Structuring your business

Selecting a business structure may be the most important decision to make when starting a business. You can restructure later, but it may come at a cost – and at the least, a nuisance. Different structures carry different pros and cons, and we will lay them out here.

Basic structures

Trusts

A trust is not a thing that trades so much as a way of holding something. A trustee holds the assets and enters the contracts, the beneficiaries are entitled to the income, and the deed governs all of it.

A trust is not a legal person: the trustee signs the contracts and owes the debts – so an individual trustee is exposed exactly as a sole trader is. The trustee should almost always be a company set up for that purpose and doing nothing else, which is an extra company to maintain and usually money well spent. It is a company like any other, though, so the same limits apply – see where a company does not protect you below.

Unit trust or company?

Both give every owner a defined, transferable stake – units in one, shares in the other – so both work where the parties are unrelated. The choice comes down to one trade-off: a company can retain profit at the company rate, while a unit trust passes the character of income – capital gains and foreign tax credits – through to unitholders intact.

The full comparison covers retained profit, CGT, foreign tax, franking credits and losses side by side.

Multi-layer structures

Once there are real assets and real risk, the answer is often not one entity but several, each doing one job.

A common arrangement:

• A discretionary trust at the top, owning the shares in the company below it, to protect the business from external claims against its owners
• A trading company underneath, doing the work, employing the staff and carrying the risk
• Sometimes a second entity holding the property, plant or intellectual property, and leasing it to the trading company

The trading company is deliberately the entity with everything to lose and little to take. If a claim arrives, it reaches the business that caused it and stops there. That only holds if the trading company is left able to meet its ordinary obligations – it cannot be stripped of the means to pay its own way.

The benefits

The cost

The cost is real. It is worth it when there is something to protect, and premature when there is not, which is the judgement rather than the rule.

Decision factors – making your own call

These are the things worth weighing, roughly in the order we would weigh them. Work through them yourself and you will usually land where the tool above lands, with a better sense of why.

Liability, first

Your risk assessment must be done thoroughly. It is the factor to weigh hardest, because it cannot be fixed after the liabilities are incurred. Moving from sole trader to a company protects you from that day forward – new debts belong to the company – but it does nothing about what you already owe, or a claim that arises from work you have already done. Tax rates change and elections can be revisited; a creditor reaching your house does not unwind.

Sole traders and partners are personally liable without limit. A company draws a line: creditors reach the company's assets, not yours. A trust does the same only if the trustee is a company – an individual trustee is personally on the hook, which is why the corporate trustee is usually worth its cost.

We do not recommend partnerships. Liability is joint and several, so each partner is exposed to the whole of the debts and to the other partner's decisions – and there is nothing a partnership offers that a company does not, other than being cheaper to set up. In our view that saving buys you the wrong thing. We will still explain one, and set one up if that is what you want after the conversation, but it is not where we point people.

Where a company does not protect you

A company draws the line in most places, but not everywhere. Directors are personally exposed for trading while insolvent, for unpaid PAYG withholding, GST and super through a Director Penalty Notice, and under any personal guarantee they have signed – which steps straight past the company and undoes the protection you paid to establish.

The three exposures in full, and why most of them come from paperwork left undone rather than bad luck.

Then tax, and what you do with the profit

Sole traders, partnerships and trusts are flow-through: profit lands on someone's personal return and is taxed at their marginal rate, up to 47%. A company pays the company rate on what it retains – 25% in most circumstances, and 30% above $50 million of turnover.

So the question is what happens to the money. A company earns its keep when profit is reinvested – funding stock, equipment, staff or growth. Every dollar retained is taxed at the company rate rather than your marginal rate, and that gap is real money left working in the business.

If you draw most of the profits out to live on, this feature is not as beneficial. It does not follow that a company is the wrong answer – the liability reasons above stand on their own, and for most businesses they are the ones that decide it.

