Sole Trader vs Company vs Trust: Choosing the Right Business Structure in Australia (2026)
Why Your Business Structure Is One of the Most Important Financial Decisions You’ll Make
The structure you use to run your business in Australia affects virtually every financial outcome: how much tax you pay, what assets are protected if things go wrong, how much it costs to comply with the law, and how easily you can bring in partners or sell the business.
Yet a majority of Australian small business owners either chose their structure by default (registering as a sole trader because it was the easiest option) or set up a company or trust years ago without reviewing it since. In 2026, with the ATO focused on trust tax avoidance (particularly Section 100A), company tax rates at historic lows, and personal liability exposure growing as contract and professional services businesses scale, getting the structure right matters more than ever.
Australia has four main business structures available to small and medium business owners: sole trader, partnership, company, and trust. Each has distinct tax, legal, and operational characteristics. Most established businesses end up using a combination — for example, a company as trustee of a trust, or a holding company over operating companies.
This guide breaks down each structure in plain terms, compares the key characteristics, and explains when each structure makes sense in 2026.
The Four Business Structures: At a Glance
| Feature | Sole Trader | Partnership | Company | Trust |
|---|---|---|---|---|
| Legal entity | No | No | Yes | No (trustee holds assets) |
| Personal liability | Unlimited | Unlimited (jointly) | Limited (generally) | Depends on structure |
| Tax rate | Marginal (up to 47%) | Marginal (each partner) | 25% or 30% | Beneficiary marginal rates |
| Income splitting | No | Limited | Via dividends | Yes (discretionary) |
| CGT discount (50%) | Yes | Yes | No | Via beneficiaries |
| Setup cost | ~$0 | ~$500 | ~$1,000-$2,500 | ~$1,500-$3,500 |
| Annual compliance | Low ($0-$500) | Medium (~$800-$1,500) | Medium-High ($2,000-$5,000) | Medium-High ($2,000-$5,000) |
| Asset protection | None | Low | Good | Good (with correct structure) |
| Profit retention | N/A | N/A | Tax-effective | Limited |
Sole Trader: Simple but Exposed
A sole trader is the simplest and most common business structure in Australia. According to the ABS, there were approximately 1.4 million actively trading sole trader businesses in Australia as of 2024-25. The structure requires no formal registration beyond an ABN and business name (if trading under a name other than your own).
Tax Implications of a Sole Trader Structure
All business income flows to you as the individual and is taxed at your personal marginal tax rate. In 2025-26, this means:
| Taxable Income | Marginal Rate |
|---|---|
| $0 to $18,200 | 0% |
| $18,201 to $45,000 | 16% |
| $45,001 to $135,000 | 30% |
| $135,001 to $190,000 | 37% |
| Over $190,000 | 45% |
Plus 2% Medicare levy.
A sole trader earning $120,000 in profit pays tax at an effective rate of around 26-28%, which is comparable to the 25% small business company rate once personal tax savings like super contributions are considered. However, a sole trader earning $200,000+ is paying 45 cents in the dollar on income above $190,000 — significantly more than a company would.
When Sole Trader Works
- Early-stage businesses with turnover under $75,000 (below GST registration threshold)
- Low-risk services with minimal personal liability exposure (online consulting, creative work)
- Businesses where the owner expects to sell at a loss or isn’t building long-term equity
- Testing a business idea before committing to setup costs
When Sole Trader Doesn’t Work
- Any business carrying significant debt
- Businesses with physical clients on-site (public liability risk)
- Turnovers above $100,000 where marginal tax rates significantly exceed 25%
- Businesses building assets for eventual sale (CGT considerations)
Partnership: Simple Multi-Person Structure
A partnership exists when two or more people (or entities) carry on business together with a view to profit. In Australia, partnerships are governed by state-based Partnership Acts and are generally straightforward to set up.
