A business structure decides three things: who is legally liable for the business's debts, how its profit is taxed, and how much paperwork you carry every year. Australia has four common ones — sole trader, partnership, company and trust. Most people starting alone should begin as a sole trader, because it is free, immediate, and nothing about it prevents you incorporating later when there is a reason to.
The four structures at a glance
| Structure | Who is liable | Tax on profit | Cost and admin |
|---|---|---|---|
| Sole trader | You personally, without limit. Business debts can reach your personal assets. | Added to your individual return and taxed at your marginal rate. | Free to set up. One tax return. Lowest admin of the four. |
| Partnership | All partners, jointly and severally — including for a debt another partner incurred. | The partnership lodges but pays nothing; each partner is taxed on their share. | Free to set up, but needs its own TFN, ABN and return, plus an agreement. |
| Company | The company. Directors stay exposed via guarantees, insolvent trading and penalty notices. | Taxed at the company rate; money reaches you as wages or dividends. | ASIC registration fee, an annual review fee, its own return and records. |
| Trust | The trustee — commonly a company set up so the exposure sits there. | Distributed income is taxed to beneficiaries; undistributed income can hit the top rate. | Highest. A deed, a trustee, annual compliance and professional advice. |
Sole trader
You and the business are the same legal person. You trade under your own Tax File Number, the ABN is issued in your name, and the business's profit goes into your individual tax return on a business schedule. There is no separate company return and no separate company tax bill.
The advantage is that there is almost nothing to it. It costs nothing to start, it can be done in an afternoon, and losses from the business can in some circumstances be offset against your other income — which matters in a first year that runs at a loss.
The disadvantage is that there is no separation. A business debt is your debt, and a creditor can pursue your personal assets, including your house. Two other things surprise people: you cannot employ yourself or pay yourself a wage — money you take out is simply a drawing, not a deduction — and no one pays your superannuation but you.
Partnership
A partnership is two or more people carrying on a business together. It has its own TFN and its own ABN, and it lodges its own tax return — but the partnership itself pays no tax. Each partner declares their share of the net income in their own return and pays at their own marginal rate.
The thing to understand before signing anything is joint and several liability. Each partner is liable for the debts of the partnership, including debts a different partner ran up without asking you. If they cannot pay, you can be pursued for the lot.
A written partnership agreement is not legally required and you should have one anyway. It should cover how profits are split, who can commit the partnership to a debt, what happens when someone wants out, and how the business is valued if it is bought or wound up. Partnerships fail on those questions far more often than on the trading.
Company
A company is a separate legal entity. You register it with ASIC, it is issued an ACN, and it then applies for its own ABN. Anyone who is going to be a director must obtain a Director ID before being appointed — that is a personal, permanent number applied for through the Australian Business Registry Services, and it is a legal requirement, not an optional extra.
The company pays tax on its own profits at the company rate rather than at your marginal rate, and money reaches you as wages or as dividends. The company rate differs for base rate entities and other companies, and the dividend imputation rules matter to the outcome — check the current rates at ato.gov.au or with a tax agent rather than assuming.
Limited liability is the reason people incorporate, and it is not absolute. Directors remain personally exposed where they have given a personal guarantee — which banks and many landlords require — and where the company trades while insolvent. Unpaid PAYG withholding, GST and employee super can also be pushed onto directors personally through a director penalty notice. Incorporating is not a wall between you and every consequence.
Against that, a company costs money to register, pays ASIC an annual review fee, must lodge its own tax return, and must maintain its own records and registers. That is a real annual cost in both fees and time.
Trust
In a trust, a trustee — often a company set up for the purpose — holds and runs the business for the benefit of beneficiaries. It is created by a trust deed, and in a discretionary (family) trust the trustee decides each year how income is distributed among the beneficiaries, who then pay tax at their own rates.
The attraction is flexibility in distributing income and a degree of asset protection. The costs are the deed, the setup, the annual compliance, and the fact that income the trustee fails to distribute can be taxed at the top rate. There are also specific anti-avoidance rules about distributions that the ATO watches closely.
A trust is not a structure to choose from an article. If it genuinely suits your situation, it will suit it after you have paid an accountant or a lawyer to set it up correctly.
How to actually choose
For most people starting out, the honest answer is a sole trader, and the question is really "when should that change?". These are the signals that it should:
- Your liability exposure is real. You work on sites, you handle other people's property, you give advice that could be relied on, or you are taking on debt. Insurance covers a lot of this; a company covers a different part of it.
- Clients require it. Some larger organisations will not contract with an individual, and some labour-hire and government panels require a company.
- The profit is consistently more than you need to live on. Once you are retaining profit in the business rather than drawing all of it, the flat company rate can beat your marginal rate. Below that point it usually does not, and you have paid for the privilege.
- You are bringing in a partner or an investor. Shares divide cleanly. A sole trader's business does not.
Note what is not on that list: looking professional. A registered business name and a proper tax invoice do that job, and both are available to a sole trader.
Can I change structure later?
Yes, and moving from sole trader to company is a well-worn path. It is not a form change though — it is a new legal entity. The company needs its own ABN and its own GST registration, your business name has to be transferred to the new ABN, contracts and insurance need to be reissued in the company's name, and your bank account changes.
Transferring the business's assets into the company can also trigger capital gains tax, although small business restructure rollover relief exists for exactly this situation when the conditions are met. This is the point at which paying an accountant for an hour is unambiguously worth it.
Related reading
- How to start a business in Australia — every step, in order
- How to get an ABN — the registration each structure needs
- Do I need to register for GST? — the threshold applies to all four
- Sole trader tax deductions — claiming as an individual
- ABN vs ACN — the extra number a company carries
- How much tax does a sole trader pay? — the rates side of the comparison
- Can a sole trader have employees? — often the trigger to incorporate
Frequently asked questions
Neither is better in general. A sole trader is taxed at individual marginal rates, so at lower profits the tax can be lower than a company would pay. A company pays a flat rate on its profits, which can be an advantage once profits are consistently higher than what you draw out to live on. The crossover depends on your total income and what you retain in the business.
Yes. A sole trader can employ staff, and must then meet PAYG withholding, superannuation guarantee and workers compensation obligations like any other employer. What you cannot do is employ yourself — money you take out of the business is a drawing, not a wage, and it is not deductible.
No. A partnership lodges its own tax return showing the net income, but it does not pay tax on it. Each partner declares their share in their own individual return and pays at their own marginal rate, whether or not the money was actually distributed to them.
Yes, if you are a director of an Australian company. It is a unique identifier you apply for yourself through Australian Business Registry Services, you keep it permanently, and it must be obtained before you are appointed. It does not apply to sole traders or to partners in a partnership.
Yes, and it is a common progression. The company is a new legal entity, so it needs its own ABN, its own GST registration and its own bank account, and your business name must be transferred to it. Moving assets across can trigger capital gains tax, although small business restructure rollover relief may apply — get advice before you do it, not after.
Sources
Structure definitions, liability and tax treatment in this article follow the Australian Taxation Office, ASIC and business.gov.au. Rates, fees and thresholds change — confirm the current position at ato.gov.au, asic.gov.au and business.gov.au, or with a registered tax agent or lawyer. Balaana is bookkeeping software, not a tax agent — this article is general information, not personal tax or legal advice.