One of the first and most important decisions any business owner faces is: what structure should my business operate under? Your choice affects how much tax you pay, whether your personal assets are protected, how you distribute income, and what happens when you eventually exit or sell.
At Verus Accountants, we regularly help business owners in Sydney review and restructure to find the most appropriate setup for their circumstances. Here is a clear, practical comparison of the three most common structures in Australia.
The Four Business Structures in Australia
The ATO recognises four main business structures:
- Sole trader – operate as an individual
- Partnership – two or more individuals sharing profits and losses
- Company – a separate legal entity (Pty Ltd)
- Trust – assets held by a trustee for the benefit of beneficiaries
This guide focuses on the three most commonly chosen structures: sole trader, company and trust.
Sole Trader: Simple, But Limited
A sole trader structure is the easiest to set up. You register an ABN, and you are in business. Your income is reported as personal income on your individual tax return. The key downside is that there is no separation between you and the business – your personal assets are exposed to business liabilities.
Best for: early-stage businesses, freelancers, and tradespeople with low income and minimal risk.
Company: Tax Efficiency and Asset Protection
A company (Pty Ltd) is a separate legal entity. It files its own tax return and pays tax at 25% (base rate, 2025-26). Directors are employees of the company, which means you pay yourself a salary (and potentially dividends) rather than taking drawings.
Best for: growing businesses with profits above $80,000–$100,000 per year, those seeking asset protection, or businesses planning to bring on investors or partners.
Trust: Flexible Income Distribution and Wealth Protection
A trust is not a legal entity in itself. A trustee (which can be an individual or a company) holds and manages assets on behalf of beneficiaries. The most common type used in business is the discretionary (family) trust.
With a family trust, the trustee has discretion over how to distribute income each year among beneficiaries. This provides significant opportunities for income splitting and tax minimisation. Trusts are also commonly used for asset protection and estate planning.
Best for: family businesses, property investors, and those with multiple beneficiaries who want flexibility in how income is distributed.
Trust vs Company vs Sole Trader: Key Comparison
| Feature | Sole Trader | Company (Pty Ltd) | Discretionary Trust |
|---|---|---|---|
| Tax rate | Personal marginal (up to 47%) | 25% (base rate entities) | Distributed at beneficiaries’ rates |
| Asset protection | None | Limited liability | Strong (assets held by trustee) |
| Income splitting | No | Via dividends (limited) | Yes – full discretion each year |
| Setup complexity | Low | Medium | Medium to high |
| Ongoing compliance | Low | High (ASIC, PAYG, financials) | Medium (annual trust distributions) |
| Losses | Offset against personal income | Carried forward (not distributed) | Cannot distribute losses to beneficiaries |
| Capital gains | 50% CGT discount if held 12+ months | No CGT discount | 50% CGT discount (passed to beneficiaries) |
| Estate planning | Difficult | Via share succession | Flexible and effective |
What Is a Discretionary (Family) Trust?
A discretionary trust (commonly called a family trust) allows the trustee to decide, at the end of each financial year, how to distribute the trust’s income among its beneficiaries. Beneficiaries can include family members, companies and other trusts.
This flexibility allows income to be distributed to beneficiaries on lower tax rates, potentially saving thousands in tax each year. For example, distributing income to an adult child on a lower marginal rate is a legitimate and commonly used strategy.
Important: The ATO has rules around trust distributions and has scrutinised family trust arrangements closely in recent years. Always seek advice from a chartered accountant to ensure your distributions are structured correctly.
Company vs Trust: Which Is Better?
This is the question Verus accountants are asked most often. The short answer: it depends on your situation. Here is a practical comparison:
- Choose a company if you want predictable tax at a flat rate, plan to bring in external investors, or want the business to be clearly separated from your personal life.
- Choose a trust if you want maximum flexibility in distributing income, have family members you can legitimately distribute to, and value strong asset protection.
- Use both – many sophisticated structures use a corporate trustee (a company acting as trustee of a trust), which gives you both the asset protection of a trust and the liability shield of a company.
Our business structuring team at Verus can model all three scenarios using your actual figures, so you can see the real dollar impact before committing to a structure. This is also a critical step when setting up an SMSF, as many trustees hold business assets through their fund.
External resources:
Business.gov.au: Business Structures Overview | ATO: Starting and Registering a Business
Frequently Asked Questions
What is the best business structure for tax in Australia?
There is no single “best” structure. A discretionary trust offers the most flexibility for income splitting. A company offers a predictable flat tax rate. The best choice depends on your income level, number of beneficiaries and long-term goals. A chartered accountant can model the tax impact for your specific situation.
Can a trust own a company in Australia?
Yes. A trust can hold shares in a company. This is a common arrangement in business structuring, as it can combine the income flexibility of a trust with the tax efficiency and liability protection of a company.
What are the risks of a family trust?
Family trusts are more complex to administer and have faced increased ATO scrutiny around trust distributions in recent years. They also cannot distribute losses to beneficiaries. Trustee decisions must be documented carefully to withstand audit scrutiny.
How much does it cost to set up a trust in Australia?
Setting up a discretionary trust in Australia typically costs between $800 and $2,500 depending on complexity, the number of beneficiaries, and whether a corporate trustee is involved. Verus Accountants can provide a fixed-fee quote for trust setup.
Can I change my business structure later?
Yes, though changing structures can trigger capital gains tax and stamp duty depending on the assets involved. It is important to plan any restructure carefully with a qualified accountant to minimise the tax cost of the transition.
Does a trust pay capital gains tax?
A trust itself does not pay capital gains tax. Capital gains are distributed to beneficiaries, who include their share of the gain in their own tax return. If the asset was held for more than 12 months, beneficiaries who are individuals may access the 50% CGT discount.
What is the difference between a discretionary trust and a unit trust?
In a discretionary trust, the trustee decides each year how to distribute income. In a unit trust, each beneficiary holds a fixed number of units (like shares), and distributions are made in proportion to those units. Unit trusts are commonly used in investment and property joint ventures.
Not Sure Which Structure Suits Your Business?
The chartered accountants at Verus will assess your situation and recommend the structure that minimises your tax and protects your assets. Book your free consultation today.
