Australian Business Structures Explained: Sole Trader, Company, Trust and Partnership

A sole trader is the simplest business structure in Australia - no separate legal entity, minimal setup, and the owner is personally responsible for all business debts and liabilities:

• Legal structure: No separation between you and the business - you are the business; all assets and liabilities are yours personally
• Setup cost: ABN application free (Australian Business Register); business name registration ~$44/year (ASIC); no other mandatory registration; total cost under $100
• Tax: All business income included in your personal tax return and taxed at your marginal rate (up to 47% including Medicare Levy); the tax-free threshold ($18,200) and low income tax offset apply
• GST: Mandatory registration if turnover exceeds $75,000 (voluntary registration available below this); quarterly BAS lodgement typical
• Super: No mandatory SG for yourself as a sole trader - you must fund your own super; personal contributions up to the $30,000 concessional cap are fully deductible (with a valid Notice of Intent)
• CGT: When you sell the business or its assets, you pay CGT at your marginal rate (with 50% discount if held 12+ months and small business concessions if applicable)
• Liability: Unlimited personal liability - creditors can pursue your home, savings, and personal assets; if you're in a high-risk profession or have significant personal assets, this is a serious exposure
• Best for: Early-stage businesses, freelancers, contractors with PSI, and professionals testing viability before committing to a more complex structure; also best when income is low enough that the marginal rate advantage of a company doesn't justify the compliance cost

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A proprietary limited company (Pty Ltd) is a separate legal entity - it can own property, enter contracts, and be sued in its own name. The company's tax rate is fixed regardless of how much profit it makes:

• Legal structure: Separate legal entity; shareholders own the company; directors manage it; limited liability for shareholders (they can only lose their investment, not personal assets)
• Setup cost: ASIC registration ~$576 (2024-25); registered agent or accountant $1,000-$2,500; ongoing ASIC annual review fee $310/year; accounting and company tax return $2,000-$5,000/year
• Tax rate: Base rate entity (aggregated turnover under $50M, no more than 80% passive income) pays 25%; large companies or those above passive income threshold pay 30%
• Franking credits: Tax paid by the company at 25% creates franking credits - dividends paid to shareholders are franked at 25%; if a shareholder in the 32.5% bracket receives a $7,500 dividend with $2,500 franking credit, they pay $2,438 additional tax (vs zero if the dividend were fully franked at the shareholder rate)
• Retained profits: Income left in the company is taxed at 25% - it can be reinvested at the corporate rate; extraction later via salary (income tax + SG), dividends (with franking), or loan (Div 7A compliance required)
• CGT - no discount: Companies do NOT get the 50% CGT discount; a capital gain on an asset held 12+ months is taxed at 25-30% flat - worse than an individual or trust in most circumstances
• Super for director/employee: A company must pay SG for working directors/employees; the director (who may be the sole shareholder) can salary sacrifice into super from company wages
• Best for: Businesses with significant profits where 25% company rate is lower than the owner's marginal rate; businesses with external investors or shareholders; joint ventures requiring separate entity; businesses with liability exposure

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A discretionary (family) trust is the most tax-flexible structure but comes with ongoing compliance obligations and land tax implications for property-holding entities:

• Legal structure: Trustee holds assets for the benefit of beneficiaries; the trustee has full discretion over distribution of income each year; no separate legal entity (the trust is a relationship, not a person - the trustee is the legal entity)
• Setup cost: Trust deed $1,500-$3,000; corporate trustee company $576 ASIC + $1,500-$2,500 accountant; annual trust accounting and tax return $2,000-$5,000
• Tax - income splitting: The trustee can distribute income to beneficiaries in the lowest tax brackets each year - saving significant tax if adult family members are available as beneficiaries
• 30 June resolution: The trustee must resolve distributions in writing before 30 June each year - failure results in the trustee being assessed on all trust income at 47%
• CGT - 50% discount preserved: Unlike a company, a trust distributing a capital gain to individual beneficiaries preserves the 50% CGT discount - the most tax-efficient structure for capital gain events
• Negative gearing - losses trapped: Trust losses cannot be distributed to beneficiaries; they carry forward inside the trust to offset future trust income - this makes trusts unsuitable for negatively geared investment property
• Division 7A applies to corporate beneficiaries: If income is distributed to a bucket company, Div 7A rules apply to UPEs - benchmark interest 8.27% 2024-25 or the amount must be paid out
• Land tax - no threshold in most states: NSW and VIC deny the individual land tax threshold to discretionary trusts; annual cost can exceed the income tax saving for property-heavy portfolios
• Best for: High-income family businesses with multiple adult beneficiaries; share and business asset portfolios (avoiding the land tax problem); estate planning structures

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A partnership involves two or more people carrying on a business together. It is relatively simple to establish but creates joint and several liability - each partner is personally liable for the entire partnership's debts:

• Legal structure: Not a separate legal entity (unlike a company); the partnership files a tax return but pays no tax - income is allocated to partners according to the partnership agreement and each partner pays tax personally
• Partnership agreement: Not legally required but critical; without one, the Partnership Act of the relevant state applies - often unsuitable for commercial arrangements; a formal agreement should cover profit sharing, decision-making, exit provisions
• Tax: Each partner includes their share of partnership income in their personal tax return; losses can generally be distributed to partners (unlike trusts) - negative gearing through a partnership flows to individual partners
• Joint and several liability: If Partner A commits a contract and Partner B knows nothing about it, both are personally liable for the debt - this is the most significant risk of a general partnership
• Limited partnership: A variation where limited partners have liability capped at their contributed capital; a general partner retains unlimited liability; commonly used for investment fund structures (private equity, venture capital) rather than operating businesses
• CGT: Each partner owns their share of partnership assets; on sale of the business, each partner is assessed on their share of the capital gain - with the 50% discount if held 12+ months and small business concessions if applicable
• Super: Partners are not employees of each other; they must fund their own super (concessional contributions deductible with Notice of Intent); no mandatory SG between partners for each other's labour
• Best for: Professional practices (accounting, legal, medical) where personal responsibility and trust between principals is paramount; joint ventures between known parties with complementary skills; NOT recommended where partners have significant personal assets at risk

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A quick reference comparison of the four structures across the dimensions that matter most for Australian business owners:

• Personal liability - sole trader: Unlimited; company: Limited to investment; trust: Trustee personally liable (corporate trustee limits this); partnership: Unlimited joint and several
• Income tax rate - sole trader: Marginal rate up to 47%; company: 25-30% flat; trust: Distributes at beneficiary's marginal rate (0-47%); partnership: Marginal rate for each partner
• CGT discount - sole trader: 50% (individual); company: None; trust: 50% preserved for individual beneficiaries; partnership: 50% for each partner individually
• Income splitting - sole trader: No; company: Via franked dividends (limited); trust: Yes - full discretion annually; partnership: Fixed by partnership agreement
• Setup cost - sole trader: Under $100; company: $2,000-$3,500; trust: $3,000-$6,000 (with corporate trustee); partnership: $500-$2,000 (agreement drafting)
• Annual compliance - sole trader: Low ($500-$1,500 tax return); company: Medium ($2,000-$5,000); trust: Medium-high ($2,500-$6,000); partnership: Medium ($1,500-$4,000)
• Super obligations - sole trader: Self-funded voluntary; company: Mandatory SG for working directors; trust: SG for employed family members; partnership: Self-funded voluntary for partners
• Negative gearing - sole trader: Flows to individual; company: Trapped in company; trust: Trapped in trust; partnership: Flows to each partner individually

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