Sole Trader, Partnership, Company or Trust? Choosing Your Business Structure

"Should I be a company?" is one of the most common questions we get at BPAG Accountants. Usually it's asked after a good year, when the owner has just seen their personal tax bill.

It's the right question, but the answer isn't only about this year's tax rate. It's about liability, how you'll pay yourself, who else in the family is involved, whether you want to sell one day, and how much admin you'll put up with.

This guide compares the four main structures as at October 2026. It's general information. Structuring is exactly the kind of decision where personal advice pays for itself.

The four structures at a glance

The CGT discount rules are changing. From 1 July 2027, the general 50% discount ends: individuals and trusts can index the cost base instead, and resident individuals face a minimum 30% tax rate on most capital gains. Assets held on 30 June 2027 are generally revalued to market value at that date, so the pre-2027 gain keeps the old treatment. See CGT when selling a business.

Sole trader

You and the business are the same legal person. You use your own tax file number, report business income in your personal return, and pay tax at your marginal rates, which run from 0% up to 45%, plus the 2% Medicare levy.

Good for: starting out, testing an idea, lower profits, and businesses where liability risk is low or covered by insurance.

Watch out for:

• Unlimited liability. If the business owes money or is sued, your personal assets, including your home, are exposed.
• High marginal rates. Once profit is well into the higher tax brackets, every extra dollar is taxed at your top rate.
• Personal services income. If your income is mainly from your own personal efforts, the PSI rules can limit the deductions and income splitting available in any structure.

Partnership

Two or more people (or entities) carrying on business together. The partnership lodges a return, but it doesn't pay tax itself. Each partner pays tax on their share.

Good for: spouses or business partners starting small together.

Watch out for: each partner can be liable for the whole partnership's debts, not just their share. A written partnership agreement is essential.

Company

A company is a separate legal entity. It pays its own tax, holds its own assets and signs its own contracts.

Tax rate. The ATO says that from 2021–22 onwards, a company that's a base rate entity pays 25%. To be one, it needs aggregated turnover under A$50 million for the year, and no more than 80% of its assessable income can be base rate entity passive income (like interest, rent, dividends and net capital gains). Other companies pay 30%.

Getting money out. This is where owners get caught. The 25% isn't the end of the tax:

• Wages or director's fees are deductible to the company and taxed in your hands. PAYG withholding and super apply. From 1 July 2026, super must reach the employee's fund within 7 business days of each payday under Payday Super.
• Dividends are taxed in your hands, with a credit (franking credit) for the company tax already paid. If your marginal rate is higher than the company rate, you pay top-up tax.
• Loans. If the company lends you money, or pays your personal expenses, Division 7A can treat it as an unfranked dividend unless it's repaid or put under a complying written loan agreement by the company's lodgment day. The benchmark interest rate is 8.77% for 2026–27. We cover this in how to pay yourself.

Liability. Shareholders' liability is generally limited. Directors have duties under the Corporations Act and can be personally liable in some situations, including for some unpaid tax and super through director penalty notices. Banks and landlords will also often ask for personal guarantees.

Good for: profitable businesses that want to retain earnings for growth, businesses with real liability risk, and those planning to bring in investors.

Discretionary (family) trust

A trust isn't a legal entity. It's a relationship where a trustee (often a company set up for the purpose) holds the business for the benefit of beneficiaries, under a trust deed.

How it's taxed. Generally, the trust doesn't pay tax on income that beneficiaries are presently entitled to by 30 June. Each beneficiary pays tax on their share at their own rates. Income nobody is entitled to is taxed to the trustee at the top rate.

Why owners like it:

• Flexibility. The trustee can decide each year which beneficiaries receive income, within the deed's terms.
• CGT discount. A trust can access the 50% CGT discount on assets held at least 12 months (subject to the 2027 changes) and can pass it through to individual beneficiaries.
• Asset protection. Assets held in a well-run trust may be better protected than assets held personally, though this isn't absolute.

