What Business Structure Is Best for You in Australia?

Starting or buying a business in Australia comes with one critical decision: choosing the best business structure. Whether you’re considering a sole trader, partnership, trust, or company, understanding their pros and cons is essential for tax efficiency, liability protection and growth.

Choosing the Right Business Structure

You have a Business or are thinking of starting one or buying an established business.
What structure should you put the business in?

Your choices are:

• Sole Trader
• Partnership
• Trust
• Company

What are the advantages and disadvantages of each one?

Sole Trader: Simple and Low-Cost Setup

This is the simplest and cheapest structure, which ideally suits very small businesses (or adjuncts to a day job).

• Forms part of personal Tax Return.
• Profits are added to your other income and taxed at your marginal rate.
• Losses are taken away from your other income and again taxed at your marginal rate.
• Turnover must be greater than $20,000 per annum, otherwise it’s not really classified as a “Business” and any losses are carried forward to future years and can’t be offset against other income. However, if you make profits, it’s taxable.
• Need to also ensure it’s not “Personal Services Income” which applies when a taxpayer works under an ABN (for usually a single “employer”) but is for all intents and purposes a staff member (complex area).
• No cost to set up and no annual registration fees. Just need an ABN.
• Can register a Business Name if desired.
• Can register for GST (voluntary under $75,000 turnover; mandatory over $75,000 turnover).
• Can employ staff (register for PAYG).
• Can use software (e.g. Xero) if helpful.

Partnership: Shared Ownership Structure

Similar to a Sole Trader but applies if more than one person in the business and is ideally suited to a husband & wife who jointly operate a small business.

• A Partnership Agreement is required but is inexpensive to prepare.
• A Partnership is a separate entity and has its own Tax File Number.
• It has to lodge a Tax Return but doesn’t pay any tax.
• The income of the Partnership is distributed to the Partners in accordance with the Partnership Agreement (doesn’t have to be 50/50, but can’t arbitrarily change every year)
• The distribution is added to the partner’s personal return and tax paid at the marginal rate.
• Allows for a Partnership “Salary” if one partner is more active than the other in the business.
• The Partnership Agreement can state that Partner A gets (say) $60,000 and the rest is distributed 50/50 (say).
• This is not a Salary in the normal sense as a Partnership can’t pay a salary (& withhold tax) to its partners.
• Note that losses can be distributed to the Partners subject to the $20,000 turnover & PSI rules.
• Can register a Business Name if desired.
• Can register for GST (voluntary under $75,000 turnover; mandatory over $75,000 turnover).
• Can employ staff (register for PAYG).
• Can use software (e.g. Xero) if helpful.

Trust: Asset Protection Benefits

Once a very popular entity type but more recently targeted by the ATO as a possible Tax Avoidance vehicle.

• Recommended for Asset Protection for larger businesses. (eg the business is operated as a company structure but the assets are held in a Trust).
• A Trust is a separate entity and has its own Tax File Number.
• It has to lodge a Tax Return but doesn’t normally pay tax.
• Costs to set up include a Trust Deed.
• Requires beneficiaries and trustees.
• Corporate Trustee possible (requires cost of registration of a Company and annual ASIC fees).
• Distribution is subject to the Trustees’ discretion (no fixed amounts or percentages) but must be decided by 30 June each year (ie usually before final profits are calculated). This is the major advantage of a Trust (discretionary distribution for tax planning).
• Profits must be distributed and are added to the Beneficiary’s taxable income on their personal tax return.
• These profits must physically be transferred to the Beneficiary’s bank account.
• Complex “Unpaid Present Entitlement” provisions apply if not properly transferred.
• Can employ staff, including the beneficiaries.
• Usually registers for TFN/ABN/GST/PAYG
• As these are larger businesses usually, accounting software is required.

Company: Tax Advantages and Growth

This is my preferred entity type for a reasonable sized business.

• Requires formal set up of a Company.
• Requires a Registry Office / ASIC Agent.
• Requires registration of ABN, TFN, GST (usually), PAYG.
• Annual ASIC fees.
• Has Director(s) and Secretary.
• Ownership based on shareholding.
• Very much a separate entity. The money in the company bank account belongs to the company, not the shareholders or directors.
• All assets must be in the name of the company.
• Lodges tax returns and pays tax (@ 25% private company rate) – major advantage.
• Can pay dividends to shareholders – franked or unfranked (complex area).
• Companies normally will pay salaries to the shareholders and may pay dividends from profits.
• Shareholders may borrow from a company, but this creates a Div 7A loan that must be paid back with interest over a maximum 7 years (complex area).
• Ideal for businesses provided shareholders/directors really understand how a Company operates and what they can and can’t do.

Conclusion: Choosing Your Business Structure

To explain everything fully in an article of this size is difficult.
If you would like to make sure that the structure that you’re currently operating in is best for you, come and see us.

If you’re thinking of going into business and not sure where to start, make an appointment.

Newman

Newman Borg is the Director of Depoltz Accounting, specialising in accounting, taxation, and business advisory for individuals and small to medium businesses. With decades of experience, he helps clients navigate complex financial and tax matters. Newman values integrity, personalised service, and practical solutions that minimise tax and maximise business success.