purchase another vehicle or employ another operator.
A company can retain profits for future business use.
A discretionary trust is commonly called a family trust.
A trust involves a trustee holding and managing business assets for the benefit of beneficiaries. The trustee can be an individual or a company.
Where a company acts as trustee, it is called a corporate trustee. This may provide asset protection, similar to a company discussed above.
A business operating through a trust will generally need:
Trustees of discretionary trusts generally need to make valid decisions about the distribution of trust income by 30 June each year.
A discretionary trust may provide:
The trustee must follow the trust deed and the tax rules. Limitations exist where distributions are made to beneficiaries who do not receive any benefit from the distribution.
Ownership of the Trust can be transferred and the Trust continues to exist on the death of any of the parties.
A trust is generally more expensive to establish and administer than a sole trader business.
Other disadvantages include:
As the distribution of profit is entirely discretional, discretionary trusts are generally not appropriate for unrelated business partners.
A discretionary trust may not be the best structure for owning land in some states.
In NSW for example, for land tax purposes, discretionary trusts are generally treated as special trusts and do not receive the ordinary land tax threshold.
Additional NSW surcharge rules can also apply where a discretionary trust owns residential land and its deed allows foreign beneficiaries.
Before purchasing a workshop, warehouse, commercial property or investment property through a trust, obtain advice about land tax and transfer duty. The structure that is suitable for running the business may not be suitable for owning its property.
As at July 2026, the Australian Government has proposed a minimum tax rate of 30% for certain discretionary trusts from 1 July 2028.
Some trusts and types of income are expected to be excluded. The government has also proposed temporary rollover relief for eligible businesses that restructure.
These changes are still being developed and the final legislation may differ from the proposal.
Businesses should not rush to close or change a trust based only on an announcement. Restructuring can involve capital gains tax, NSW transfer duty, contract transfers, finance arrangements and legal costs.
Anyone operating a business through a discretionary trust should have the structure reviewed once the legislation is clearer.
A unit trust is similar to a discretionary trust, but the owners have fixed interests represented by units.
For example, two owners may each hold 50% of the units and generally have a fixed 50% interest in the income and capital of the trust.
A unit trust can provide:
A unit trust generally has:
If holding land, land tax should be considered in the relevant state. For example in NSW to receive the threshold, the trust must meet Revenue NSW’s requirements for a fixed trust. A unit trust that does not qualify may be treated as a special trust and receive no threshold.
Some established businesses use a combination of companies and trusts.
Common examples include:
These arrangements may help deal with tax minimization, business risk, retained profits, ownership or succession planning.
However, they involve multiple entities, additional tax returns, ASIC fees, legal documents and strict rules about how money moves between the entities.
A bucket company is generally a tax-deferral arrangement, not a way to permanently avoid tax. Complicated rules can apply to loans, unpaid distributions and private use of company money.
The proposed discretionary trust changes from 1 July 2028 significantly reduce the benefit of bucket-company arrangements.
These structures should only be considered after individual accounting and legal advice. The expected benefit needs to be greater than the cost and complexity of maintaining the additional entities.
Consider reviewing your structure when:
Changing structures may require a new ABN and the transfer of your business name, assets, contracts, licences and registrations.
Capital gains tax, GST and transfer duty may also need to be considered.
The best business structure is not necessarily the cheapest or most complicated option.
It should provide an appropriate balance between:
Hillier’s Advisors can help business owners understand the practical differences between the available structures.
We can review where your business is now, where you want it to go and whether your current structure still suits your circumstances.
Contact us now to find out more.
This article contains general information only and does not take into account your specific financial, tax or legal circumstances. Tax rates, thresholds and proposed laws may change. You can speak to us about your specific circumstances before establishing or changing a business structure.
Since 1989 Hillier’s Advisors have been delivering financial services to individuals, businesses and business owners across Newcastle and the wider Hunter Region. A major focus for the Hillier’s Advisors team and the work we do is providing the right financial advice when our clients need it, not just when they ask for it.