Key characteristics:
- Each partner is individually taxed on their share of partnership income
- Partners are jointly and severally liable for partnership debts — this means one partner can be pursued for all debts, even those incurred by another partner
- Partnerships file a partnership tax return (form P) but do not pay tax at partnership level
- Partnership income is allocated according to the partnership agreement
Partnerships can be useful for professional practices (medical, legal, accounting) where income needs to flow to individual licensees. However, unlimited joint liability is a significant risk for most business partnerships, which is why many professional firms have transitioned to Limited Liability Partnerships (LLPs) or company structures.
Company: The Tax-Efficient Workhorse
A company is a separate legal entity under the Corporations Act 2001, which means it can own property, enter contracts, sue and be sued, and pay tax in its own right. This legal separation is the primary advantage over a sole trader or partnership.
Tax Rate and Dividend Imputation
For 2025-26, the company tax rate is:
| Company Type | Tax Rate |
|---|---|
| Base rate entity (turnover < $50M, <80% passive income) | 25% |
| Standard company | 30% |
The imputation (franking credit) system means that when a company pays a dividend, the shareholder receives a credit for the tax already paid by the company. For a business owner who extracts profits as franked dividends, the effective combined tax rate can be competitive with other structures, depending on their marginal rate.
Example (base rate entity):
- Company earns $200,000 profit
- Company tax: $200,000 × 25% = $50,000
- After-tax profit retained: $150,000
- If distributed as a franked dividend to owner (marginal rate 37%):
- Gross dividend = $200,000 (dividend + franking credit)
- Tax at 37%: $74,000
- Less franking credit: -$50,000
- Additional tax payable: $24,000
- Total tax (company + additional): $74,000
Profit Retention in a Company
One significant advantage of a company structure is the ability to retain profits at the lower company tax rate. Rather than distributing all profits as a dividend (which triggers individual tax), a business owner can leave funds in the company to fund growth, invest, or service debt — all taxed at 25% rather than potentially 47%.
This works until profits are eventually distributed. But for growth-stage businesses reinvesting profits, it can defer significant personal tax liability.
Asset Protection in a Company
Because a company is a separate legal entity, a director’s personal assets are generally not at risk if the company fails to pay its debts — provided the director:
- Has not provided personal guarantees (extremely common in commercial leases and bank lending)
- Has not engaged in insolvent trading
- Has not breached director duties
In practice, banks and commercial landlords routinely require personal guarantees from directors of small companies, which substantially erodes this protection for new or small businesses.
Director Obligations and Compliance
Running a company comes with legal obligations under the Corporations Act 2001:
- Maintain ASIC records (registered address, director details)
- Hold and record shareholder meetings
- Pay annual ASIC review fee ($310 for a proprietary company in 2025-26)
- Lodge company tax returns
- Meet director duties: care and diligence, act in good faith, avoid conflicts of interest, prevent insolvent trading
- Lodge Taxable Payments Annual Reports (TPAR) if in relevant industries
The ATO and ASIC have increased enforcement activity against director obligations in 2025-26, particularly around Director Identification Numbers (Director IDs) and tax debt accumulation.
Trust: The Flexible Income-Splitting Vehicle
Trusts are not legal entities in the same way a company is, but they are powerful tax and asset protection vehicles that have become a staple of Australian business and wealth structures. A trust involves three parties:
- Settlor: establishes the trust
- Trustee: holds assets and manages distributions (often a company)
- Beneficiaries: receive income or capital from the trust
Types of Trusts Used in Business
| Trust Type | Key Feature | Common Use |
|---|---|---|
| Discretionary (Family) Trust | Trustee chooses who gets income each year | Family businesses, wealth accumulation |
| Unit Trust | Income allocated by units held | Joint ventures, property investment, external investors |
| Hybrid Trust | Mix of discretion and fixed entitlements | Complex structures |
| Testamentary Trust | Created by a will | Estate planning |
Tax Advantages of a Discretionary Trust
A discretionary trust allows the trustee to distribute income to beneficiaries in the most tax-effective way each year. For a family business, this might mean distributing:
- $18,200 to a spouse (0% tax, fully within the tax-free threshold)
- $45,000 to an adult child (taxed at 16% up to $45,000)
- Remaining income to the primary business operator
This income splitting can generate substantial tax savings for family businesses with multiple lower-income beneficiaries.
