What is the best business structure for me?

Sole Trader

Definitely the cheapest and most simple way to get your business up and running is to operate as a sole trader. All that is really involved is applying for an ABN and away you go. There are some pitfalls however. The first issue is that 100% of the profit the business generates is taxable in the individual’s hands, so there is very little opportunity for tax planning. The other issue is one of liability. As a sole trader there is no protection from lawsuits attacking your personal property (including your home).


One step up from sole trader is a partnership. Unfortunately there is still no protection from lawsuits. In fact it can be worse as both partners become liable if something goes wrong. The benefit is one of income splitting, which is an option here, in certain circumstances.


With over 1.5 million companies currently registered in Australia, this is definitely the most popular choice of structure. Using a company as your trading entity provides simplicity in taxation and is a good option if large profits are expected as the tax rate is capped at 30%. This can be much more attractive than the top tax rate for individuals being 46.5% (including medicare levy). Another strong argument for using a company is the opportunity to protect personal family assets from legal situations. Its important to keep in mind that getting money out of a company needs to be done correctly. The two main methods are Salaries or dividends (which are taxable to the individual).


Trusts (Discretionary/Unit/Hybrid)

Trusts are another popular structure to trade under for both business, but more specifically investment. The great benefit of a trust is that you can access all the benefits of a company while maintaining control over the flow of income to manage tax. The major difference between the company and trust is that a company pays tax on the profits, but a trust distributes its income to beneficiaries (normally family members) and they pay tax at their marginal tax rate.

The three main types of trusts are Discretionary (Family), Unit or Hybrid. The discretionary essentially allows the trustees to distribute the income at their discretion (hence the title). A unit trust must distribute in accordance with the unit holdings. The hybrid trust is effectively a combination of the two.