Choosing a business structure in Australia: sole trader, partnership or company?

The most important decision before you register

Your business structure determines how you are taxed, how far your personal assets are protected, what legal obligations you must meet, and what ownership arrangements are allowed.

Choosing the wrong structure at the outset and fixing it later costs money, takes time, and sometimes carries unwanted tax consequences. This article helps you understand the options so you can prepare for a conversation with an accountant — not so you can decide on your own without a professional.

Sole trader — the simplest option

A sole trader is the simplest and most common way to start a business in Australia. You trade as an individual.

Advantages:

• Simple to register and the lowest cost — you only need an ABN
• No separate reporting to ASIC is required
• Income is declared in your personal tax return
• Full control and maximum flexibility

Disadvantages:

• No personal liability protection — if the business makes a loss or is sued, creditors can pursue your personal assets (house, car, savings)
• Business income is added to your personal income and taxed at personal rates
• Hard to raise capital from investors
• When you stop operating, the business stops too

Best suited to: Freelancers, contractors, one-person or low-risk service businesses, and people testing an idea before committing to something larger.

Partnership — sharing the business

A partnership is where two or more people run a business together, sharing the profits and the responsibilities. A partnership can be a general partnership or a limited partnership.

Advantages:

• Simpler to set up than a company
• You share the workload and resources with a partner

Disadvantages:

• Each partner is liable for all the partnership’s obligations — including obligations created by the other partner
• Income is divided by share and each partner declares their portion in their personal tax return
• If one partner wants to leave or there is a problem, it can affect the whole partnership

Essential if you choose a partnership: A clear, written partnership agreement, drafted by a solicitor, before you begin. This document sets out who contributes what, who decides what, and what happens when a partner wants to leave. Without it, when a dispute arises — and disputes do arise — it is very hard to resolve.

Company (Pty Ltd) — separating you from the business

A proprietary limited company (Pty Ltd) is the most common form of company in Australia. A company is a separate legal entity — it exists independently of its shareholders.

Advantages:

• Limited liability — shareholders are generally only liable up to the value of their shares, not their entire personal assets
• Easier to raise capital through shares
• A separate company tax rate (income is not added to your personal income as it is for a sole trader)
• It exists independently even when shareholders change
• More credibility with some partners, customers and suppliers

Disadvantages:

• Higher setup and ongoing costs — ASIC registration fees, annual reporting fees, and more accounting costs
• More complex compliance — ASIC requires reporting and record-keeping, and there are separate director obligations
• Directors have their own legal obligations — directors are not automatically protected by limited liability in every situation

A note on limited liability: Limited liability protects you in many cases — but not all. A director can still be held personally liable in some situations, for example where there is a personal guarantee on a loan or where director duties are breached. This is why understanding director duties matters even after you have a company.

Trust — a more complex structure

A trust (most commonly a discretionary trust, or “family trust”) is a structure in which a trustee manages assets and distributes income to beneficiaries. Trusts are typically used for more complex tax and family asset planning.

A trust is not suitable for getting started and is usually considered alongside, or after settling into, one of the three structures above. If someone advises you to start with a trust from day one without clearly explaining why, ask more questions or get a second opinion.

Factors that affect the decision

There is no single structure that is “best” for everyone. The decision depends on:

• Legal risk in your industry: Health services, construction and food businesses often need more liability protection
• Number of people involved: On your own, or with a partner?
• Plans to raise capital: Will there be outside investors?
• Personal assets you want to protect: Do you have significant assets you need to separate?
• Long-term plans: A business to run until you sell it, or one built to pass on?
• Visa status: Some structures can affect visa conditions

The answer is not always a company just because it sounds “more professional”. And it is not always a sole trader just because it is “simpler”. The right answer is the one that fits your specific circumstances.

Next step

Use this article to prepare for a conversation with an accountant. Ask: “For my specific circumstances, which structure suits me best, and why?”

Once you have chosen a structure, the next step is to understand the registration numbers — see the companion guide on how ABN, ACN and a business name differ.