Choosing a business structure is one of the first — and most consequential — decisions a business owner makes. It affects personal liability, tax obligations, the ability to raise capital, succession planning, and the cost of compliance.
Most people make this decision quickly, based on limited information, and often do not revisit it as the business grows. That’s understandable — when you’re starting, the last thing you want is to spend three weeks analysing legal structures. But the costs of starting in the wrong structure, or staying in it too long, can be significant.
This article sets out the four main structures used by Australian businesses, what distinguishes them, and when each one is likely to be appropriate.
The Four Main Options
Sole Trader
A sole trader is an individual operating a business in their own name (or a registered business name). It is the simplest and cheapest structure to establish and maintain.
Liability: Unlimited. As a sole trader, you are personally liable for all debts and obligations of the business. If the business cannot pay a creditor, the creditor can pursue your personal assets — including your home.
Tax: Business income is reported as personal income in your individual tax return, taxed at your marginal rate. No separate business tax return is required.
Setup cost: Low. Register a business name with ASIC (if trading under a name other than your own), apply for an ABN, and you are operational.
Compliance: Minimal ongoing compliance requirements compared to other structures.
Suitable for: Freelancers, sole practitioners, tradespeople, and service providers starting out with limited capital and modest revenue. Works well where personal liability is manageable (low-risk activities, adequate insurance), where there is no need to bring in investors, and where simplicity is valued over protection.
Limitations: No liability protection. Difficult to bring in equity partners or raise external capital. The business cannot continue beyond your involvement without a formal restructure.
Partnership
A general partnership is two or more people carrying on a business together with a view to profit. Like a sole trader, it is not a separate legal entity — the partners own the business assets and are personally liable for its debts.
Liability: Unlimited — and joint and several. Each partner is personally liable not just for their own actions but for the actions of every other partner taken in the course of the partnership business. This is the critical risk in a general partnership: if your partner incurs a debt you didn’t know about, you can be pursued personally for the full amount.
Tax: Partnership income is split between partners in agreed proportions and each partner pays tax on their share at their individual marginal rate. The partnership lodges a partnership tax return but does not pay tax itself.
Setup cost: Low. A partnership agreement is not legally required — a partnership can exist informally — but operating without one is strongly inadvisable for the reasons set out in the partnership disputes article in this series.
Suitable for: Professional practices (historically law firms, medical practices, accounting firms) and small businesses with two or more founders who want to start simply. Less suitable as the business grows, the risk profile increases, or where liability separation becomes important.
Limitations: Joint and several personal liability. The partnership dissolves automatically on a partner’s death, bankruptcy, or retirement (unless the agreement provides otherwise). No ability to bring in equity investors without restructuring.
Company (Proprietary Limited)
A company registered under the Corporations Act 2001 (Cth) is a separate legal entity. It can own property, enter contracts, employ staff, sue and be sued in its own name. Shareholders are generally not personally liable for the company’s debts.
Liability: Limited to the shareholders’ investment. The company is liable for its own debts; shareholders’ personal assets are protected (subject to the exceptions discussed in the directors’ duties and personal liability articles in this series).
Tax: Companies pay tax at a flat rate — 25% for small businesses with turnover under $50 million (the “base rate entity” rate); 30% for larger companies. This can be advantageous where the business generates profits above the owners’ marginal tax rate, as profits can be retained in the company and taxed at 25% rather than distributed and taxed at 45% plus Medicare levy.
Franked dividends: When profits are distributed to shareholders as dividends, those dividends can carry franking credits — effectively passing on a credit for the corporate tax already paid. This prevents double taxation and makes the company structure tax-efficient for shareholders on lower marginal rates.
Setup cost: Moderate. Registration with ASIC costs around $590 for a proprietary limited company. Ongoing compliance costs include an annual review fee, corporate tax return, and the cost of maintaining proper books and records.
Compliance: More substantial than sole trader or partnership. Directors have duties under the Corporations Act. Annual financial statements and tax returns are required. Company decisions need to be properly documented.
Suitable for: Most businesses that have reached the point where personal liability protection matters, or where multiple people are involved, or where external investment is contemplated. The company structure is the default for businesses of any meaningful scale.
