Choosing the Right Business Structure: How Each Is Taxed

Key Takeaways

• Each business structure — sole trader, partnership, company, and trust — has very different tax rules.
• The right choice affects not only today’s tax rate, but also liability, flexibility, risk profile, and long-term planning.
• Too often, businesses are set up based on cost or convenience rather than strategy, creating complications down the track.
• At Aspira, we help clients look beyond tax, considering risk management, funding needs, customer perception, and succession planning.

Sole Trader

• Who pays the tax: You personally, via your individual tax return.
• Tax rate: Progressive personal tax rates (0%–45%) plus Medicare levy.
• Features:
   
  • Straightforward and inexpensive to set up.
   
  • All profits are yours, but so are all liabilities — no separation between you and the business.
   
  • Cannot retain profits in the business.
   
  • Best suited to: Individuals starting out, with modest profits and low risk exposure. Not typically ideal if you plan to, grow quickly, borrow, employ staff, or eventually sell

Partnership

• Who pays the tax: Each partner includes their share of profit in their individual return.
• Tax rate: Personal marginal rates.
• Features:
   
  • Profits (and losses) are shared as per the partnership agreement.
   
  • Partners are jointly and severally liable — one partner’s actions can expose the others.
   
  • Limited flexibility compared to trusts.
   
• Best suited to: Businesses with two or more operators, modest profits, and a clear working relationship. Risk exposure and borrowing limitations can be drawbacks.

 Company

• Who pays the tax: The company itself, as a separate legal entity.
• Tax rate: 25% for base rate entities, 30% for others

• Features:
   
  • Limited liability for shareholders — a key risk-management benefit.
   
  • Can retain profits for reinvestment.
   
  • Dividend imputation system reduces double taxation on distributions.
   
  • Stronger perception of professionalism with banks, investors, and customers.

• Best suited to: Growing businesses seeking reinvestment capacity, legal protection, and credibility. Often the preferred vehicle for scaling, attracting finance, or selling.

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Trust (Discretionary / Family Trust)

• Who pays the tax: Beneficiaries (if distributed); otherwise, the trust pays at 45%.
• Tax rate: Varies with beneficiary’s marginal rate.
• Features:
   
  • Flexibility in distributing profits among family members or related parties.
   
  • Asset protection benefits when structured correctly.
   
  • Can facilitate succession and estate planning.
   
  • Higher compliance and administrative cost

Best suited to: Family businesses or investment vehicles where flexibility, protection, and intergenerational planning matter most. Best suited to: Family businesses or investment vehicles where flexibility, protection, and intergenerational planning matter most.

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Structuring for the Future, Not Just Today

Many businesses default into the cheapest or simplest structure, often on the advice of someone focused only on setup costs. But the wrong structure can:

• Trigger costly restructures when the business grows.
• Jeopardise parts of the Small Business CGT concessions worth hundreds of thousands at exit.
• Add unnecessary administrative burden as investment to change structures increases.

Non-Tax Reasons to get the structure right

Equally important, there are non-tax reasons to get structure right from day one:

• Risk management: Limiting liability protects personal assets.
• Borrowing capacity: Banks often favour companies for lending and expansion.
• Customer perception: A Pty Ltd can signal professionalism and stability.
• Succession and sale: Certain structures make it easier to transfer ownership or admit new investors.

The lesson: Structure should reflect your 5-, 10-, and 20-year business vision— not just today’s tax bill or establishment cost.

Final Thoughts

The right structure balances tax efficiency with risk management, growth potential, and long-term planning.

• Sole traders and partnerships are simple but can be risky and limiting.
• Companies offer strong protection, scalability, and credibility.
• Trusts provide flexibility and succession benefits, though with added complexity.

At Aspira, we’re not just accountants — we’re business advisers. We help clients weigh up all factors— tax, risk, growth plans, funding, and family goals — so the chosen structure truly supports the future of the business.

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