Your business structure decides how much tax you pay, what you can lose if something goes wrong, and how easily you can bring in a partner or sell. Most founders chose theirs in a hurry at the start and have never looked again. This guide covers the four structures used in Australia, when each one is right, and the point at which a growing business should move.
The four structures
| Sole trader | Partnership | Company | Discretionary trust | |
|---|---|---|---|---|
| Who pays tax | You, at marginal rates | Each partner, at marginal rates | The company, at a flat rate (25% for most trading businesses) | Beneficiaries, at their marginal rates |
| Personal liability | Unlimited | Unlimited, including for your partner’s actions | Limited to the company, with exceptions for directors | Limited if the trustee is a company |
| Flexibility of income | None | Fixed by the partnership agreement | Salary or dividends only | Distributed each year at the trustee’s discretion |
| CGT 50% discount | Yes | Yes | No | Yes (flows to individuals) |
| Retaining profit at a low rate | No | No | Yes | Only via a bucket company |
| Set-up and running cost | Lowest | Low | Moderate | Moderate to higher |
| Bringing in investors | Not possible | Awkward | Straightforward, shares | Awkward, usually needs a company underneath |
Sole trader
Right for testing an idea, a side income, or a one-person service business with low risk and modest profit. Wrong the moment there is real money or real risk. Everything you own is exposed, every dollar of profit is taxed at your marginal rate, and there is no way to split income or retain earnings. We move most sole traders out well before $200K of profit.
Partnership
Simple and cheap, which is its only advantage. Each partner is personally liable for the whole partnership, including what the other partner does. Profit is split in fixed shares, so there is no tax flexibility. For two or more owners we almost always recommend a company or a trust instead, with a shareholders or unitholders agreement that sets out what happens when someone wants to leave.
Company
The workhorse of Australian business. A flat tax rate, limited liability, and a clean way to hold shares, raise money and sell. The trade-offs: no CGT discount on assets the company sells, and money cannot simply be taken out. Anything the owners draw has to be a salary, a dividend or a properly documented loan, or Division 7A treats it as an unfranked dividend and taxes it at your top rate.
A company suits businesses that reinvest profit, carry staff and contracts, or expect outside investment. A company held by a family trust gets the limited liability of the company and the distribution flexibility of the trust.
Discretionary (family) trust
The trustee decides each year who receives the income, so profit can be directed to family members on lower rates, and capital gains keep the 50% discount when distributed to individuals. Assets held in the trust are separated from the people running the business. The costs are a trust deed, a corporate trustee, annual distribution resolutions by 30 June, and the discipline to keep the paperwork right. Trusts cannot retain profit without paying tax at the top rate, which is where the bucket company comes in.
Bucket company
A company whose only job is to receive distributions from a trust. Income distributed to it is taxed at the company rate rather than the top personal rate, and it can be invested from there or paid out as franked dividends in a lower-income year. It is the standard answer when a trust is earning more than the family can absorb at reasonable rates. The money has to actually be paid to the bucket company or put on a complying loan; leaving it as an unpaid entitlement creates its own Division 7A problem.
Holding structures and asset protection
Once a business is worth something, the usual pattern is: a trading entity that carries the risk and owns as little as possible; a separate entity that owns the property, the equipment and the intellectual property and leases them to the trading entity; and a holding company or trust above both. If the trading entity is sued, the valuable assets are not in it. Done early this costs little. Done after a claim exists it does not work and can be unwound.
When to restructure
- Profit is above $150K to $200K and still in a sole trader or partnership.
- You are taking on a partner, an investor or a second site.
- The business now owns assets worth protecting, or you do personally.
- You are within five years of a possible sale. The small business CGT concessions and the structure that unlocks them need time in place.
- A trust is distributing more than the family can use at low rates and there is no bucket company.
How we do it
Structure is reviewed every year as part of tax planning, and modelled properly when something changes. We work with New Wave Law on the deeds and agreements, so the accounting advice and the legal documents say the same thing. Start with the structuring service or bring it up on the first call.