Important 2025-26 consideration: Section 100A
The ATO’s Section 100A compliance program targets trust arrangements where a beneficiary is entitled to a trust distribution but the economic benefit goes to a different person (typically someone on a higher income). The ATO has successfully challenged several arrangements where:
- A distribution was made to a low-income beneficiary
- But the cash was effectively returned to the trustee or controlled by a higher-income individual
The ATO now expects trusts to maintain robust documentation of beneficiary resolutions, actual payments to beneficiaries, and financial accounts demonstrating that beneficiaries genuinely received and used their entitlements.
Trusts and the 50% CGT Discount
One significant advantage of trusts over companies is access to the 50% CGT discount. When a trust holds an asset for more than 12 months and sells it at a profit, the capital gain can be discounted by 50% before being distributed to beneficiaries. Companies cannot access this discount.
For a family trust selling an investment property held for more than 12 months with a $400,000 capital gain:
- Discounted gain: $200,000
- Distributed to beneficiaries at their marginal rates
- Significant reduction in CGT compared to a company structure
Trust Compliance and Land Tax Considerations
Trusts have their own compliance obligations and some significant disadvantages:
- Annual trust tax return required (separate to any company tax return)
- Trustee resolutions must be made by 30 June each year
- In most states, trusts do not receive the land tax principal place of residence exemption and may be subject to surcharge land tax rates (e.g., Victoria’s additional 0.5% surcharge on trust-held land)
- Trust income distributed to minors (under 18) is taxed at up to 66% under the minors’ tax rules
The Company-as-Trustee Structure
The most common structure used by established Australian businesses and investors is a discretionary trust with a corporate trustee. This combines:
- Asset protection: Trust assets are held by the company, not personally. If a director is sued, trust assets are not at risk (provided there’s no piercing of the corporate veil).
- Income splitting: Discretionary trust distributions to beneficiaries at their marginal rates
- CGT discount: Available to individual beneficiaries on trust gains
- Retained earnings: Profits can be distributed to a related company for retention at 25%
This structure adds complexity and compliance cost but is standard for any business with meaningful turnover, assets to protect, or multiple stakeholders.
Which Structure Should You Choose?
The right business structure depends on your specific circumstances, but here are general guidelines:
| Situation | Recommended Structure |
|---|---|
| Starting out, low revenue, low risk | Sole trader |
| Two or more equal partners, low turnover | Partnership |
| Revenue over $100k, solo professional services | Company |
| Family business, income splitting important | Discretionary trust + corporate trustee |
| Property investment with partners | Unit trust |
| High-risk business, significant personal assets | Company or trust (with professional advice) |
The Cost of Getting It Wrong
Choosing the wrong structure isn’t just a tax problem. Consider:
- A sole trader in professional services who faces a negligence claim has unlimited personal liability. A company or trust structure could have protected their family home.
- A business owner who stays as a sole trader after profits exceed $135,000 pays 37 cents on every additional dollar. Restructuring to a company can save tens of thousands annually.
- Restructuring after assets have grown can trigger CGT events and stamp duty, which are often avoidable if the right structure is established early.
The ATO provides a small business restructure rollover (Subdivision 328-G) that allows eligible businesses to restructure tax-free, but strict conditions apply and the rules are complex.
Getting Professional Advice
Business structure decisions involve tax law, corporate law, state land tax, and personal risk considerations simultaneously. The right answer is rarely obvious without a detailed review of your specific situation, goals, and asset position.
