Best Business Structure in Australia: Sole Trader vs Company vs Trust (Simple Guide)

When you’re starting or growing a business, it’s tempting to choose the simplest option (usually sole trader) and “sort the rest later”.

But your business structure is more than paperwork, it affects:

• how much tax you pay

• how much personal risk you carry

• how you pay yourself

• how easy it is to bring in partners or investors

• how your profits can be distributed

• your accounting, admin and compliance

• your long-term wealth and asset protection

In Australia, the most common structures are:

1. Sole trader

2. Company (Pty Ltd)

3. Trust (usually a discretionary/family trust)

There’s no single “best” structure for everyone. The best option depends on your income level, risk, growth plans, and personal circumstances.

Let’s break it down clearly, without jargon.

Quick Snapshot: Which Structure Suits Who?

Sole trader is often best if:

• you’re starting out or testing an idea

• income is still modest or unpredictable

• you want low cost and minimal admin risk is low (e.g., service-based work with low liabilities)

Company is often best if:

• you’re earning consistent profits

• you want limited liability protection

• you want better separation between business and personal

• you plan to hire staff or scale

• you want flexibility in paying yourself (salary/dividends)

Trust is often best if:

• you want flexibility to distribute profits to different beneficiaries

• you want asset protection (in the right setup)

• you want long-term family wealth planning

• you have strong profits and professional support

• you’re comfortable with extra admin and compliance

What Is a Sole Trader Structure?

A sole trader is the simplest structure. You operate the business as an individual.

How tax works

You declare business income in your personal tax return, and you pay tax at individual marginal tax rates.

Pros of being a sole trader

• Cheap to set up

• Minimal admin (compared to company/trust)

• Full control over decisions

• Simple bookkeeping and tax reporting

• Good for side hustles and early-stage businesses

Cons of being a sole trader

• You are personally liable for business debts and legal issues

• Harder to separate personal assets from business risk

• Profit taxed at personal rates (can become expensive as income rises)

• Harder to bring in partners/investors

• Some lenders and suppliers may prefer dealing with a company for larger arrangements

Example: sole trader may suit

A freelance designer or consultant earning under (say) mid-six figures, with minimal business debt and low legal risk.

What Is a Company Structure (Pty Ltd)?

A company is a separate legal entity registered with ASIC. It can own assets, borrow money, and enter contracts in its own name.

How tax works

A company pays tax at the company tax rate, which is different from individual tax rates. The full rate is 30%, and a lower rate may apply to “base rate entities” (depending on current ATO rules).

Then, when you take profits out (via salary or dividends), tax is assessed depending on how it’s paid and your personal situation.

Pros of a company

• Limited liability (your personal assets are generally more protected)

• Clear separation between business and personal finances

• Perceived as more “established” by clients, lenders and suppliers

• Can be more tax-effective once profits are high

• More flexible for growth, staff, investors and future sale

Cons of a company

• Higher setup and ongoing costs

• More admin: ASIC obligations, director duties, extra reporting

• Must keep good records and run properly (minutes, compliance, accounts)

• Director obligations can still create personal risk if mismanaged

Example: company may suit

A trades business, agency, or product business earning strong profits consistently, hiring staff, and taking on risk/contracts.

What Is a Trust Structure?

A trust is a legal structure where a trustee holds and manages assets on behalf of beneficiaries.

Most business owners who use a trust use a discretionary (family) trust, which can distribute income to different beneficiaries (within the trust deed rules).

How tax works

A trust generally doesn’t pay tax as a separate entity if it distributes income to beneficiaries. The beneficiaries pay tax at their own marginal rates on the distributions they receive.

If the trust retains income (or does not distribute properly), tax outcomes can become less favourable.

Pros of a trust

• Flexibility to distribute profits among family members (where appropriate)

• Can support long-term family wealth planning

• Potential asset protection (depending on design and how it’s used)

• Useful for investment income and holding assets

• Can be combined with a company (“bucket company”) for planning (with correct advice)

Cons of a trust

• More complex and more expensive than sole trader

• Requires ongoing accounting support and documentation

• Distributions must be done correctly and on time

• Trust losses generally can’t be distributed like income, losses stay in the trust and are carried forward subject to rules

• Trust arrangements and distribution strategies are an area of ATO scrutiny documentation and “doing it right” is essential

Example: trust may suit

A business with strong profits where the owner wants flexibility to distribute income to a spouse/adult beneficiaries (where appropriate), and wants asset protection and long-term wealth strategy.

