Starting a Business: Choosing the Right Structure

Choosing the right business structure is one of the first important decisions you make when starting a business in Australia.

Your structure affects how you pay tax, how much paperwork you have, who controls the business, how profits are taken out, and what happens if the business has debts or legal issues.

There is no single "best" structure for every business. The right choice depends on your income, risk, ownership, growth plans and personal situation.

At GSD Tax & Business Advisory, we help individuals, contractors and business owners choose practical business structures that suit their tax position, commercial risk and long-term plans.

Quick answer: what is the best business structure for a new business?

For many small businesses, the common options are:

The right structure should be chosen before you register for tax, open bank accounts, sign contracts or start trading.

Why your business structure matters

Your business structure affects:

• who legally owns and controls the business
• who is responsible for business debts
• how business profits are taxed
• whether you need a separate tax return
• how easy it is to bring in business partners or investors
• how profits can be paid to owners
• asset protection and legal risk
• succession planning if you sell, retire or pass the business on
• GST, PAYG withholding and other tax registrations
• ongoing accounting and compliance costs

A structure that works well at the start may not be suitable once the business grows. It is common for businesses to start as a sole trader and later move into a company or trust structure.

However, changing structure later can involve tax, GST, stamp duty, contract and business name issues. It is better to get advice before making the move.

The four common business structures in Australia

The four common business structures in Australia are:

1. Sole trader
2. Partnership
3. Company
4. Trust

Each structure has different tax and legal responsibilities.

1. Sole trader

A sole trader is the simplest business structure. One person owns and runs the business.

You can trade under your own name or register a business name. Your business income and expenses are included in your individual tax return.

When a sole trader structure may suit

• you are starting a small business on your own
• the business is low risk
• you want low setup costs
• you do not have business partners
• you are testing a new idea
• you do not need a complex structure yet

Main advantages

• Simple to set up
• Low ongoing admin
• Lower accounting costs
• Full control over business decisions
• Business losses may be available to offset other income, subject to tax rules
• Easier to close or change compared with more complex structures

Main disadvantages

• You are personally responsible for business debts
• Your personal assets may be exposed if something goes wrong
• All profit is taxed in your own name
• Less flexible for tax planning
• Harder to bring in investors or co-owners
• May look less established for some larger contracts

Tax treatment

As a sole trader, the business does not pay tax separately. The net business profit is included in your personal tax return and taxed at your individual marginal tax rate. You may also need to register for GST if your GST turnover is $75,000 or more.

2. Partnership

A partnership is where two or more people, or entities, run a business together. The partnership itself does not usually pay income tax. Instead, it lodges a partnership tax return, and each partner includes their share of profit or loss in their own tax return.

When a partnership may suit

• two or more people want to start a business together
• the business is relatively simple
• the owners want shared control
• the setup needs to be cheaper than a company or trust
• each partner understands their responsibilities

Main advantages

• Relatively simple to set up
• Shared control and resources
• Lower cost than a company or trust
• Profits can be split according to the partnership agreement
• Useful for some professional or family businesses

Main disadvantages

• Partners may be personally responsible for partnership debts
• Disputes can be difficult if there is no clear agreement
• One partner's actions can affect the others
• Less asset protection than a company or trust
• Limited flexibility compared with more advanced structures

Partnership agreement

A written partnership agreement is strongly recommended. It should cover:

• ownership percentages
• profit and loss sharing
• decision-making
• partner salaries or drawings
• who owns business assets
• what happens if a partner leaves
• what happens if there is a dispute
• how the business can be sold or closed

Starting a partnership without a proper agreement is risky. It may feel simple at the beginning, but problems usually appear when money, workload or expectations change.

3. Company

A company is a separate legal entity. This means the company exists separately from its owners and directors. A company can own assets, enter contracts, employ staff, sue and be sued. The company lodges its own tax return and pays tax on its profits.

When a company may suit

• the business has higher legal or commercial risk
• you plan to employ staff
• you want to retain profits in the business
• you want a more professional structure
• you may bring in shareholders or investors
• you want clearer separation between business and personal affairs
• the business is growing beyond a simple side business

Main advantages

• Separate legal entity
• Limited liability for shareholders, subject to important exceptions
• Company tax rate may be lower than high individual tax rates
• Easier to bring in shareholders
• Better structure for growth
• More suitable for employing staff
• Can continue even if ownership changes

Main disadvantages

• Higher setup costs
• More ongoing compliance
• ASIC annual review fees
• Director obligations
• Separate company tax return
• More record keeping
• Money in the company is not automatically your personal money

4. Trust

A trust is a structure where a trustee holds assets or runs a business for the benefit of the beneficiaries. The trustee can be an individual or a company. In many family business structures, a company acts as trustee of a discretionary family trust.

When a trust may suit

• a family business wants flexibility in distributing income
• asset protection is important
• profits may be distributed to different family members or entities
• there are long-term wealth or succession planning goals
• the business owner wants separation between control and benefit
• the business structure needs to work with a broader family group

Main advantages

• Flexible income distribution, depending on the trust deed
• Can assist with asset protection planning
• Useful for family business and investment structures
• Can support succession planning
• May provide tax planning opportunities when used correctly

Main disadvantages

• More complex to set up and administer
• Higher ongoing accounting and compliance costs
• Trust losses generally cannot be distributed and are trapped in the trust
• Strict rules around trust distributions and record keeping
• Requires a properly drafted trust deed

Sole trader vs company: which is better?

