You are about to start trading, or you have been trading for a year or two and the question that keeps coming up is the same one: what should the business actually be? Banks ask it when you open an account, suppliers ask it on the credit application, and the accountant asks it before they can give you a figure that is worth anything. Most people answer with the structure they happened to hear about first, or the one a friend used. The choice is worth more thought than that, because it fixes forever how much of your own money is on the line, how the tax office treats every dollar of profit, and how hard it will be to bring on the people you will need later. You can change it, but changing a structure you have already built around is far more costly and disruptive than choosing well at the start.
The main structures on the table
Australian business owners effectively choose between four structures: operating as a sole trader, joining a partnership, incorporating a company, or carrying on the business through a trust. Each is a genuinely different legal arrangement, and each changes who owns the money, who is liable when things go wrong, and who pays the tax.
A sole trader is simply you trading in your own name or a business name you have registered. There is no separate legal entity, so there is no gap between the business and you. A partnership is two or more people carrying on a business together with a view to profit. A company is a separate legal entity created by registration with ASIC: once registered, the company owns its own assets, owes its own debts and can sue and be sued in its own name, distinct from the people who own and run it. A trust is not a separate legal entity at all; it is an arrangement where a trustee holds the business assets for the benefit of beneficiaries, and the trustee can be either an individual or a company.
One thing worth flagging early is that some of these options can look interchangeable but are not. More than one structure can be combined: many family businesses run a company that acts as trustee of a discretionary trust, so the trust owns the assets while the company provides limited liability to the people controlling it. Conversely, a partnership and a trust are not the same thing even though both involve multiple people, and a sole trader cannot simply "add a partner" later without forming a partnership under state law. Keep those distinctions in mind as you weigh the factors below.
Factor 1: How much of your personal wealth is exposed
The single biggest reason people incorporate is to separate their personal assets from the business. As a sole trader or a general partner you have no such buffer. As a sole trader, your business debts are your debts, and a creditor can pursue your house, your car and your savings to recover them. In a partnership, every partner is jointly and severally liable for the debts of the firm: each partner can be made to pay the whole of a debt the partnership owes, even if another partner caused it.
A company is different. Under s 1 of the Corporations Act 2001 (Cth), a company is a separate legal entity with its own property, rights and obligations, and shareholders are not liable, in their capacity as shareholders, for the company's debts. So if the company's business fails, the shareholders generally lose what they put in but nothing more, and their personal assets are protected. That protection is real but not absolute. A bank will often ask directors to guarantee a company's loan personally, and the company's directors owe their own duties that can expose them individually. Limited liability protects your assets as a shareholder; it does not protect you from a personal guarantee, from breaching a director's duty, or from negligence that is genuinely yours.
A trust gives a more indirect form of protection. Because the trustee may be a company, many people use a corporate trustee so that the limited liability of the company protects the individual controlling it, while the trust maintains the flexibility over how income is distributed. If you are weighing liability, think about what you genuinely own personally and whether you are prepared to put it at risk.
Sole trader or partnership vs company
The difference in exposure is stark:
- Sole trader / partnership: business debts are personal debts; unlimited personal liability for you (and, in a partnership, for your partners' share too).
- Company: separate legal entity; shareholders have limited liability, subject to personal guarantees and directors' duties.
Factor 2: How your profit is taxed
The way each structure is taxed is often the deciding factor, and it is also the one people most frequently misunderstand. As a sole trader, your business income is added to your personal income and taxed at your marginal personal rate. The same is broadly true in a partnership: the partnership itself does not pay income tax; instead each partner is taxed on their share of the partnership's profits in their own hands. This can be efficient when you are in a low tax bracket and are taking all the profit out, and it is where many people start.
A company pays its own tax on its profit. For the 2025-26 income year the ATO applies a company tax rate of 25% to base rate entities (roughly, small companies that are not publicly listed and whose aggregated turnover is below the threshold) and 30% to everyone else. That 25% figure is below the top marginal personal rate, which is why a company can be attractive: profit left in the company is taxed at a lower rate than the same amount would be taxed if it landed in your personal hands. But that money does not become yours until it is paid out, usually as a dividend, and when it is, you pay personal tax on it (offset by franking credits for tax the company has already paid). So a company can be a good way to accumulate or smooth income, but it introduces a second layer of tax when profit is extracted.
A discretionary trust offers the most flexibility. The trustee decides each year how to split the trust's income among the beneficiaries, and each beneficiary is taxed on what they receive at their own marginal rate. That lets a family business stream income toward family members in lower tax brackets. The flexibility is the attraction and the risk: it only works if the distributions are genuine and properly documented, and the tax treatment of trusts is governed by complex rules in the Income Tax Assessment Act 1936 (Cth) that are easy to get wrong.
Factor 3: What it costs and takes to run each day
The cheapest structure to run is usually the one that is easiest to set up. A sole trader needs little more than an ABN and, once the business's GST turnover reaches $75,000, GST registration. No separate tax return for the business, no separate accounts, no ASIC fees. A partnership is similar but requires a partnership agreement to be worthwhile, and each partner files their own return.
