Best Business Structure in Australia: Pros and Cons for Small Businesses
Learn how to choose the right business structure in Australia by weighing the pros and cons for your small business setup.
Navigating the maze of business structures in Australia can be daunting for small business owners. With options ranging from sole trader through to corporation and a myriad of choices in between, each small business structure comes with its own set of legal, tax, and operational repercussions. In this article, we’ll break down the factors to consider when choosing a business structure and explain the pros and cons of each, so you can choose the right business structure for your needs.
What Are the Main Business Structures in Australia?
What is a Business Structure in Australia?
The definition of ‘business structure’ refers to the way in which your business is legally organised, informing how you operate and conduct business. There are four types of business structures in Australia: sole trader, partnership, company, and trust. Just to complicate matters further, within each of these structures are variations and often, business owners will require more than one structure as part of their tax strategy. For instance, you may own a trust under which your company operates – or vice versa.
Why Business Structure Matters for Tax, Risk & Compliance?
The impact of business structure is far-reaching, with tax liabilities, setup and registration costs, and asset protection being directly impacted by your business classification – among other things. The ongoing administration and compliance needs of the business will change according to the business formation type. Whether you’re an employee of your own business will be dictated and how much control you have over it will also be determined by your business structure.
Business Structure Types in Australia: Side-by-Side Comparison
| Structure | Pros | Cons |
|---|---|---|
| Sole Trader |
– The simplest and cheapest way to set up a business – Aren’t many tax or legal formalities to meet |
– Owner is personally responsible and liable for all aspects of the business – Must lodge annual returns (more admin than sole trader) |
| Partnership | – Responsibilities and liabilities are split between owners – Inexpensive and relatively easy to set up | – As a partner, you can’t claim deductions for money drawn from the business – More expensive to set up and higher admin and legal compliance needs |
| Trust |
– Can be very beneficial for tax purposes – Owner has limited liability for the company | – More expensive to set up and higher admin and legal compliance needs – Tax compliance is higher and more complicated |
| Company | – Taxed at the set company rate rather than the individual income rate (highly beneficial once earning over a certain amount) | – The most expensive and complicated business structure to set up and comply with |
Legal & Tax Implications of Business Structure Types
Tax Obligations by Business Structure Type in Australia
The tax obligations of business structures will differ according to your exact circumstances; however, broadly, there are clear implications whether you choose to go down the sole trader, partnership, trust or company route. A common question we get asked is “What are the tax benefits of business structures in Australia?” Here’s your answer!
| Business Structure | Taxation | Tax Rate | Deductions | Superannuation |
|---|---|---|---|---|
| Sole Trader | As a sole trader, the business income is considered personal income. You report your business income and expenses on your individual tax return. | You pay tax at the individual income tax rates, which are progressive. The more you earn, the higher the tax rate you pay. | You can claim deductions for expenses incurred in running your business. | You need to pay your own superannuation (this is, however, not a legal requirement – but we highly recommend doing so). |
| Partnership | A partnership does not pay tax on its income. Instead, it distributes the income (or losses) to partners. | Each partner reports their share of the partnership income in their individual tax return and pays tax at their personal tax rate. | The partnership can claim deductions for business expenses, but these are then distributed among the partners. | Each partner is responsible for their own superannuation. |
| Trust | Trusts are complex structures with specific rules. Generally, the trust does not pay tax if it distributes its income to beneficiaries. | Beneficiaries pay tax on the income they receive from the trust at their own marginal tax rates. If income is retained in the trust, it may be taxed at the highest marginal rate. | Trusts can claim deductions for expenses before distributing income to beneficiaries. | Trustees may be responsible for contributing to superannuation for any employees of the trust. |
| Company | A company is a separate legal entity and pays tax on its income. | Companies are subject to a flat company tax rate (currently 25%). | Companies can claim deductions for business expenses. | Companies are required to pay superannuation for their employees (and you, as the owner, will be an employee of your own company). |
How to Choose the Best Business Structure for a Small Business
Key Factors to Consider When Choosing a Business Structure
Factors to consider when choosing a business structure include not only the practical questions like what your income looks like and how it’s projected to track over the next 12-24 months, but also variables like whether you want a business partner or how you plan to operate the business (is it bricks and mortar? Is it a product or a service?). Does your business plan come with high or low associated risks?
A lot of the decision-making also comes down to what you’re comfortable with. If you do have some high risks associated with the business, are you comfortable with potentially wearing those risks personally? Or would you prefer the security of a company where your personal liability is limited?
Tax strategy is often the biggest factor when making a business structure decision. The intricacies of this are very much case-by-case and require a tax accountant and business advisor to strategise.
Another factor to consider when choosing a business structure is succession planning. The four structures vary in options when looking to pass a business on, which won’t be the intention of everyone.
- Sole Trader: Business ceases upon the owner’s death unless transferred through a will.
- Partnership: Continues with remaining partners or as outlined in the partnership agreement.
- Trust: Can provide continuity if the trust deed allows for the appointment of new trustees.
- Company: Continues to exist beyond the life of the original owners, providing continuity and an easier transfer of ownership.
How to Choose a Business Structure in Australia?