A qualified accountant or tax adviser can model the after-tax outcomes of different structures for your income level, project compliance costs, and identify the most effective path forward. This is one of those decisions where professional advice pays for itself many times over.
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Frequently Asked Questions
What is the company tax rate in Australia for small businesses in 2025-26?
For the 2025-26 financial year, the base rate entity (small business) company tax rate in Australia is 25%. This applies to companies that are base rate entities — broadly, companies with an aggregated annual turnover below $50 million where 80% or less of assessable income is passive income. The standard company tax rate (for larger companies and those that don't qualify as base rate entities) is 30%. Retained profits in a company are taxed at the company rate, and shareholders pay tax on dividends at their marginal rate minus a franking credit offset.
Can an Australian sole trader be held personally liable for business debts?
Yes. A sole trader in Australia has unlimited personal liability for all business debts, which means personal assets — including your home, savings, and car — can be used to satisfy business debts if the business cannot pay. There is no legal separation between the person and the business. This contrasts with a company structure, which creates a separate legal entity. Sole trader structures are simpler and cheaper to establish and run, but the exposure to personal liability is a significant risk for any business that carries substantial debt, takes on contracts, employs staff, or operates in a professional services context where negligence claims are possible.
How are trust distributions taxed in Australia in 2025-26?
Trust distributions in Australia are taxed in the hands of the beneficiaries at their individual marginal tax rates — not at a trust-level tax. A discretionary (family) trust allows the trustee to allocate income to beneficiaries in the most tax-effective way each year, including to lower-income family members who may be taxed at 0% (under the $18,200 tax-free threshold) or 16% (between $18,200 and $45,000). However, the ATO's 'Section 100A' compliance program is actively targeting arrangements where adult beneficiaries receive trust distributions on paper but the economic benefit goes to someone else (typically a higher-income individual). Distributions to children under 18 are taxed at penalty rates under the minors' tax (Division 6AA) — up to 66% — rather than the child's marginal rate.
What are the annual costs of running a company compared to a sole trader in Australia?
In Australia, the annual compliance costs of running a company are significantly higher than a sole trader structure. Sole traders lodge a single individual tax return (typically $200-$500 via an accountant). Companies must pay ASIC an annual review fee (currently $310 per year for a proprietary company), lodge a separate company tax return (accountant fees typically $800-$2,500), maintain ASIC records and minutes, and comply with director obligations under the Corporations Act 2001. If a trust is involved, a separate trust tax return is also required. Total annual compliance cost for a small company or trust structure typically ranges from $2,000 to $6,000 or more, depending on the complexity of the business.
Is a unit trust or discretionary trust better for investing in property in Australia?
For Australian property investment, the choice between a discretionary (family) trust and a unit trust depends on your circumstances. Discretionary trusts offer flexibility to distribute income to low-income beneficiaries, but typically cannot access the 50% CGT discount directly (though individual beneficiaries can when a gain flows through). Unit trusts allocate income in proportion to unit holdings, making them more suitable for equal partners or where external investors are involved. Note that in Victoria, Queensland, and some other states, land held in a trust attracts surcharge land tax rates (trusts do not receive the principal place of residence exemption), which can significantly affect the economics of property in a trust. Both trust types also face land tax aggregation rules that can push holdings into higher tax brackets.
When should an Australian business owner consider restructuring their business structure?
In Australia, the common triggers for reviewing your business structure include: your turnover crossing $100,000 (professional liability risk increases), personal assets growing significantly (more to protect), taking on a business partner (partnership or company becomes more appropriate), bringing family members into the business (trust structure offers income splitting), accessing small business CGT concessions on sale (structure affects eligibility), accessing the 25% small business company tax rate, or when an accountant flags that your effective tax rate as a sole trader has significantly exceeded the company rate. The ATO does allow small business restructure rollovers (tax-deferred restructure from sole trader or partnership into a company or trust) under Subdivision 328-G, but strict conditions apply and the process requires professional guidance.