Limitations: More complex and costly to set up and maintain than a sole trader or partnership. Less tax flexibility than a trust for income splitting (though the 2026 Budget changes have altered this comparison — see the trust article in this series).
Trust
A trust is not a separate legal entity but a legal relationship in which a trustee holds assets for the benefit of beneficiaries. In a business context, the two most relevant types are:
- Discretionary (family) trust — the trustee has discretion over how income is distributed among a class of beneficiaries
- Unit trust — income and capital are distributed in proportion to unit holdings, like shares in a company
Liability: The trustee is personally liable for trust debts, but where a corporate trustee is used, the trustee’s liability is limited to the trust assets (in most circumstances). Beneficiaries are not personally liable for trust debts.
Tax: Has historically offered significant flexibility through income splitting to lower-bracket beneficiaries. This is changing substantially. The 2026-27 Federal Budget proposes a 30% minimum tax on discretionary trust income from 1 July 2028. Unit trusts are not directly affected by this measure.
Asset protection: Assets held in a discretionary trust are generally not personally owned by any beneficiary, providing some protection from creditors of individual beneficiaries.
Setup cost: Moderate — trust deed, corporate trustee, stamp duty in most states.
Suitable for: Asset protection, succession planning, and estate planning. Unit trusts remain useful for joint ventures and investment structures where fixed proportional entitlements are appropriate. The income-splitting benefit of discretionary trusts is being significantly reduced.
Limitations: More complex to administer than a company. Annual distribution minutes required. The 2026 Budget has fundamentally changed the tax case for new discretionary trusts. Existing trusts need review.
Comparing the Structures
| Sole Trader | Partnership | Company | Discretionary Trust | |
|---|---|---|---|---|
| Separate legal entity | No | No | Yes | No |
| Personal liability | Unlimited | Unlimited (joint & several) | Limited | Limited (with corporate trustee) |
| Tax rate | Marginal (up to 47%) | Marginal (up to 47%) | 25% / 30% flat | 30% minimum (from 2028) |
| Income splitting | No | Limited | Via dividends | Yes (being reduced) |
| Setup cost | Very low | Low | Moderate | Moderate |
| Ongoing compliance | Minimal | Low | Moderate | Moderate |
| Investor ready | No | No | Yes | No |
| Succession | Difficult | Dissolves on exit | Straightforward | Flexible |
When to Consider Changing Structure
The structure that makes sense when starting is often not the right structure as the business grows. Common triggers worth thinking about:
From sole trader to company: When the business is generating meaningful profit, when personal liability from the business activities becomes material, when employees are being engaged, or when outside investment is being sought.
From partnership to company: When the joint and several liability exposure becomes uncomfortable, when the partnership needs to bring in new investors, or when succession is being planned.
From company to trust / holding structure: When the business has accumulated significant assets and wants to separate the risk of trading activities from the underlying asset base, or when multiple entities are involved and a holding company structure provides clarity.
From discretionary trust to company: Given the 2026 Budget changes, businesses currently operating through a discretionary trust may want to consider whether a company now provides a better tax outcome — particularly given the rollover relief available from 1 July 2027.
A Note on Holding Companies
A common structure for businesses of meaningful scale is a holding company sitting above one or more operating companies or trusts. The holding company owns the shares of the operating entities and may also hold the group’s valuable assets — intellectual property, property, plant and equipment — separately from the entities carrying on trading activities (and the associated liability risk).
This structure provides asset protection (a creditor of the operating company cannot readily access the holding company’s assets), can simplify succession and sale transactions, and may provide tax advantages through the inter-company dividend flow and the ability to offset profits and losses across the group.
The Bottom Line
There is no universally correct structure — the right answer depends on the nature of the business, the number of people involved, the risk profile, the tax position, and the growth trajectory. What matters is that the decision is made deliberately, with an understanding of the implications, and that it is revisited as the business evolves.
Getting structural advice early — from both a lawyer and an accountant — is an investment that tends to pay for itself many times over. Restructuring later is almost always more expensive, more disruptive, and more tax-intensive than getting it right from the start.
This article contains general information only and does not constitute legal advice. Envision Legal accepts no liability for any loss arising from reliance on this content. You should seek independent legal advice tailored to your specific circumstances. For enquiries, contact Envision Legal.