Sole trader, partnership, family trust or company: which business structure?

Direct answer: The right structure depends on who owns and controls the business, exposure to claims and debts, how profits and losses should be taxed, whether income is mainly personal services, how new owners will enter, and how the business will be sold or passed on. No structure automatically provides both the lowest tax and complete asset protection.

Comparison at a glance

Issue	Sole trader	Partnership	Family/discretionary trust	Company
Legal identity	Individual and business are the same legal person	Partnership operates through partners; state law and agreement matter	Trustee conducts business for beneficiaries	Separate legal entity
Control	Individual	Shared under agreement and law	Trustee, subject to deed and appointor powers	Directors manage; shareholders own
Debt exposure	Owner personally liable	Partners may be personally and jointly exposed	Trustee primarily liable; indemnity and corporate trustee matter	Company generally liable, but directors/guarantors can be personally exposed
Income tax	Individual marginal rates	Partnership lodges return; partners assessed on shares	Usually beneficiaries assessed on valid distributions; trustee can be assessed in some cases	Company pays company tax; extracting funds has further tax consequences
Losses	May offset other income subject to rules	Allocated under tax rules, with restrictions	Generally trapped in trust	Generally remain in company, subject to loss rules
CGT discount	Individual may access discount if eligible	Partners may access according to circumstances	Trust may access/pass through discount if conditions met	Ordinary companies generally do not receive the individual 50% discount
Administration	Lowest	Moderate	High and deed-dependent	Higher ASIC, tax and governance obligations
Succession	Business tied closely to owner	Death/exit can destabilise without agreement	Control succession depends on trustee/appointor and deed	Shares can transfer; director succession must also be planned

This is a high-level comparison only. Tax results vary with income, assets, distributions, tax residency, personal-services-income rules and future sale plans.

Sole trader

A sole trader operates personally, even if using a registered business name or ABN.

Potential advantages

• simple and relatively inexpensive to establish;
• direct control;
• fewer governance formalities;
• business income and deductions included in the individual return;
• eligible capital gains may access individual concessions.

Legal and tax consequences

• the owner is personally liable for business debts and claims;
• personal assets may be exposed;
• all taxable profit is assessed to the individual, whether withdrawn or retained;
• losses may be subject to non-commercial-loss and other rules;
• taking on an equity owner usually requires restructuring;
• death or incapacity can immediately disrupt authority and operations.

A business name does not create a separate legal entity.

Partnership

A partnership generally involves two or more persons carrying on business together with a view to profit. A written partnership agreement is essential even between relatives.

Potential advantages

• relatively straightforward shared ownership;
• flexibility in roles and agreed profit sharing, subject to law and tax rules;
• combined capital, skills and contacts;
• partnership itself generally does not pay income tax; partners are assessed on their shares.

Legal and tax consequences

• a partner can expose the partnership and other partners through authorised business acts;
• partners can be jointly liable for debts and claims;
• disputes arise over drawings, labour, capital and decision-making without clear rules;
• partnership losses and distributions are governed by tax rules, not merely cash movements;
• admission, retirement, death or incapacity may dissolve or reconstitute the arrangement;
• transferring property or goodwill on restructure may trigger duty, CGT or other consequences.

The agreement should cover contributions, roles, authority, banking, profit, leave, restraint, deadlock, valuation, exit, death, incapacity and dispute resolution.

Family or discretionary trust

A trust is not simply a “family company”. A trustee legally operates the business and holds trust assets under the trust deed for beneficiaries. The trustee may be an individual or company. The appointor or principal may hold significant power to replace the trustee.

Potential advantages

• discretionary distribution among eligible beneficiaries, subject to the deed and tax law;
• separation of beneficial interests from legal ownership;
• succession and asset-holding flexibility when properly designed;
• a corporate trustee may reduce some operational exposure compared with an individual trustee;
• potential access to CGT treatment and small-business concessions when conditions are met.

Legal and tax consequences

• the trustee incurs liabilities and relies on rights of indemnity from trust assets;
• guarantees, insolvent trading and director duties can still create personal exposure;
• the deed strictly controls beneficiaries, powers and distribution requirements;
• annual resolutions and records must be completed correctly and on time;
• trust losses generally remain in the trust;
• unpaid present entitlements and related-party dealings can create complex tax consequences;
• changing trustee, appointor, beneficiaries or deed terms may create tax, duty or resettlement risk;
• family trust elections and distributions can have consequences beyond the immediate year.