Who else is involved

• On your own – nobody's stake needs defining, so let other factors guide your decision.
• Family – if the family has a genuine stake in the business, a sole trader is the one structure that will not do. How profit is distributed and how family assets are protected are the factors that should decide it, and a company, a unit trust or a discretionary trust are all on the table.
• Unrelated partners – a company or a unit trust. Shares and units both fix each person's stake at arm's length, so ownership and exit are unambiguous on the day someone wants out, and whichever you choose, it is best to have a shareholders agreement behind it.

What you sell

Selling goods brings stock, suppliers and product risk – creditors and claims, all of which argue for keeping liability inside an entity.

Selling your own services raises a different issue. Where income comes mainly from your personal skill and effort, the personal services income rules can attribute it back to you whatever entity earned it. That is worth knowing before you rely on a tax saving that may not arrive – but it does not settle the question on its own. The liability protection still works, and it is usually the better reason anyway. And if the business grows past you – staff, subcontractors, work you are not personally doing – you are already incorporated, rather than restructuring at the point you are busiest.

The ownership checklist

What you trade through is the easier half. Who owns it is where the planning happens, and it turns on things no questionnaire can see. Before you settle on ownership, these are the questions worth working through:

• Will the business hold assets that grow in value? Property, or goodwill you might one day sell. This is the big one: a company cannot pass the 50% CGT discount to its shareholders, so an entity that saved you tax every year can cost you far more on the way out. From 1 July 2027 individuals and trusts lose that discount too – replaced by cost-base indexation and a minimum 30% rate on gains for resident individuals – with gains accrued before that date preserved through a deemed disposal and reacquisition. It changes the answer without reversing it, and it is one of the reasons this decision is worth doing properly now.
• What do you already own? Structures do not exist in isolation. An existing trust, a property, or a company you already control usually changes the answer.
• What do you earn elsewhere? A salary, investments or a spouse's income all affect where a dollar of business profit is best taxed.
• Who should benefit, and when? Family circumstances change year to year. That flexibility is what a discretionary trust buys – though the June 2026 legislation changes what a trust is worth for holding appreciating assets from 1 July 2027.
• Are the other owners related to you? Unrelated parties need fixed entitlements. That is what units in a unit trust, or shares in a company, are for.
• What happens on death, or if someone wants out? Succession and exit are structural questions, and retrofitting them is expensive.
• How much complexity will you actually maintain? A structure nobody keeps up with is worse than a simpler one that gets done properly.

Start simple, expand later

A structure that fits the business you have is better than one built for the business you hope to have. Full structures cost money to establish and to run, and a new business often cannot justify it.

If your exposure is genuinely low at the start, that is manageable. No employees, nothing owed to suppliers and low-risk work – begin as a sole trader, keep the cost down and put the money into the business instead. The structure can catch up when the risk does.

We will happily design something that fits now and can be improved later, once the concept is proven or the funds are there. That is frequently the right answer for a first-year business, and we would rather say so than sell you a trust you do not yet need.

Moving later is also less painful than people expect. The small business restructure rollover lets a business with aggregated turnover under $10 million transfer active assets into a new structure without an immediate income tax or CGT bill, provided the ultimate economic ownership does not change. Keep that ownership unchanged for three years after the transfer, keep the assets active and out of private use, and the safe harbour treats the restructure as genuine without further argument.

It is not automatic and it does not cover everything – but growing into a company is rarely the tax event people assume it will be.

Restructuring an existing business

Businesses outgrow their structure. The usual triggers are risk that has grown, a partner joining or leaving, or profits that have started to stay in.

We plan and execute restructures with the costs on the table: the tax on moving assets, the disruption while it happens, and the concessions and rollovers that may reduce both. Sometimes the answer is that the existing structure is good enough and the money is better spent elsewhere – and that is a legitimate finding, not a failure.

How this connects

Once the structure is decided, business setup is the execution – registering the entity, ABN, TFN, GST and PAYG, and getting the books running from day one.

The structure also shapes everything downstream: which returns get lodged and by whom is tax returns work, and the distribution and Division 7A decisions each year are tax planning.