Why the ATO watches trusts closely:

• Section 100A. If a beneficiary is made entitled to trust income but someone else actually benefits, and the arrangement was entered into to reduce tax, section 100A can tax the trustee at the top rate. The ATO's ruling TR 2022/4 and guideline PCG 2022/2 set out its view. Arrangements that are "ordinary family or commercial dealing" are outside the rule, but distributing to adult children or a low-income spouse who then hands the money back is the kind of arrangement the ATO looks at.
• Minors. Distributions to beneficiaries under 18 are generally taxed at penalty rates. The ATO's 2026 trust instructions show resident minors with more than A$1,307 of eligible income paying 45% on the entire amount.
• Distributions to a company beneficiary. If the trust distributes to a company and doesn't pay the money across, the unpaid entitlement can raise Division 7A issues.
• Trust resolutions. Trustees must generally make valid resolutions by 30 June. Miss it, or get the wording wrong, and the tax can fall where you didn't intend.

Good for: family-owned businesses with several adult family members genuinely involved, owners who expect to sell and want access to the CGT discount, and groups that want flexibility over time.

A simple comparison (illustrative)

Take a business making A$200,000 of profit a year. The owner needs A$120,000 a year to live on.

• As a sole trader, all A$200,000 is taxed at the owner's marginal rates, including the top brackets.
• As a company, the owner could take a salary of A$120,000 (taxed personally, deductible to the company), and the company pays 25% on the remaining A$80,000 if it's a base rate entity. That A$60,000 left after company tax is retained to grow the business. When it's eventually paid out as a dividend, it's taxed again in the owner's hands, with a franking credit for the 25% already paid.
• As a trust, profit could be distributed between the owner, a spouse who works in the business, and possibly a company beneficiary, subject to section 100A and Division 7A.

The company looks better on paper while profit is retained. The advantage shrinks or disappears if every dollar ends up in the owner's pocket anyway. That's why the right answer depends on how much you need to take out, not just how much you make.

We haven't put tax figures on this example on purpose. Rates, offsets, Medicare levy, super and the owner's other income all change the numbers. Ask your accountant to model your actual situation.

Structure and selling your business

If you might sell in the next five to ten years, structure matters more than most owners realise:

• Who owns the goodwill? A buyer buys the assets or the shares of whatever entity holds them.
• Share sale or asset sale? Buyers of small businesses usually prefer assets. A company structure gives you the option of selling shares.
• CGT concessions. The small business CGT concessions can apply to individuals, partnerships, companies and trusts, but there are extra conditions (like having a "significant individual") when the asset is held through a company or trust, or when you sell shares or units.
• The CGT discount. Companies don't get it. Individuals and trusts do, until the 2027 changes.

Read more in selling a subscription business in Australia and how much is my business worth.

When should you change structure?

Common triggers we see:

• Profit has grown well past what you need to live on.
• You've taken on staff, a lease or contracts with real liability risk.
• A spouse or adult children have started working in the business.
• You're bringing in a partner or investor.
• You're thinking about selling in the next few years.

Moving an existing business into a new structure is a disposal. It can trigger CGT, stamp duty (depending on the state and assets), GST, employee transfers and new registrations. Rollover relief may be available in some cases, including the small business restructure rollover, but only if the conditions are met. Plan the change with your accountant before you set up anything new.

Our checklist before you decide

1. How much profit do you expect over the next three years?
2. How much do you need to take out each year to live on?
3. Who else in your family genuinely works in or owns the business?
4. What's your liability risk, and is it insured?
5. Do you plan to sell, bring in investors or hand the business on?
6. Are you willing to keep the admin up: separate bank accounts, minutes, trust resolutions, loan agreements?

Free Subscription Profit Review

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• whether a subscription model could work for your business
• how recurring revenue could cover your fixed costs each month
• how it could lift what your business is worth

Book my free review Call 1300 272 422

No cost, no obligation. General information only until we understand your situation.

Frequently asked questions

Written by BPAG Accountants

This guide was written by the tax team at BPAG Accountants, a Sydney accounting firm that helps Australian business owners with tax, structuring, cash flow and business advice. Reviewed by Robert Coorey, a Director at BPAG and author of The Subscription Playbook. Talk to BPAG on 1300 272 422 or at bpag.net.au.