Choosing between a sole trader, company, or trust structure has significant tax implications in Australia, and the right answer depends on your income level, risk profile, and long-term goals. There is no single "best" structure for everyone — speak with a registered tax agent or accountant to assess your specific circumstances before making any changes.
Sole trader vs company vs trust: which structure saves the most tax — 2026 AU guide
Running a business in Australia means making one of the most consequential financial decisions early on: how to structure it. Your choice between operating as a sole trader, registering a company, or establishing a trust affects how much tax you pay, how you protect your assets, and how complex your compliance obligations become each year.
This guide walks through each structure in plain language so you can have a more informed conversation with your accountant.
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What each structure actually means
Sole trader is the simplest option. You and the business are legally the same entity. All profit is assessed as your personal income and taxed at individual marginal rates. There is no separation between personal and business assets, which carries asset-protection risk. Company is a separate legal entity registered with ASIC. It has its own tax file number and lodges its own tax return. Directors and shareholders are distinct from the company itself, which provides a layer of liability protection. For many small businesses, the company structure unlocks access to the lower corporate tax rate that applies to base rate entities — though the eligibility rules are specific and you should confirm your situation with the (ATO). Trust is not a separate legal entity in the same way a company is, but it is a legal arrangement where a trustee holds assets and income on behalf of beneficiaries. Discretionary (family) trusts are common in Australia because they allow flexibility in distributing income to beneficiaries each financial year. This flexibility can be valuable for income-splitting, but the rules are complex and increasingly subject to ATO scrutiny.---
How sole traders are taxed
As a sole trader, your net business profit is added to any other personal income and taxed at the individual marginal tax rates published by the (ATO). You may be eligible for the small business income tax offset, subject to eligibility conditions set out in the (Income Tax Assessment Act 1997).
The main tax disadvantage of the sole trader structure becomes apparent as income grows. Because all profit is personal income, higher earners move into higher marginal brackets quickly. There is no ability to split income with a spouse or adult children the way a discretionary trust can, and there is no flat corporate rate available.
On the positive side, the compliance burden is relatively low. You lodge one individual tax return and, if registered for GST, a business activity statement. Sole traders considering growth or seeking to reduce tax exposure often explore a transition to another structure with help from best accountants in Sydney or their local equivalent.
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How companies are taxed
A company pays tax on its taxable income at the corporate rate. Base rate entities — broadly, companies with an aggregated annual turnover below a legislated threshold and whose passive income does not exceed a set proportion of assessable income — may access a lower tax rate. For current rates, refer directly to the (ATO's company tax rates page).
The gap between the top personal marginal rate and the corporate rate is one reason high-income business owners consider incorporating. However, the tax saving is not automatic or universal. Money retained in the company is taxed at the company rate, but when profits are ultimately distributed to shareholders as dividends, the franking credit system interacts with the shareholder's personal tax rate. The net outcome depends on your individual circumstances.
Companies also have significant ongoing compliance obligations: ASIC annual review fees, separate company tax returns, and stricter record-keeping requirements. Refer to (ASIC) for current fee schedules and obligations.
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How trusts are taxed
Discretionary trusts do not pay tax at the trust level, provided all income is distributed to beneficiaries each year. The trustee exercises discretion to allocate income to beneficiaries who may have lower marginal rates, which can reduce the overall family tax burden. This is sometimes called income splitting.
The ATO has significant compliance activity around trust arrangements. Trust tax rules, including the application of trust tax avoidance provisions and the treatment of unpaid present entitlements, are an area of active regulatory focus. The (ATO's guidance on trusts) is a reliable starting point for understanding current rules.
Unit trusts, hybrid trusts, and special purpose trusts each carry different tax and legal implications. Setting up a trust incorrectly, or distributing income in a way that does not satisfy the relevant deed and tax law, can create serious liabilities.
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Asset protection considerations
Tax is only one dimension of the structure decision. Sole traders have unlimited personal liability, meaning business debts can reach personal assets including the family home. Companies and trusts can provide a buffer, but neither is bulletproof. Directors of companies can still be personally liable in certain circumstances under the Corporations Act, and improperly structured trusts may not protect assets as intended.
Asset protection strategy is closely linked to business structure and should be considered alongside the tax question. Your accountant and a commercial lawyer should ideally be involved in any restructuring decision.
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When to reconsider your structure
Many Australians start as sole traders and review their structure as income grows or as the business takes on employees, contracts, or external investment. Common triggers for a structural review include:
- A sustained increase in net profit that pushes personal income into a higher bracket - Taking on a business partner - Wanting to bring family members into the business in a tax-effective way - Planning for succession or sale - Expanding into property investment alongside the operating business
Restructuring has its own tax implications, including potential capital gains tax and stamp duty considerations. Any proposed restructure should be modelled carefully. See our cost guide to understand what professional advice typically involves.
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How to choose the right structure in 2026
There is no universally superior structure from a tax perspective. The optimal choice depends on your taxable income, the nature of your business income, your family circumstances, your risk tolerance, and your compliance capacity.
What the comparison does make clear is that the decision benefits from proper professional input. A registered tax agent can model the after-tax position under each structure for your specific projected income. Verify that any adviser you engage is listed on the (Tax Practitioners Board public register) before engaging them.
Treasury also publishes background on business tax policy settings at (Treasury) for those interested in the policy context.
You can also read our methodology to understand how we evaluate and present information in this directory.
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FAQ
Q: Can I change my business structure after I've already started? A: Yes, but restructuring can trigger capital gains tax, stamp duty, and other obligations. It is essential to get professional advice before making any changes. The ATO publishes guidance on small business restructure rollover provisions that may apply in certain circumstances. Q: Is a company always better than a sole trader for tax purposes? A: Not necessarily. For lower income levels, the compliance costs of operating a company may outweigh any tax benefit. The right answer depends on your projected income and individual circumstances, and should be assessed by a registered tax agent. Q: Are family trusts still worthwhile given ATO scrutiny? A: Discretionary trusts remain a legitimate and widely used structure in Australia, but the compliance requirements and ATO focus in this area have increased in recent years. Professional advice from an experienced accountant is particularly important when setting up or administering a trust. Q: What is the first step if I want to review my business structure? A: Start by gathering your recent tax returns and financial statements, then book a consultation with a registered tax agent. Being prepared with your income history and business projections will help the adviser give you more tailored guidance.---
Sources
- Australian Taxation Office — business structures and tax: https://www.ato.gov.au/ - ATO — company tax rates: https://www.ato.gov.au/businesses-and-organisations/preparing-lodging-and-paying/income-tax-for-businesses/company-tax-rates - ATO — trusts: https://www.ato.gov.au/businesses-and-organisations/trusts - Tax Practitioners Board public register: https://www.tpb.gov.au/public-register - ASIC — company registration and obligations: https://asic.gov.au/ - Income Tax Assessment Act 1997 (AustLII): https://www.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/itaa1997240/
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Information in this article is general only and not tax or financial advice. Verify the details with the linked sources or an appropriately qualified Australian professional before relying on them.
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