Insights

Before your business can grow, it needs the right foundation and that starts with choosing the right structure. Whether you’re launching a side hustle, stepping into self-employment, or building something bigger, the decisions you make early on can shape your future. One of the most important choices is your business structure; it affects your tax, personal liability, and how your business grows.

In this article, we’ll explore the pros and cons of the three most common small business structures in Australia: Sole Trader, Company and Trust. Understanding these pros and cons can help determine which structure aligns the most with your goals and gives your business the best possible start.

Sole Trader: Simple and Flexible

Pros:

• Easy and inexpensive to set up.
• Full control over business decisions.
• Fewer reporting requirements.
• Income taxed at individual rates.
• If certain criteria are met, any business losses made can offset other taxable income in that financial year instead of being carried forward, such as your employment or investment income.

Cons:

• Unlimited personal liability – your personal assets are at risk.
• Limited access to capital and funding.
• May be less credible to investors or clients.
• Depending on your income level, income taxed at your individual rate might be higher than the company tax rate or the tax rate of other eligible beneficiaries in a trust.

Best for: Freelancers, consultants, small-scale start-ups and low-risk businesses wanting a straightforward setup.

Company: Growth, Asset Protection and Credibility

Pros:

• Limited liability – personal assets are generally protected.
• Greater access to funding and investment.
• Perceived as more credible and professional.
• Business profits taxed at the corporate rate (currently 25% for base rate entities, 30% all others).
• Has the ability to retain business profits and pay them out as dividends, allowing flexibility around timing when tax liabilities arise.

Cons:

• More complex and costly to set up, with ongoing compliance costs.
• Regulated by ASIC, therefore requires additional reporting and compliance obligations annually.
• Directors have legal duties and responsibilities.
• Directors must obtain a Director ID, which adds an extra step in the setup process.

Best for: Most businesses, including those aiming for scalability, external investors/business partners in the future, or long-term growth .

Trust: Flexibility, Tax Planning and Capital Gains Benefits

Pros:

• Flexible income distribution to eligible beneficiaries (e.g. members of your family or other entities you control) which can lead to potential tax advantages with smart tax planning.
• Assets sold in the trust that are eligible for the 50% capital gain discount can pass this discount onto its individual beneficiaries; whereas capital gains made in a company do not have access to the 50% discount.

Cons:

• More complexity and cost to set up in comparison to a sole trader due to normal trust deed and trustee as well as higher annual compliance costs .
• Trusts cannot retain business profits, all profit must be distributed for tax purposes each year, not allowing for the timing advantages that can be provided by companies.
• Trust distributions must be decided and signed before the end of the financial year (30 June at the latest). If not, the trustee is taxed at the highest marginal rate (47% incl. Medicare).
• They are not separate legal entities and do not offer personal asset protection for individuals (unlike companies) if that individual is also the trustee.
• Adding asset protection to your trust may require incorporating a company to act as trustee, which has additional cost and compliance in addition to the trust.

Best for: Professionals or families operating low-risk businesses looking for greater flexibility and to manage their income distributions strategically. For investors looking for a structure that can hold assets with significant projected capital growth.

How to Choose the Right Business Structure

When deciding on the type of business to set up, consider:

• Your short and long-term goals.
• Risk tolerance and asset protection needs.
• Tax implications and administrative capacity.
• Whether you plan to hire staff or seek investors.

There’s no one-size-fits-all answer, and the best structure depends on your unique circumstances.

Frequently Asked Questions

Can I change my business structure later?
Yes. Many business owners start as sole traders and transition to a company or trust as their business grows.

Can I change from a trust to a company, or vice versa?
You can restructure, however it’s more complex than changing from a sole trader. Moving between a trust and a company often involves transferring assets, updating registrations, and considering tax implications like capital gains or stamp duty. Always seek professional advice before making the switch to avoid unexpected costs or compliance issues.

Do I need an ABN to start a business?
Yes. An Australian Business Number (ABN) is required for all business structures. It’s used for tax purposes and is essential for invoicing and registering for GST if applicable.

What’s the easiest structure for tax time?
Sole trader is generally the simplest, as your business income is reported on your personal tax return. Companies and trusts require more detailed reporting and compliance but may offer tax planning advantages.

What is a Director ID and why do I need one?
A Director ID is a unique identifier that directors of companies and corporate trustees must apply for under Australian law. It’s designed to help prevent fraudulent activity and improve transparency by verifying the identity of directors.

• Who needs it? Anyone appointed as a director of an Australian company or as a corporate trustee of a trust.
• When to apply? Before you become a director or within the required timeframe after appointment.
• How to apply? Through the Australian Business Registry Services (ABRS) using your myGovID.

Failure to obtain a Director ID can result in penalties, so it’s an essential step when setting up a company structure.

Let’s Set Your Business Up for Success

If you’re unsure which structure suits your business idea, there is support available. Our team at Altitude can help you weigh your options, understand the implications, and set up your business with confidence. We’re here to support your journey from start-up to success.

Book a time to see your Altitude Accountant today to get personalised advice tailored to your goals.