Sole trader, company or trust? Choose on the risk, not the tax rate

The structure question usually arrives dressed as a tax question — "should I incorporate to pay 25% instead of 47%?" — and that framing leads people to the wrong answer surprisingly often. The company rate is not a discount you get to keep. It is a deferral you pay back on the way out.

Here is how the three main structures actually compare, and what genuinely should drive the decision.

Sole trader

You and the business are the same legal entity. Your ABN is attached to your TFN, business income goes on your individual return, and you are taxed at individual marginal rates.

What it costs: almost nothing. No ASIC fee, no separate return, minimal compliance.

Where it hurts: unlimited personal liability. If the business is sued or cannot pay a debt, your house and your savings are in scope. There is also no flexibility — every dollar of profit is taxed to you, in the year it is earned, at your marginal rate, whether you took it out or left it in the business.

When it is right: early stage, low risk, low profit, testing an idea. Also many contractors and consultants where personal services income rules would neutralise most of the benefit of a company anyway.

Company

A separate legal entity that you own through shares. Profits are taxed at the company rate — 25% for base rate entities, 30% otherwise — and there are conditions attached to the lower rate, including an aggregated turnover test and a limit on how much of the income can be passive.

What it costs: ASIC annual review fee, a separate tax return, financial statements, and the discipline of keeping company money separate from personal money.

What it gets you: limited liability, a retained-earnings buffer taxed at 25% rather than your marginal rate, credibility with larger customers, and a vehicle that can be sold or brought investors into.

The catch everyone underestimates: getting money out. A company's money is not your money. Take it as a wage and you pay marginal rates with PAYG withholding and super. Take it as a franked dividend and you top up to your marginal rate anyway. Take it as a loan and you are into Division 7A, with a minimum yearly repayment, a benchmark interest rate and a deemed dividend waiting if you get it wrong. The 25% rate is genuinely useful for profit you are leaving in to fund growth. For profit you intend to spend this year, the saving largely evaporates.

Discretionary (family) trust

A trustee holds assets for a class of beneficiaries and decides each year who receives the income. Australian small business runs on these for a reason: distribution flexibility.

What it gets you: the ability to direct income to beneficiaries on lower marginal rates, access to the 50% CGT discount that companies do not get, and a solid asset-protection position when combined with a corporate trustee.

What it costs: a deed, usually a corporate trustee (another ASIC fee and another set of obligations), a trust tax return, and annual distribution resolutions that must be made before 30 June and documented properly.

Where trusts bite: all income must be distributed each year or the trustee is taxed at the top marginal rate on what is retained — so a trust is a poor vehicle for accumulating capital. Distributions to children under 18 are taxed punitively above a very small threshold. And the ATO has been active on arrangements where a distribution is made on paper to a low-rate beneficiary but the cash goes somewhere else. Distributions need to be real.

Side by side

	Sole trader	Company	Discretionary trust
Setup cost	Minimal	Moderate	Moderate to high
Ongoing compliance	Low	Moderate	Moderate to high
Personal liability	Unlimited	Limited	Limited with corporate trustee
Tax on profits	Your marginal rate	25% or 30%	Beneficiaries' marginal rates
Retain profits cheaply	No	Yes	No
50% CGT discount	Yes	No	Yes, flows through
Income splitting	No	Limited	Yes, subject to rules
Bringing in investors	No	Straightforward	Awkward

What should actually drive the decision

Risk before tax. If a bad day in your business could produce a claim larger than your insurance, you need limited liability, and the tax comparison is secondary. Trades, health services, anything with staff, anything with premises, anything where you sign a lease or a personal guarantee.

What you will do with the profit. Reinvesting for growth favours a company. Distributing to a family with different income levels favours a trust. Spending it all yourself favours whatever is cheapest to run.

Whether you will sell. If there is a realistic exit, the CGT discount and the small business CGT concessions matter enormously, and the structure you choose now determines whether you can access them. This is the single most expensive thing to get wrong.

Whether the income is really yours. If you personally perform the work and most income comes from a small number of clients, the personal services income rules may attribute the income back to you regardless of structure. A company does not fix a PSI problem — it just adds a return.

The combination most established businesses land on

A discretionary trust running the business, with a corporate trustee, and often a corporate beneficiary — a "bucket company" — to cap tax on retained profits at the company rate while keeping the trading risk away from accumulated wealth.

It is more moving parts and more cost. It is also flexible, protective, and it preserves the CGT discount. Whether the extra complexity earns its keep depends almost entirely on profit level. Below roughly $100,000 of profit it usually does not; well above it, it usually does.

Two mistakes that are expensive to undo

Buying appreciating assets in the trading entity. The business is where the risk lives. Property, intellectual property and investments should generally not sit in the same entity that signs customer contracts. Moving them later means stamp duty and CGT.

Restructuring after the value is built. There are rollovers that let you change structure without an immediate tax bill, and they have conditions. The time to use them is before the business is worth something, not during the due diligence on a sale.

Structure is not a decision you make once and file. It is worth a genuine review whenever profit changes materially, you take on staff or premises, you buy property, or someone starts talking about selling.

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General information only. Structure decisions depend heavily on your circumstances, and the wrong one is costly to reverse. This is not tax or legal advice. Book a free consult and we will look at your actual position.