Choosing a suitable business structure is usually one of the first steps when starting a business. There are a few key questions to ask. We’ll look at them in this article.
Importance of business structure
Choose your legal business structure based on important factors such as:
- Who will own the business
- Who can make important decisions
- Tax obligations
- Protecting your personal assets
- How profits and losses are taken out of the business
- Setup costs and ongoing fees
Types of business structures
Australia has four main types of business structure, each with its own pros and cons.
- Sole traders
- Partnerships
- Companies
- Trusts
- A combination of any of the above!
Let’s look at each one and see which may suit your business and personal situation. Other structures include co-operatives, social enterprises and incorporated associations. We won’t cover these here.
Sole trader
A sole trader structure is simple to set up and manage. It can suit a small business with one owner, such as a trade or health professional.
As a sole trader you own the business, control it and make all the decisions. You keep the business profits, but you also carry its liabilities. Business losses, taxes and debts remain your responsibility, even when the business has no cash.
As a sole trader, you can hire employees but cannot employ yourself or pay yourself a wage or salary. Money you take from the business counts as drawings. It counts as drawings. You must pay super for your employees and yourself.
You don’t need to have a separate bank account as a sole trader, but it is strongly advised for better cash flow and business management.
Tax considerations for a sole trader structure
- Sole traders don’t submit a separate business tax return. You report business income and expenses on your personal tax return using your individual TFN (tax file number).
- You pay tax at individual marginal rates. If your business profit exceeds $190,001, you pay 45 cents in tax for each dollar above that threshold (this is the current FY2026-27 top threshold). You may be eligible for the small business tax offset — chat to a registered tax agent to check.
- You don’t need an ABN to operate as a sole trader, unless required by your circumstances. An ABN still offers several benefits when running a business. Benefits include registering a domain name and issuing tax invoices. Without an ABN, other businesses may need to withhold 47% from payments to you.
- Once your GST turnover reaches $75,000, you need to register for GST. You’ll then lodge a monthly, quarterly or annual BAS.
- You’ll need to pay your income tax at the end of the financial year. The ATO may also require quarterly PAYG instalments.
Partnerships
A partnership has two or more people running a business together. Partnerships are increasingly uncommon these days but can be used in a variety of ways e.g. a partnership between two trusts or companies.
Partners share the business losses, risks and liabilities. They also share profits and control.
A partnership agreement usually sets out how partners share these responsibilities. You don’t have to have one, but we strongly recommend it. It gives partners something to refer to if disputes arise.
This form of business structure is also fairly inexpensive to set up and maintain. Partnerships need a separate bank account.
Tax considerations for a partnership structure
- The partnership will have its own TFN and must lodge an annual return.
- Partnerships are not taxed on their profits. Instead, each partner will show their own portion of the profits on their tax return under the appropriate section.
- Each partner pays tax at their own individual tax return rate and may be eligible for the small business tax offset.
- A partnership has to apply for an ABN and use it.
- A partnership must register for GST if the annual GST turnover reaches $75,000.
Company business structure
A company structure is more complex than a sole trader or partnership. Setup costs are higher. Companies also have ongoing reporting and administration costs.
A key difference is the separation of ownership and management. Shareholders own the company, while directors manage it. In smaller companies, the same people may own and manage the business. Larger companies usually separate these roles.
Companies are regulated by the Australian Securities & Investments Commission (ASIC).
As with any setup, there are pros and cons to a company business structure. Unlike sole traders and partnerships, a company (pty ltd) offers limited liability to its owners. The company carries its assets, liabilities, taxes and debts. Shareholders generally aren’t personally liable.
The same applies to profits. Shareholders cannot draw money out of a company without formally ‘distributing’ them as profits (aka dividends) or paying themselves a salary. Companies must pay super guarantee contributions (SGC) to all employees and directors.
Companies are required to have their own business bank account.
Tax considerations for a company structure
- A company has its own TFN and must lodge an annual return.
- ASIC issues an Australian Company Number (ACN) after you register the company. Once you have that number you can apply for your ABN with the ATO.
- It must also register for GST once its turnover reaches the threshold $75,000.
- Companies must lodge their own annual tax return and pay tax on profits at the relevant rate. This is usually managed via monthly or quarterly instalments (depending on the turnover of your business).
- Shareholders may pay additional tax on dividends if their personal tax rate exceeds the company tax rate already paid. For example, the company may pay tax at 25%, while a shareholder’s marginal rate is 30%. The shareholder may then pay the 5% difference. These are known as franked dividends. If the company tax rate exceeds the shareholder’s personal rate, the shareholder may receive a credit on their tax return.
- Companies may be eligible for small business tax concessions.
Trusts
Trusts can be complex and costly to set up and run. In the right circumstances, they can also be cost-effective.
Trusts can operate businesses or hold investments such as shares and property. Family trusts are a common structure used when a family wishes to protect their personal assets from business risk exposure.
If you’re considering buying property in a trust, it’s worth reading that guide alongside this section — it covers the asset-protection and tax trade-offs specific to holding property this way.
One key benefit of a trust is tax planning flexibility. The trustee can generally decide how to distribute trust income and capital gains to beneficiaries. This gives the trustee flexibility when making distributions.
A formal trust deed sets out how the trust will operate and what the trustee can do.
A business trust can employ people, including trustees. It must also pay superannuation for eligible employees. It must also have a separate bank account.
Tax considerations for a business trust structure
- The trust needs its own TFN and must lodge an annual return.
- Trusts must have their own ABN.
- A trust must be registered for GST if its GST turnover reaches $75,000.
- The trust’s tax position depends on how it distributes income. According to the ATO:
- A trust generally does not pay income tax when it distributes all income to adult or resident beneficiaries. Each beneficiary must declare their share on their tax return.
- If income goes to minors or non-residents, the trustee may be liable for tax.
If the trust does not distribute net income, the trustee may pay tax on the accumulated amount at the highest individual rate.
Changing your business structure
You may start as a sole trader and later decide to change your structure. Reasons can include tax, ownership, profitability and asset protection.
This is exactly the decision point our Sole Trader vs Company comparison is built for — if you’re weighing up whether you’ve outgrown your current structure, that article breaks down the tax gap between the two in more detail.
Often, it’s better to get the structure right upfront than fix it later.
You can change your business structure later. First, consider the bigger picture and how the change will affect your business. If you change your structure, make sure you understand its new obligations. Chat to your accountant or CFO first.
Comparison: Types of business structures
The table below compares the main business structures in Australia and their pros and cons.
FAQs
1. What is the best business structure for a small business run by partners?
There is no single best structure for partners. It depends on the business, ownership and level of risk. The right structure should protect their assets, provide tax advantages and suit their circumstances.
2. What’s the best business structure to avoid tax?
There is no business structure that lets you legally avoid all tax. If you’re paying tax, your business is making money. Tax is simply a cost of doing business.
3. What business structure is best for small business?
It depends on the client’s goals and business. For some small businesses, a company with a trust as shareholder may be suitable.
Not sure which structure fits where your business is headed? Book a free discovery call and we’ll map it out together.
