Sole Trader vs Company vs Trust: How Each Is Taxed in Australia (2025-26) and How to Choose

Australia has four main business structures, and each one changes your legal, tax and reporting obligations. Most businesses start as a sole trader and move to a company or trust as they grow, take on risk, or earn more. You can change structure later, though doing so can trigger tax and costs, so it is worth getting the decision broadly right early.

Here is the short version of how they differ:

• Sole trader: you and the business are the same legal entity. Simplest and cheapest to run, but you are personally liable for all debts and you pay tax at your own marginal rates.
• Partnership: two or more people sharing income, losses and (in a general partnership) unlimited liability. The partnership lodges its own return but does not pay tax; partners pay on their share.
• Company: a separate legal entity that limits your liability, pays its own tax (25% or 30%), and has higher setup and compliance obligations.
• Trust: a trustee holds and runs the business for the benefit of beneficiaries. The most complex and costly to set up and administer, but flexible for distributing income and protecting assets.

The right answer depends on how much you earn, whether you reinvest profits, how much personal risk the business carries, and whether family members are involved. None of these structures is universally best.

As a sole trader there is no separate business tax return. You report your business income and expenses in your individual tax return (using the business and professional items schedule) and pay tax at the standard resident individual rates. You must lodge a return even if your income is below the tax-free threshold.

For the 2025-26 income year the resident individual rates are: nil on the first $18,200; 16% on income from $18,201 to $45,000; 30% from $45,001 to $135,000; 37% from $135,001 to $190,000; and 45% on income above $190,000. These rates do not include the Medicare levy of 2%, which most residents also pay.

The upside is simplicity and the tax-free threshold: low and moderate earners often pay less overall as a sole trader than they would as a company, and any business losses can generally be offset against your other income. The downside is that as profits climb, more of each dollar is taxed at 37% and then 45%, and there is no way to defer or split that income with anyone else. You are also personally liable: business debts are your debts, and your personal assets are exposed.

A company is a separate legal entity. It lodges its own company tax return and pays tax on its profits at a flat rate. For 2025-26 the rate is 25% if the company is a base rate entity, and 30% otherwise. A base rate entity is one with aggregated turnover under $50 million where no more than 80% of its assessable income is passive income (such as interest, rent or dividends). Unlike an individual, a company has no tax-free threshold, so the flat rate applies from the first dollar of profit.

The flat rate is attractive when profits are high or when you reinvest profits back into the business, because money retained in the company is taxed at 25% or 30% rather than at your personal marginal rate (up to 47% including Medicare). But you cannot simply take cash out: as a director or shareholder you receive money as a wage, director's fees, or dividends, each with its own tax treatment, and you must keep formal records.

Company tax is not a second layer of tax that is lost. Under the imputation (franking) system, when the company pays a franked dividend out of taxed profits, shareholders receive franking credits for the tax already paid. The shareholder includes the grossed-up dividend in their income and claims an offset for the franking credit, which prevents the same profit being taxed twice. If the shareholder's marginal rate is below the company rate, the excess franking credits can even be refunded.

A trust is an arrangement where a trustee (often a company acting as trustee) holds and runs the business for beneficiaries. The trust lodges its own tax return but generally does not pay tax itself. Instead, the trust's net income is distributed to beneficiaries, who include their share in their own returns and pay tax at their own marginal rates. This is what makes a discretionary (family) trust flexible: income can be distributed among adult family members to use their lower tax brackets.

There is an important catch. Any net income that is not distributed to a beneficiary is taxed to the trustee, and under section 99A of the Income Tax Assessment Act 1936 that retained income is taxed at the highest marginal rate (currently 45%). Distributions to minors are also taxed at penalty rates. So a trust is not a way to park income cheaply; the tax planning happens in how income is distributed each year, and that must be properly resolved before 30 June.

Trusts also keep the 50% CGT discount, which companies lose, so a trust that sells a long-held business asset can pass a discounted capital gain to individual beneficiaries. Trusts are the most complex and most expensive structure to set up and run, and getting the deed, distributions and resolutions right is a job for a professional adviser.

How you are taxed when you eventually sell the business or a business asset can matter more than the rate you pay on annual profits. Individuals and trusts that have owned an asset for at least 12 months can apply the 50% CGT discount, halving the taxable capital gain. Companies cannot use the CGT discount at all, so a gain made inside a company is taxed at the full company rate with no discount.

On top of the general discount, eligible small businesses can access the small business CGT concessions, which can dramatically reduce or eliminate the tax on selling an active business asset. These include the 15-year exemption (a full exemption if you have owned the asset for at least 15 years and are 55 or older and retiring, or permanently incapacitated), the 50% active asset reduction, the retirement exemption (up to a lifetime limit of $500,000 per individual), and a rollover that defers the gain.

This is one of the strongest arguments against holding a business that you plan to sell inside a plain company structure, and a reason trusts are popular for businesses with valuable goodwill or assets. The concessions have detailed eligibility tests, so confirm them at the ATO before relying on them.

Cost and admin scale with complexity. A sole trader can get an ABN for free and renews a business name for $45 to $104. Registering a company costs $611 in ASIC fees (from 1 July 2025) plus an annual review fee of $329 for a proprietary company, and you must keep financial records for at least seven years and meet director obligations. Trusts add the cost of a trust deed and usually a corporate trustee, plus annual accounting. ASIC fees are indexed each year on 1 July, so confirm the current figure.

Every structure must register for GST once turnover reaches $75,000, and register within 21 days of crossing the threshold. GST registration is optional below that.

Two anti-avoidance rules catch people who choose a structure mainly to cut tax on personal effort. The personal services income (PSI) rules attribute income that is really payment for your own skills or labour back to you as an individual, even if it is earned through a company or trust, and limit the deductions you can claim. Division 7A treats money a private company lends or pays to a shareholder or their associate as a deemed (usually unfranked) dividend unless it is a properly documented complying loan. In short, the structure does not let you avoid tax on income that is genuinely yours.

Lead with the simplest option that fits, and only add complexity when the numbers or the risk justify it. A rough guide based on the official material:

• Sole trader: best when you are starting out, profits are modest, the business carries low risk, and you want minimal cost and paperwork. You get the tax-free threshold and can offset losses against other income, but you are personally liable.
• Company: worth it when profits are higher than you need to draw, you want to reinvest at 25% or 30% rather than your top personal rate, or you need to limit personal liability. Expect more compliance and you cannot freely draw cash.
• Trust: suits family businesses wanting to split income among adult beneficiaries, and those wanting asset protection and the 50% CGT discount on a future sale. It is the most complex and costly to run, and undistributed income is taxed at 45%.
• Partnership: a simple way for two or more people to share a business, but each partner usually has unlimited liability, so many partners eventually move to a company or trust.

Because the right choice depends on your income, risk, family situation and growth plans, and because getting it wrong can be expensive to unwind, this is the one decision most worth checking with a registered tax agent or accountant. You can confirm an adviser is registered on the Tax Practitioners Board public register before you engage them.