A company steps up the compliance burden significantly. It must be registered with ASIC and pay annual review fees, it must maintain proper books, and its directors owe statutory duties. A company's tax affairs run through company accounts and, where the business is registered for GST, business activity statements through the year. A trust adds another layer again: the trust must be properly documented, a deed is essential, and the trustee must make and record the income distributions each year. The annual accounting and tax work for a company or trust is typically more expensive than for a sole trader, because there is simply more to prepare. None of this makes a company or trust wrong; it makes them the right choice only when the liability and tax benefits genuinely outweigh the ongoing running costs.
Factor 4: Who else is involved and how you will split the rewards
If you are genuinely on your own and expect to stay that way, a sole trader structure is a clean fit. The moment a second person is involved the question changes. If you are going into business with a friend or family member, a partnership is legally straightforward, but you should understand that without a written partnership agreement you are governed by the default rules of state partnership legislation, including joint and several liability for the firm's debts. A proper partnership agreement sets out how profits are split, who can make decisions, and what happens if someone wants out.
If you intend to bring in investors, issue equity to staff, or one day sell the business, a company is far and away the most practical vehicle. A company issues shares, so ownership can be divided, transferred and diluted in a way that has no real equivalent in a partnership or trust. A discretionary trust, by contrast, works best as a way to distribute income to a known group of beneficiaries such as a family, and it is a poor fit if you want external investors to hold an equity stake. Think about the people who will hold an interest in the business over its life, because that single question often points to the structure better than anything else.
Who will hold an interest
The ownership picture looks different under each structure:
- Sole trader: just you; nothing to divide.
- Partnership: the partners share profits as agreed; equity cannot be issued.
- Company: ownership via shares; easy to add investors, staff and buyers.
- Trust: income distributed to named beneficiaries; poor vehicle for outside investors.
Factor 5: How likely you are to need to change later
Every structure is possible to change, but they do not change with equal pain. Moving from sole trader to company, or forming a partnership, is a common step that most businesses will take at some point. What people underestimate is that a change of structure can trigger a tax event. Assets held personally, by partners or by a trustee may need to be transferred into the new vehicle, and a transfer of a business asset can give rise to capital gains tax, stamp duty and GST consequences unless it is planned carefully. The later in the business's life you restructure, the more it has grown, the more the assets are worth, and the larger the tax bill a transition can trigger.
This is the argument for making a considered choice early. If there is a realistic chance that your business will scale, take on investors, or cross the GST threshold, choosing a company now can save you a restructure down the track. If the business is a quiet one-person service operation that you expect to keep simple, a sole trader structure avoids paying for compliance you do not need. The structure should not be chosen to fit the business as it is today only; it is usually worth choosing the structure that fits the business you expect to have in a few years.
How an Artificer Legal business structuring lawyer helps you decide
Choosing a structure is rarely a purely legal question, and the value of a lawyer is in joining the legal, tax and practical strands together before you commit. At Artificer Legal, a business structuring lawyer will start by stress-testing the assumptions behind your choice: what you actually own personally, whether the liability risk is real for your industry, who will hold an interest in the coming years, and whether your profit expectations make the tax treatment of one structure genuinely better than another. They will model the downside of each option, not just the upside, so you understand what happens to you personally if the business fails or a claim is made against it. That assessment often surfaces the threshold you should be watching, such as whether the business is heading toward the GST registration threshold, or whether it will soon carry enough value that a later restructure would be costly in tax.
Once the decision is made, a lawyer does the drafting that makes the structure actually work. A company needs its constitution and registration steps, a partnership needs a properly drawn partnership agreement, and a trust is only as good as its trust deed and the record-keeping that supports its distributions. Getting the documents right at the outset means the structure is real, not just chosen. A lawyer can also set up the supporting documents the structure will need, such as a shareholders agreement where a company has more than one owner, and can flag the compliance obligations, from ASIC fees to business activity statements, that come with the structure you pick.
The structure decision is not about today
The one question that takes the most effort to get right, and the one people most often get wrong, is not which structure saves the most tax this year. It is which structure will still be the right one when the business has grown, taken on other people, and accumulated assets that would be expensive to move. A sole trader structure looks cheap and simple today and can look very expensive to unwind in five years once the business owns real assets and employs staff. Tax saving for a single year is the easy part of the decision; the hard part is how the structure will cope with everything the business becomes.
To pull it together: a sole trader is the simple, low-cost default for someone genuinely on their own who accepts unlimited personal liability. A partnership suits a small group of people sharing the work and the risk, provided they document how it will run. A company is the choice for anyone who wants limited liability, plans to grow, or will need to bring in investors, and it trades a higher running cost for that protection. A trust offers the most flexible way to stream income to a family, at the price of real complexity. Work through how much of your own wealth is exposed, how the profit will be taxed, what the structure costs to run, who will hold an interest, and whether you will need to change later. If the combination of those answers points to a company or a trust, that is the point at which a business structuring lawyer earns their keep, both in choosing well and in drafting the documents that make the choice real.