Choosing Your Business Structure: Sole Trader, Company, Partnership or Trust?

Sally Preston

Choosing the right business structure affects tax, asset protection, succession, compliance and future sale options. Compare sole trader, partnership, company and trust structures under Australia’s post-reform CGT rules.

Key message: There is no perfect structure. The right structure depends on risk, profit level, ownership, growth plans, asset protection and exit strategy. The new CGT reforms also mean that structures holding appreciating assets should be reviewed before major transactions or succession events.

The main structure options

Sole trader: Simple and low cost, but with unlimited personal liability and limited tax flexibility.

Partnership: Useful for shared ownership, but partners may be exposed to liabilities and relationship risks.

Company: A separate legal entity with limited liability and the ability to retain profits, but no general CGT discount, potential Division 7A issues when owners access funds, and limited flow-through of capital gains.

Trust: Flexible distributions and potential access to indexation/new CGT rules where eligible, but more complex and deed/resolution compliance is critical.

How the main structures work in practice

Sole trader. A sole trader is the individual trading personally. It is simple and inexpensive to establish, but the individual is legally responsible for the business, including business debts and claims. All business profits are taxed to the individual at personal marginal rates, which can make this structure less attractive as profits grow or where profits are intended to be reinvested.

Partnership. A partnership can be useful where two or more people or entities are carrying on a business together. It is often simpler than a company or trust, but partners may be jointly and severally liable for partnership debts. Changes in partners, transfers of interests and partnership asset dealings can also create legal, tax and CGT issues.

Company. A company is a separate legal and tax entity. It can provide limited liability, a clear ownership structure and the ability to retain profits, subject to the relevant company tax rate and other rules. However, care is needed with director responsibilities, personal guarantees, shareholder loans, Division 7A, profit extraction and the fact that companies do not receive the general CGT discount or the new individual/trust indexation treatment.

Trust. A trust can provide flexibility, particularly where income or capital is to be distributed among different beneficiaries. Discretionary trusts are often used for family groups, while unit trusts can suit fixed ownership arrangements. Trust deeds, annual resolutions, trustee obligations, loss rules and beneficiary entitlements need to be managed carefully.

Why the new CGT reforms matter for structures

Australia’s CGT reforms change the way many capital gains will be taxed for CGT events happening from 1 July 2027. The general 50% CGT discount is being replaced for individuals, trusts and partnerships with cost base indexation and a 30% minimum tax on relevant post-reform capital gains. Companies remain outside the discount regime, but the reforms still matter where companies hold assets, shares are held by individuals or trusts, or a group structure is being prepared for sale, succession or restructuring.

This means structure choice is no longer just about comparing the company tax rate with personal tax rates. It is also about who should own appreciating assets, whether profits will be retained or distributed, how value will be extracted, whether small business CGT concessions may be available, and whether a buyer is likely to acquire assets, shares or units.

What should you consider?

☐ How risky is the business activity?

☐ Will there be unrelated owners or investors?

☐ Will profits be retained or distributed?

☐ Do you need flexibility to distribute income?

☐ Will the business own valuable goodwill or intellectual property?

☐ Could the business be sold in future?

☐ Could the structure access small business CGT concessions, and how will the new CGT rules affect a future sale?

☐ Should valuable assets, intellectual property or goodwill be held separately from the trading risk?

☐ What are the annual compliance costs?

☐ Can the structure support succession or estate planning?

Reviewing an existing structure

A structure that was suitable at start-up may not remain suitable once the business has employees, valuable assets, higher profits, external risks or succession issues. Changing structure can trigger tax, GST, duty and commercial consequences, so advice should be obtained before assets are transferred.

The CGT reforms make this review more important. Existing structures should be tested for how they deal with retained profits, shareholder or beneficiary access to funds, asset protection, future sale method, valuation issues and the interaction between company, trust and individual owners.

Need help?

Smart Solutions Tax Advisory can help review existing structures and advise on business structuring, restructures, asset protection and the tax consequences of the new CGT reform environment.

Disclaimer: This article contains general information only and should not be relied on as tax or legal advice.

References / Useful links

ATO business structures: Business structures - key tax obligations | Australian Taxation Office