Sole Trader, Company, Partnership, Or Trust: A Tax Comparison For Australian Entrepreneurs

If you’re starting or growing a business in Australia, choosing the right structure—sole trader, company, partnership, or trust—can have a big impact on how much tax you pay, your legal protection, and how you run your business.

The quick answer?

• Sole traders are simple and low-cost but taxed at personal income rates. 
• Companies offer lower tax rates and limited liability, but come with more admin. 
• Partnerships are flexible for two or more people, with income split between partners. 
• Trusts can be tax-effective but are complex and best for asset protection or family businesses. 

Each structure comes with its pros, cons, and tax obligations. Let’s explore each option so you can decide which best fits your situation.

What Is a Sole Trader?

A sole trader is the simplest and most common business structure in Australia. You operate the business as an individual, and you’re legally responsible for everything.

Tax Overview

As a sole trader, your business income is treated as your personal income. That means:

• You’re taxed at individual marginal tax rates, which can be as high as 45% (plus Medicare levy). 
• You can claim deductions for business expenses. 
• You don’t pay separate business tax or super (unless you voluntarily contribute). 

Pros

• Easy and inexpensive to set up. 
• Full control of your business. 
• Less paperwork and fewer compliance obligations. 

Cons

• No legal separation between you and your business. 
• You’re personally liable for all debts and legal issues. 
• Higher tax rates once your income exceeds $45,000. 

Example:

Emma runs a small online clothing store as a sole trader. She earns $70,000 in profit. This is added to any other income she earns and taxed at her personal tax rate. If her business grows significantly, she might pay more tax than if she ran it as a company.

What Is a Company?

A company is a separate legal entity from its owners (called shareholders). In Australia, most small businesses use a private company structure (Pty Ltd).

Tax Overview

Companies pay a flat tax rate, which is:

• 25% for base rate entities (most small businesses). 
• 30% for other companies. 

If you take money from the company as wages or dividends, you pay personal tax on that income—but you may receive franking credits to offset double taxation.

Pros

• Lower tax rate (compared to high personal tax rates). 
• Limited liability: your personal assets are protected. 
• More credibility with suppliers and lenders. 

Cons

• More expensive to set up and run. 
• Complex reporting and compliance with ASIC and the ATO. 
• Funds belong to the company, not to you personally. 

Example:

Tom sets up a cleaning services company. The company makes $120,000 profit. It pays 25% tax ($30,000). Tom pays personal tax only on what he takes out as a salary or dividend. If he leaves profit in the company, it can be reinvested with a lower tax burden.

What Is a Partnership?

A partnership is a business run by two or more people who share profits, losses, and responsibilities.

Tax Overview

A partnership itself doesn’t pay tax. Instead:

• Each partner reports their share of profit (or loss) on their individual tax return. 
• Tax is paid at personal income tax rates. 

The partnership must still lodge a partnership tax return with the ATO for record-keeping.

Pros

• Easy and cheap to set up. 
• Income can be split between partners. 
• Shared responsibility and decision-making. 

Cons

• Unlimited liability: each partner is legally responsible for business debts. 
• Disagreements can cause problems. 
• Not suitable if you want to scale or seek investors. 

Example:

Sarah and James start a photography business as a partnership. They earn $100,000 profit and split it 50/50. Each adds $50,000 to their personal tax return and pays tax accordingly.

What Is a Trust?

A trust is a structure where a trustee holds and manages assets or business income on behalf of beneficiaries.

Tax Overview

Trusts don’t pay tax (usually). Instead:

• Profits are distributed to beneficiaries, who pay tax at their personal rates. 
• If income isn’t distributed, the trust may be taxed at the highest marginal rate (45%). 

There are two common types:

• Discretionary trusts: the trustee decides who gets how much. 
• Unit trusts: profits are distributed based on fixed units held. 

Pros

• Flexible income distribution (can help minimise tax). 
• Asset protection. 
• Suitable for families or long-term planning. 

Cons

• Complex to set up and run (requires a formal trust deed). 
• Annual accounting and legal costs. 
• Tax penalties if mismanaged. 

Example:

A family runs a small café through a discretionary trust. The trust makes $150,000 profit. The trustee distributes income to family members in lower tax brackets, reducing the overall tax paid.

Tax Comparison Summary

How to Choose the Right Business Structure

Choosing the right structure depends on your:

• Business size and growth goals 
• Income level 
• Risk and liability exposure 
• Plans to involve other people (e.g. partners or investors) 
• Desire for simplicity vs. tax efficiency 

If you’re just starting out, a sole trader is often the easiest path. But if you plan to scale, raise funds, or protect your personal assets, consider moving to a company or trust. A partnership might work if you’re working with others but want to keep it simple.

Final Thoughts

Your business structure affects everything from your tax bill to your personal liability. There’s no one-size-fits-all answer, and what works now might not suit you later.

If you’re unsure, it’s worth speaking with an accountant or tax adviser. They can help you weigh the tax benefits and legal implications based on your individual situation.

Remember: a well-chosen business structure isn’t just about saving tax—it’s about setting your business up for long-term success.