The 2026 discretionary-trust announcement

Treasury’s 2026–27 Budget material announces a proposed minimum 30% tax rate for discretionary trusts from 1 July 2028, with exceptions and three years of restructuring rollover relief from 1 July 2027. Detailed operation and exceptions require final legislation and consultation.

Do not establish, distribute from or restructure a family trust based only on a headline. Obtain current tax advice and confirm whether the measure has been enacted, how the minimum operates, what exceptions apply and whether rollover relief is available.

Company

A registered company is a separate legal entity. Shareholders own shares; directors control and manage the company subject to the constitution, replaceable rules and Corporations Act.

Potential advantages

• separate legal identity and perpetual succession;
• limited liability for shareholders in their capacity as members;
• clearer entry of investors through shares;
• profits may be retained for business use, subject to tax and commercial needs;
• losses generally remain available to the company if continuity or business tests are satisfied;
• ownership can transfer without transferring each underlying business asset.

Legal and tax consequences

• ASIC registration, annual review, records and governance duties;
• directors owe statutory and general-law duties;
• directors can face personal liability for breaches, insolvent trading and certain tax/super debts;
• banks, landlords and suppliers often require personal guarantees;
• company money is not the shareholder’s money—wages, dividends, loans and benefits need correct treatment;
• private-company loans or payments can trigger Division 7A consequences;
• companies generally do not receive the individual 50% CGT discount;
• selling shares and selling business assets produce different legal and tax outcomes.

Tax issues that can override the apparent benefit

Personal services income

Using a company or trust does not automatically permit income mainly earned from an individual’s personal efforts or skills to be split or retained at a lower rate. The PSI rules may attribute income and limit deductions.

GST, payroll tax and employment

Structure does not remove GST registration, PAYG withholding, superannuation, payroll tax, workers compensation or employment-law obligations where thresholds and rules apply.

Capital gains and small-business concessions

The legal owner of an asset, period of ownership, active-asset use, turnover, net-asset position and sale structure can materially affect CGT. Choosing a company merely for its income-tax rate can produce a less favourable exit outcome.

Retaining and extracting profits

Compare the total tax and legal consequences of earning, retaining and later extracting money. Company tax paid is not always the final tax. Trust distributions require valid beneficiaries and resolutions. A sole trader cannot defer individual tax merely by leaving cash in a business account.

Asset protection is not a guarantee

Even with a company or corporate trustee, personal assets may remain exposed through:

• personal guarantees;
• director breaches or insolvent trading;
• PAYG withholding, GST estimate or superannuation director-penalty regimes;
• professional negligence or personal wrongdoing;
• security over personal property;
• transactions designed to defeat creditors;
• family-law, bankruptcy or succession events.

Insurance, contracts, record keeping, risk controls and appropriate asset ownership remain necessary.

Structure selection checklist

• Who will contribute money, labour, assets and intellectual property?
• Who should own, manage and control the business?
• What claims, debts, leases, employees or professional risks exist?
• Will personal guarantees be required?
• Is income mainly generated by an individual’s personal services?
• Should profits be distributed or retained for growth?
• Are business losses expected initially?
• Will family members genuinely work in or benefit from the business?
• Are investors or business partners likely to join?
• Will the business hold appreciating property or goodwill?
• How is the business expected to be sold?
• What happens on dispute, retirement, death or incapacity?
• Are licences, leases or contracts transferable?
• What are the setup and annual compliance costs?
• What tax, duty and CGT arise if the structure is changed later?

Changing structure later

Restructuring is possible but may involve a new ABN/entity, contract assignments, employee transitions, landlord or lender consent, licence changes, asset transfers, duty, GST and CGT. Available rollover relief has detailed conditions and may defer rather than eliminate tax.

Plan the intended exit and succession before transferring valuable assets into a structure that is difficult to unwind.

What happens next?

Legal Care Australia may advise on governance documents, partnerships, companies, trusts, shareholders agreements, leases, business acquisitions and succession planning in coordination with the client’s accountant and licensed financial adviser.

Client next step: Prepare expected owners, activities, risks, assets, funding, projected profit, use of profits and five-year exit plan. Obtain coordinated legal and registered-tax-agent advice before registering entities or signing contracts.

Official sources

• business.gov.au — choose your business structure
• ASIC — register a company
• ATO — business structures
• Treasury — Budget 2026–27 tax changes

General information only, not legal, tax or financial advice. Tax settings and announced reforms may change before commencement.