A sole trader may be right at the start. A company may be better once the business has risk, staff, larger profits, finance needs or plans to grow.

Company vs trust: which is better?

A company and trust can both be useful, but they do different jobs. A company is often used to run a trading business. A trust is often used where flexibility, family income distribution or asset protection planning is important. In many cases, a business may use both — for example, a company may act as trustee of a family trust.

GST and business structure

Your business structure does not remove your GST obligations. You generally need to register for GST if your GST turnover is $75,000 or more. If you operate a taxi, limousine or ride-sourcing business, GST registration rules can apply regardless of turnover.

Once registered for GST, you usually need to:

• charge GST on taxable sales
• claim GST credits on eligible purchases
• lodge business activity statements (BAS) on time
• keep proper tax invoices and records

Business name vs company

A business name is not the same as a company.

A business name is the name you trade under. A company is a separate legal entity registered with ASIC.

For example, a sole trader can register a business name. That does not make the business a company. If you want a company structure, you need to register a company.

Personal services income and business structures

If your income mainly comes from your personal skills or labour, the personal services income (PSI) rules may apply. This is common for consultants, contractors, medical professionals, IT workers, tradies and other service-based businesses.

Setting up a company or trust does not automatically avoid the personal services income rules. If the PSI rules apply, income may still be treated as your personal income for tax purposes, even if it is earned through a company, trust or partnership.

This is an area where advice is important before choosing a structure.

Common mistakes when choosing a structure

1. Choosing a company just because it "sounds professional"

A company adds real cost and compliance. It should be chosen for good reasons, not just image.

2. Copying what a friend or competitor did

Your circumstances, income and risk are different. The right structure for someone else may not suit you.

3. Registering before getting advice

Undoing structures can be expensive. It is easier to get advice first.

4. Ignoring personal services income rules

Contractors and consultants often set up companies expecting a tax benefit that the PSI rules take away.

5. Assuming a company protects everything

No structure gives complete protection. Personal guarantees, director obligations, tax debts and poor conduct can still create personal risk.

6. Ignoring future plans

The right structure should consider future growth, finance, sale, family succession and investment plans.

How to choose the right business structure

Before choosing a structure, ask these questions:

1. Who will own the business?
2. Who will control the business?
3. Is the business high risk?
4. Will the business employ staff?
5. Will profits be taken out or retained?
6. Will there be business partners or investors?
7. Is income mainly from your personal work?
8. Do you need asset protection?
9. Do you expect the business to grow?
10. Will you sell the business later?
11. Are family members involved?
12. What are the setup and ongoing costs?
13. What tax registrations are needed?

Answering these questions honestly will usually point you toward a structure — or a short list — that fits both your current situation and where the business is heading.

Worked examples

Example 1: Freelance graphic designer

A freelancer working from home with modest income, no staff and low commercial risk. A sole trader structure may suit while the business is small.

Example 2: Growing trades business with employees

A tradesperson employing staff, using vehicles and equipment, and signing larger contracts. A company structure may be more suitable to manage risk and support growth.

Example 3: Family business with multiple family members involved

A family business that wants flexibility around income distribution, asset protection and future planning. A discretionary trust with a corporate trustee may be appropriate, depending on their circumstances.

Example 4: Consultant earning personal services income

A consultant earns most of their income from their own labour and works mainly for one client. A company or trust may not provide the expected tax benefit because the personal services income rules may apply.

Can you change business structure later?

Yes, but changing structure can have tax, GST, legal and commercial consequences. You may need to:

• apply for a new ABN
• register a new business name
• transfer assets
• update contracts
• notify customers and suppliers
• open new bank accounts
• update insurance
• register for GST and PAYG withholding again
• consider CGT, GST and stamp duty issues
• update payroll and accounting software

Restructuring can be worthwhile, but it needs planning. Getting advice before you move helps avoid unnecessary tax and cost.

When should you get advice?

You should get advice before starting or restructuring if:

• you expect turnover above $75,000
• you are signing leases or major contracts
• you are employing staff
• you are taking on business debt
• you have personal assets to protect
• you are working with a business partner
• you want to use a company or trust
• you are buying or selling a business
• you are a contractor or consultant
• your income may be personal services income
• you want to bring in family members or investors
• you plan to grow or sell the business later

Good advice at the start can save tax, reduce risk and avoid expensive restructuring later.

How GSD Tax & Business Advisory can help

At GSD Tax & Business Advisory, we help business owners across Australia choose and set up structures that are practical, tax-effective and suitable for long-term growth.

We can help with:

• choosing between sole trader, partnership, company and trust structures
• setting up companies and family trusts
• ABN, GST and PAYG registrations
• ASIC registrations and compliance
• tax planning before you start trading
• restructuring from sole trader to company or trust
• reviewing whether your current structure still suits your business

Before you register a business, sign contracts or move income into a new entity, speak with an advisor who can review the full picture.

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