Picking the right business structure isn’t just ticking a box—it shapes how your business runs day to day. From tax obligations to paperwork load, each structure comes with its own set of rules and responsibilities. That’s why it’s worth taking the time to figure out what suits your goals best.
Here’s what your business structure can affect:
- The licences and permits you’ll need
- How much tax you’ll pay (and how it’s reported)
- Whether you’re classed as the owner or an employee
- Your level of personal liability if things go pear-shaped
- How much control will you have over operations?
- Ongoing costs and the amount of admin you’ll deal with
And here’s the good news—you’re not locked in for life. As your business evolves, you can switch structures to better match your needs. Whether you’re starting as a sole trader or scaling up to a company, your structure can grow with you.
Business Structure Advice for Australian SMEs
As you are now very aware, selecting the right business structure is not a one-size-fits-all solution. It’s largely determined by your personal situation, your business, and the intricacies of how it operates, as well as your goals – both personally and professionally.
What Is the Best Business Structure for Your Small Business in Australia?
There’s no such thing as a ‘best’ structure!
Our case studies
Case Study 1: From Sole Trader to Company
Business Type: Cleaning Services
Initial Structure: Sole Trader
Current Structure: Company
The Challenge
Our client began their journey as a sole trader, providing cleaning services to commercial clients in Melbourne. As the business grew, they began receiving requests from larger commercial clients, which required more resources and higher liability coverage.
Transition
We decided to transition the client from a sole trader to a company to limit her personal liability and to create a more professional image that larger clients would trust. This move also allowed her to attract investment and hire employees more effectively.
Pros:
- Limited Liability: Our client’s personal assets were protected from business liabilities
- Income Tax: Capped income tax rate @ 25%
- Investment Opportunities: Easier to raise capital.
Cons:
- Higher Costs: Increased setup and compliance costs
- Complex Administration: More rigorous record-keeping and reporting requirements.
Case Study 2: Establishing a Trust for Property Development
Business Type: Property Development
The Challenge
Our clients – experienced property developers – aimed to undertake a large-scale residential development project. They needed a business structure that offered flexibility in income distribution, protected their personal assets, and provided efficient tax planning.
Establishing the Trust
- A discretionary trust was chosen, allowing the trustees to distribute income among beneficiaries flexibly.
- The trust was registered for an Australian Business Number (ABN) and Goods and Services Tax (GST).
- A Tax File Number (TFN) was obtained for the trust.
Pros:
- Asset Protection: Personal assets of our clients were protected from any business liabilities
- Tax Efficiency: Flexible income distribution allowed for optimal tax planning
- Succession Planning: The trust structure provided a clear pathway for business continuity, allowing the development project to continue seamlessly even if one of the trustees stepped down.
Cons:
- Complex Setup: Establishing a trust involves higher initial costs and complexity compared to other structures like a sole trader or a partnership.
Conclusion
The four main business structures in Australia are a sole trader, a partnership, a trust, and a company. Each of these comes with its own pros and cons – particularly regarding the personal liability for the owner to the business and its operations, tax repercussions, ongoing cost of setting up the business structure and managing it, and the legal and administrative time and requirements that it takes.
Choosing the best business structure for your circumstance requires answering many questions before making a decision – most of which should stem from a comprehensive business plan.
Remaining compliant and utilising the best tax strategy possible are both non-negotiable pieces of running a business, no matter which structure you opt for. The best way to choose the best business structure is to involve a trusted, experienced tax accountant and business advisor. Please feel free to contact us to start the conversation.
FAQs on Business Structures
- Cancelling or updating licences and permits
- Transferring business assets and accounts
- Reviewing employment and insurance obligations
- If you’re a sole trader, you report all business income on your personal tax return. This works well if you’re earning under the tax-free threshold ($18,200) or keeping things small. But once your income increases, you could be looking at personal tax rates up to 47%.
- A partnership allows income splitting between partners, which might help reduce the overall tax burden if one partner earns significantly less.
- A company can offer tax advantages for higher-earning businesses. Profits are taxed at a flat 25% rate (if you qualify as a base rate entity), and you can pay yourself a salary, dividends, or director’s fees, each with different tax implications. It also helps with reinvesting profits back into the business.
- A trust offers flexibility in distributing income to beneficiaries, which can be useful for tax minimisation in family-run or multi-owner businesses. But trusts are complex and need careful planning.
1. Sole Trader
This is the simplest and most popular choice for solo operators. It’s easy to set up, low-cost, and gives you full control over your business. You report your income on your individual tax return, but you also carry unlimited liability, so your personal assets could be on the line if things go south.2. Partnership
Great for two or more people running a business together. Partnerships share responsibilities, profits, and risks. You don’t have a separate legal entity, and all partners are personally liable, so it’s important to have a solid agreement in place.3. Company
A company is a separate legal entity, which means limited liability for owners. It offers tax advantages and scalability, but comes with more setup costs, compliance requirements, and admin.4. Trust
A more complex structure is used for asset protection and tax planning. A trustee manages the business for the benefit of beneficiaries. Trusts offer flexibility in income distribution, but are expensive to set up and require strict compliance. Need help deciding? We’re here to guide you. The most common business structures in Australia are sole trader, partnership, trust, and company.For more detailed information on business structures, visit our blog.
