Law Plus One of the first decisions any new business owner faces is also one of the easiest to get wrong: what structure should the business actually operate through? It's tempting to treat this as a formality, but the structure you choose affects who's personally liable if something goes wrong, how profit is taxed, and how easily you can bring in a business partner or investor down the track. Here's how the main options compare.
Sole trader
Operating as a sole trader means you and the business are legally the same entity. It's the simplest and cheapest structure to set up — there's no separate registration beyond an ABN, and often a business name — and all profit is taxed as your personal income. The trade-off is personal liability: if the business is sued or can't pay a debt, your personal assets are on the line, not just the business's. It suits low-risk businesses with a single owner and modest turnover, but the liability exposure becomes a real concern as the business grows.
Partnership
A partnership is two or more people running a business together, sharing profits and — critically — sharing liability. In a standard partnership, each partner can be personally liable for debts the other partner incurs in the course of the business, even without their knowledge. A well-drafted partnership agreement, setting out how profits are split, how decisions are made and what happens if a partner wants out, is essential; without one, a state Partnership Act fills the gaps, usually in ways that don't suit anyone.
Company
A company is a separate legal entity from its owners (shareholders) and managers (directors). This is the key advantage: in most circumstances, shareholders' personal assets are protected from the company's debts, limited to what they've invested — this is what "limited liability" actually means. Companies also make it easier to bring in investors or transfer ownership, since shares can be issued or sold. The trade-offs are more setup and ongoing compliance — ASIC registration, annual reviews, financial records — and company profits are taxed at the corporate rate, with directors also carrying specific legal duties and potential personal liability in some circumstances, such as insolvent trading.
Trust
A discretionary (family) trust doesn't run the business itself — a trustee (often a company, for extra liability protection) holds and operates the business for the benefit of nominated beneficiaries, distributing income at the trustee's discretion. Trusts are commonly used for their flexibility in distributing income to beneficiaries in lower tax brackets and for asset protection, but they come with their own complexity and ongoing costs, and aren't well suited to every business — particularly if you want to reinvest profit into growth rather than distribute it.
Common combinations
In practice, many businesses don't use just one structure. A common set-up is a company acting as trustee of a family trust, combining the liability protection of a company with the tax flexibility of a trust. Which combination makes sense depends on the number of owners, the level of risk in the business, growth plans and the owners' personal tax position — which is exactly why this is a decision to make with both a lawyer and an accountant, not alone.
Changing structure later
Businesses aren't locked into their first structure forever, but changing later — for example, moving from sole trader to a company as the business grows — has real costs and tax consequences, including potential capital gains tax and stamp duty depending on what assets are involved. Thinking ahead about how the business might grow, even if you start simple, can save a more complicated and expensive restructure later.
Getting it right from the start
There's no single "best" structure — only the one that fits your circumstances, your risk profile and your plans for the business. Our business and commercial lawyers work alongside your accountant to help you choose a structure that actually fits, and can set it up properly the first time.