Key Comparison: Sole Trader vs Company vs Trust

1) Liability (personal risk)

• Sole trader: You are personally liable

• Company: Limited liability (but directors still have responsibilities)

• Trust: Liability depends on trustee structure (corporate trustee is common for protection)

2) Tax flexibility

• Sole trader: Taxed at your personal marginal rates

• Company: Taxed at company tax rate, then taxed again when profits are paid out (depending on method)

• Trust: Income can be distributed to beneficiaries for potentially flexible tax outcomes (within rules)

3) Setup + ongoing admin

• Sole trader: Lowest cost, simplest
  
  

• Company: More admin and ASIC obligations
  
  

• Trust: Complex, requires careful compliance and documentation
  
  

4) Paying yourself

• Sole trader: drawings (not a wage)

• Company: salary and/or dividends

• Trust: distributions to beneficiaries (and potentially salary if employing you)

5) Growth and investment

• Sole trader: harder to scale and bring in investors

• Company: easier to scale, sell, bring in shareholders

• Trust: can be very effective for holding assets and long-term wealth, but not as simple for investors

“Best Structure” Depends on Your Stage of Business

If you’re starting out (low income, testing ideas)

Sole trader is usually the simplest and cheapest.

But it’s worth reviewing if:

• profit grows quickly

• risk increases (contracts, staff, debt, legal exposure)

• your personal tax bracket climbs

• you begin investing profits

If you’re growing (profits increasing and consistent)

A company often becomes attractive because of:

• limited liability

• professionalism

• flexibility in reinvesting profits

• scalability and sale potential

If you’re profitable and planning long-term wealth

A trust (or trust + company) can make sense when:

• you want income distribution flexibility

• you want asset protection layers

• you’re building investments

• you want intergenerational wealth planning

• you can afford the setup and admin

Common “Best Practice” Structures Australians Use

1) Sole trader (basic)

Good for early stage. Often evolves later.

2) Company only

Good for growth, limited liability, strong profits, simple reinvestment.

3) Family trust (with corporate trustee)

Good for asset protection and flexibility, but must be managed properly.

4) Trust + Company (“bucket company”)

Common for higher-profit businesses and families where:

• trust earns income

• distributes to a company beneficiary (within rules)

• company retains profits at company tax rates

• cash and documentation are managed properly

This is powerful but complex and needs professional advice because trusts are a focus area for ATO compliance and documentation standards.

Mistakes to Avoid When Choosing a Structure

1) Choosing based on “tax savings” only

Tax matters, but so do:

• risk exposure

• admin costs

• your lifestyle and exit plans

• personal borrowing needs

• industry requirements

2) Setting up a structure you can’t maintain

A trust or company structure is pointless if:

• records are messy

• distributions aren’t documented properly

• BAS and tax are always late

• business and personal spending are mixed

3) Ignoring liability

If your business has contracts, staff, equipment, debt, or public-facing risk, a sole trader structure may expose your personal assets more than you realise.

4) Not planning “how you’ll pay yourself”

Different structures change whether you use:

• wages

• dividends

• trust distributions

• drawings

Your pay strategy affects tax, super, and compliance.

Practical Checklist: How to Choose the Right Structure

Ask yourself:

Income & profitability

• How much profit do I expect this year?

• Will I reinvest profits or withdraw most of it?

Risk & liability

• Am I exposed to legal claims?

• Do I have debt, staff, or contracts?

Growth plans

• Do I plan to scale, hire, or sell?

• Do I want to bring on partners/investors?

Personal and family planning

• Do I want to distribute income to family beneficiaries (where appropriate)?

• Am I building investments or assets outside the business?

Admin tolerance

• Am I willing to maintain higher compliance requirements?
  
  

Key Takeaways

• Sole trader is simple and cheap but offers little liability protection

• Company structures offer limited liability and flexibility for growth, but have higher admin costs Trusts can provide distribution flexibility and wealth planning benefits, but require strong compliance and documentation

• The best structure depends on your profits, risk, growth plans and long-term goals

• Many businesses evolve from sole trader → company → trust/company combination as they grow

• The wrong structure can cost you in tax, risk and admin time

FAQ 

1) What is the best business structure in Australia?

There isn’t one best structure for everyone. The best structure depends on your income, risk exposure, growth goals, and need for tax and asset protection strategies.

2) Should I start as a sole trader or a company?

Many people start as a sole trader because it’s cheaper and simpler. If profit becomes consistent or risk increases, a company may be worth considering.

3) Is a trust better than a company for tax?

A trust can offer flexibility in distributing income to beneficiaries, but it’s not automatically “better”. Trusts are complex and need correct documentation and compliance.

4) Can a trust run a business in Australia?

Yes. A trust can operate a business, with the trustee responsible for running the trust’s affairs.

5) Can I change business structure later?

Yes, but changing structures can trigger tax and legal consequences (for example, transferring assets). It’s best to plan before switching and get advice.

Still asking “what if” about your finances?

That’s exactly where clarity begins.

Whether you’re planning ahead, growing wealth, or simply want confidence in your financial decisions, the advisers at What If Advice can help you turn questions into a clear, personalised plan.

👉 Book a free 15-minute strategy session or get in touch today at
whatifadvice.com.au 

General Advice Disclaimer

This information is general in nature and does not take into account your personal financial situation, needs, or objectives. You should consider whether it is appropriate for you and seek personal financial advice before making any decisions. You should seek professional tax and legal advice before establishing or changing a business structure.