The business structure you choose in Australia can significantly affect how much tax you pay and how well your assets are protected. The right structure can reduce your tax bill, while the wrong one can quietly drain your profits year after year.
Let’s look at what that means in practice and how you can make sure your setup works for you, not against you.
Why Does Your Business Structure Matter?
Your business structure determines how your income is taxed, how profits are shared, and who’s personally liable for debts.
Many new business owners start as sole traders because it’s quick and cheap. But as the business grows, what seemed simple at the start can become limiting and expensive.
If your goal is to grow, protect your assets, and keep more of what you earn, it’s worth reviewing your structure sooner rather than later.
How Does Each Business Structure Affect Your Tax Bill?
Let’s break down the four main business structures in Australia and how each one impacts your tax position.
Sole Trader – Straightforward, But With Strings Attached
A sole trader operates the business under their own name. You use your personal Tax File Number (TFN), report business income on your individual tax return, and pay tax at personal income tax rates.
Tax perspective:
You can claim deductions and offset business losses against other income in some cases, but there’s no option to split income with a spouse or family member. Once your income rises, your tax rate can quickly hit the top marginal rate.
Expert insight:
This setup is fine when you’re testing the waters. But if your profits are growing or you’ve built up valuable assets, staying a sole trader could cost you thousands in unnecessary tax and expose your personal assets if something goes wrong.
Partnership – Shared Income, Shared Risk
A partnership is when two or more people run a business together and share income and losses. It’s still relatively simple, but it requires its own ABN and TFN.
Tax perspective:
Each partner reports their share of the partnership income on their own tax return. The partnership itself doesn’t pay tax.
Expert insight:
While this setup can help spread income and reduce tax across partners, it comes with shared liability. That means if your partner makes a poor business decision or incurs debt, you’re equally on the hook.
Partnerships work best for small operations built on strong trust, but they can become messy if personal finances or goals shift.
Company – Lower Tax Rates, Higher Responsibility
A company is a separate legal entity. This means your business has its own legal identity, separate from you personally.
Tax perspective:
Companies pay a flat 25% tax rate if classified as a base rate entity (turnover under $50 million). That’s often lower than individual rates, especially for higher earners.
Expert insight:
This structure offers two big advantages:
- Tax control – You can decide how and when to pay yourself (wage or dividends).
- Asset protection – Your personal assets are usually shielded from business liabilities.
However, companies come with higher setup costs, strict reporting rules, and ongoing compliance with ASIC and the ATO. You also can’t use company losses to offset your personal income.
If your business is expanding or you plan to reinvest profits, a company structure can be highly tax-efficient.
Trust – Flexible and Tax-Efficient
A trust is an arrangement where a trustee runs the business for the benefit of others (the beneficiaries).
Tax perspective:
Trusts don’t usually pay tax themselves. Instead, profits are distributed to beneficiaries, who then pay tax at their personal rates. This allows you to direct income to family members in lower tax brackets, reducing the overall tax paid.
Expert insight:
Trusts are often used by family businesses for tax flexibility and asset protection. However, they’re more expensive to set up and require careful year-end management. If profits aren’t distributed, they can be taxed at the highest marginal rate, currently 45%.
When managed properly, a trust can deliver excellent tax outcomes and protect wealth, but it needs ongoing expert oversight.
Can You Change Your Structure Later?
Yes, you can, but it’s not always simple.
As your business grows, you may outgrow your initial setup. Moving from a sole trader to a company or trust is common, but changes can trigger capital gains tax (CGT) or stamp duty.
It’s best to seek advice before switching to make sure the change is done in a tax-efficient way. A good accountant can help you restructure without paying more tax than necessary.
The Hidden Cost of Sticking With the Wrong Structure
Many business owners stay in the same structure for years because it “works well enough.” But over time, that decision can cost far more than it saves.
The wrong structure can leave you:
- Paying higher tax than you need to
- Personally liable for business debts
- Missing out on legal concessions and deductions
Tax is often the biggest expense in business. Reducing it legally through the right structure isn’t just smart, it’s a good business strategy.
How to Choose the Right Structure for Your Business
When choosing a structure, ask yourself:
- How much risk am I comfortable taking on personally?
- What’s my income now, and what will it look like in a few years?
- Do I need flexibility to distribute income to family members?
- Do I plan to grow, reinvest, or sell the business?
An experienced accountant can help model your options and show how each structure affects your tax bill. What works today might not be right tomorrow, so regular reviews are just as important.
Our team at Clear Tax specialises in business structuring and tax strategy for Australian businesses. Whether you’re starting out or ready to restructure, we’ll help you choose the setup that supports your goals and keeps more money in your pocket.
Key Takeaway
Your business structure is more than paperwork; it’s the framework for how you earn, protect, and keep your money.
The structure you choose affects:
- Tax rates and deductions
- Legal liability
- Access to concessions
- Ease of growth or sale
If you’re unsure whether your current setup is still right, it’s worth having a professional review. A small adjustment today could lead to major savings in the years ahead.
Frequently Asked Questions
1. What’s the cheapest business structure to start with?
A sole trader setup is the cheapest and simplest. You can apply for an ABN and start almost immediately. But it offers no separation between you and the business, meaning higher personal risk.
2. Do companies always pay less tax than sole traders?
Not always. Companies pay a flat rate of 25%, but once profits are paid out as dividends, those dividends may still attract personal tax. The benefit depends on your income level and how you take profits from the company.
3. Can a trust help reduce my tax bill?
Yes, if managed correctly. By distributing income to beneficiaries in lower tax brackets, trusts can lower overall tax payable. However, poor management or undistributed profits can lead to higher taxes instead.
4. Can I change from a sole trader to a company later?
Yes, and many business owners do. Just be aware that transferring assets may trigger capital gains tax or stamp duty. It’s best to plan this move with professional guidance.
5. How often should I review my business structure?
At least every couple of years or whenever there’s a major change in your income, ownership, or business goals.
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