Business Structure

The structure you choose for your business is one of the most consequential decisions you will make as a founder. It determines how much personal risk you carry, how you are taxed, how you can raise capital, and how much paperwork you deal with every year. Getting it wrong does not just cost money - it can expose your personal assets to business debts, lock you into an inefficient tax position, or create friction when you try to bring on investors or co-founders later.

Australia recognises four main business structures: sole trader, partnership, company (Pty Ltd), and trust. Each comes with its own rules around liability, taxation, setup cost, and ongoing compliance. There is no universally "best" structure - the right choice depends on your risk profile, growth plans, and how many people are involved.

Before you register anything, take the time to understand what each structure offers and what it costs. A conversation with an accountant or lawyer at this stage is almost always worth the fee - it is far cheaper than restructuring later. For an overview of the broader startup legal roadmap, start with the getting started chapter.

A sole trader is the simplest business structure in Australia. You and the business are legally the same entity. There is no separation between your personal finances and your business finances - which keeps things straightforward but comes with a significant trade-off.

Setup and Registration

All you need to start trading is an Australian Business Number (ABN), which you can apply for free through the Australian Business Register. If you want to trade under a name other than your own legal name, you will also need to register a business name through ASIC and pay the current registration fee. There is no separate company registration and no ASIC annual review fee for sole traders.

Tax and Liability

All business income is reported on your personal tax return and taxed at your individual marginal rate. You are entitled to claim business deductions, and if your turnover exceeds $75,000 you must register for GST. The simplicity cuts both ways: there is minimal record-keeping compared to a company, but you have unlimited personal liability. If the business takes on debt or is sued, creditors can pursue your personal assets - your home, car, and savings.

A partnership is a business run by two or more people (or entities) who share income, losses, and control. Partnerships do not pay income tax themselves - instead, the net income flows through to each partner, who reports their share on their own tax return.

General vs Limited Partnerships

In a general partnership, every partner is jointly and severally liable for all debts and obligations. That means if one partner signs a bad contract, the other partners are on the hook too. A limited partnership (available in most states) allows some partners to limit their liability to their capital contribution, but at least one partner must remain a general partner with unlimited liability.

Why You Need a Partnership Agreement

You are not legally required to have a written partnership agreement, but operating without one is a serious risk. Without an agreement, the Partnership Act in your state or territory fills the gaps - and the defaults rarely match what partners actually intend. A good partnership agreement covers:

• Profit and loss sharing - how income and losses are split (it does not have to be equal).
• Decision-making - which decisions require unanimous agreement and which can be made individually.
• Capital contributions - how much each partner contributes and what happens if more capital is needed.
• Exit and dispute resolution - what happens if a partner wants to leave, retires, or dies. Without clear exit provisions, winding up a partnership can become expensive and adversarial.

If you are entering a partnership, it is worth having that agreement drafted carefully from the start rather than relying on default legal rules.

A proprietary limited company (Pty Ltd) is a separate legal entity from its owners (shareholders). This separation is the key advantage: the company owns its own assets, enters its own contracts, and is liable for its own debts. If the company fails, shareholders generally lose only what they invested - not their personal assets.

Registration and Setup

You register a company with ASIC. The process requires at least one director (who must be an Australian resident), at least one shareholder, a registered office address, and a principal place of business. There is no minimum paid-up capital requirement beyond the nominal share price - most companies start with $1 shares. ASIC charges incorporation and annual review fees for proprietary companies, and those fees change from time to time. Check the current ASIC fee schedule before you register. Once the company is set up, it will have an ACN (Australian Company Number) in addition to any ABN it applies for.

Taxation

Companies pay tax at the corporate rate rather than the individual marginal rate. For the 2025-26 financial year, the base rate entity company tax rate is 25% for companies with aggregated turnover under $50 million. Companies that do not qualify as base rate entities pay the full 30% rate. Profits distributed to shareholders as dividends can carry franking credits, which offset the shareholder's personal tax liability and avoid double taxation.

Directors' Duties

Running a company comes with legal duties under the Corporations Act 2001. Directors must act in good faith and in the best interests of the company, avoid conflicts of interest, not trade while insolvent, and keep proper financial records. Breaching these duties can result in personal liability, fines, or disqualification from managing companies. These obligations are real - but they are manageable with basic governance practices and good accounting.

A trust is not a separate legal entity - it is a relationship where a trustee holds and manages assets for the benefit of beneficiaries. In business, trusts are most commonly used for asset protection and tax planning, particularly among family businesses and property investors.

Discretionary (Family) Trusts

A discretionary trust gives the trustee flexibility to decide how income and capital are distributed among beneficiaries each year. This allows income to be directed to family members in lower tax brackets, potentially reducing the overall tax burden. The trust itself does not pay tax on distributed income - each beneficiary pays tax at their own marginal rate on the amount they receive. Any undistributed income is taxed at the top marginal rate (currently 45% plus Medicare levy).

Unit Trusts

In a unit trust, beneficiaries hold fixed "units" (similar to shares) and receive distributions in proportion to their unitholding. Unit trusts are common when unrelated parties want to invest together in a venture or asset, because they provide certainty about each party's entitlement. They are frequently used for property investment and joint ventures.

Practical Considerations

Trusts require a trust deed (the governing document) and a trustee. The trustee can be an individual, but for liability protection most business trusts appoint a corporate trustee - a Pty Ltd company whose sole purpose is to act as trustee. This adds a layer of setup cost and compliance (you are effectively running a company anda trust), but it means the trustee's personal assets are shielded if something goes wrong.

Trusts are more complex and more expensive to establish and maintain than sole trader or partnership structures. They suit businesses where asset protection and flexible income distribution are priorities, but they are not the best fit for every startup. Get advice from a tax professional before committing to a trust structure.

Your business structure is not permanent - you can change it as your business grows. Many founders start as a sole trader to test an idea, then incorporate a Pty Ltd once the business gains traction and the liability risk justifies the extra compliance.

When to Consider Restructuring

• Revenue growth - once your taxable income consistently exceeds the threshold where the company tax rate (25%) is lower than your effective marginal rate, incorporation often makes financial sense.
• Hiring employees - employing staff increases your liability exposure significantly. A company structure protects your personal assets from workplace claims.
• Raising capital - investors almost always require a company structure so they can receive shares in exchange for funding.
• Bringing on partners - if you are adding co-founders, a company with a shareholders agreement provides clearer governance than an informal partnership.

CGT and Transfer Costs

Changing structure typically involves transferring assets from one entity to another, which can trigger a capital gains tax (CGT) event. For example, if you transfer a business with goodwill from a sole trader to a Pty Ltd, the ATO treats that as a disposal at market value. There are rollover relief provisions that can defer (not eliminate) CGT in certain circumstances - but they come with conditions, and you need professional advice to apply them correctly.

Beyond CGT, restructuring may also involve transferring contracts, leases, licences, and employee relationships. Some contracts contain change-of-control clauses that require counterparty consent. Plan the transition carefully, budget for legal and accounting fees, and give yourself enough lead time to manage it without disrupting operations.