How do I choose the right structure for my business?

If you’re starting a business - choosing the right business structure is going to be one of the most important decisions you’ll make as an entrepreneur.

Your choice affects how much tax you pay, your personal liability, and the way profits are shared or reinvested.

With options ranging from sole traders to trusts, it can feel overwhelming - but understanding the pros and cons of each structure will help you make a decision that supports your business goals and growth.

Here is a quick summary of 4 most common business structures in Australia:

1. Sole Trader

A sole trader is the simplest business structure to set up.

You and your business are legally the same entity, which means all profits are taxed at your personal income tax rate. You’re responsible for any debts the business incurs, and you report business income in your personal tax return.

This structure is best for small businesses, freelancers, or side hustlers who want a low-cost, low-complexity setup.

For example: Sarah runs a small online bakery by herself. She earns all the profits and reports them on her personal tax return. Simple to set up, and she keeps full control of her business.

• Pros: Easy setup, low compliance costs, full control of the business.

• Cons: Unlimited personal liability, fewer tax planning opportunities.

2. Partnership

A partnership involves two or more people running a business together.

Profits are shared according to the partnership agreement and are taxed in the hands of the individual partners, not at the partnership level.

Each partner reports their share of the profit on their tax returns.

For example: Tom and Lisa start a landscaping business together. They share profits 50/50 and each pays tax on their share through their personal tax returns. Decisions and responsibilities are shared.

• Pros: Shared responsibility, simple to establish, flexible profit sharing.

• Cons: Partners are jointly liable for business debts, potential disputes over decisions.

3. Company

A company is a separate legal entity from its owners (shareholders).

Companies pay corporate tax on profits at a set rate (generally 25% or 30%), which can be lower than personal tax rates.

Profits distributed to shareholders as dividends may also be subject to personal tax, but franking credits can reduce double taxation.

Companies offer strong liability protection and are often chosen by businesses planning to grow or seek investment.

For example: Tech startup “BrightApps Pty Ltd” is incorporated as a company. The company pays corporate tax on profits, and shareholders receive dividends. This structure limits personal liability and makes it easier to attract investors.

• Pros: Limited liability, potential tax advantages, easier to raise capital.

• Cons: Higher compliance and setup costs, more complex reporting requirements.

4. Trust

A trust is a structure where a trustee holds assets and income for the benefit of beneficiaries.

It can provide flexible tax planning, as the trustee can distribute income to beneficiaries in a way that minimises tax.

Trusts are more complex to set up and operate, with legal and accounting fees, but they are often used for family businesses, asset protection, or high-income ventures.

For example: The Smith Family Trust owns a chain of cafes. The trustee distributes profits to family members in a tax-efficient way. The trust structure also protects assets and helps with estate planning.

• Pros: Tax flexibility, asset protection, estate planning benefits.

• Cons: Complex administration, higher setup and ongoing costs, strict legal rules.

Final Thoughts…

There’s no one-size-fits-all answer when it comes to choosing a business structure. The best choice depends on your business size, growth plans, risk tolerance, and financial goals.

Taking the time to weigh the benefits and drawbacks of each option - and seeking professional advice when needed - can save you time, money, and stress down the track. The right structure will not only keep your business compliant but also position it for long-term success.

If you’re setting up a business and need help choosing the correct business structure, we can help you.