Choosing the Right Business Structure for Tax Efficiency

If you're considering starting a business in Australia or restructuring an existing one, among the most important decisions to make is selecting the best business structure for your goals. Your business structure can impact operations, legal responsibilities and how much tax you pay.

There are four business structures you can choose from, including sole trader, partnerships, companies and trusts. Understanding the differences between these structures will help you make an informed decision that aligns with your goals, protects your assets and sets you up for sustainable growth.

In this guide, we'll examine each structure, helping you decide which is best for you.

Australian Business Structures 101

The structure of your business determines how you'll file taxes, register for GST and undertake your role as an employee or business owner — which extends to how you receive a salary, wages or dividends. These are the implications we will discuss today.

Keep in mind that these business structures also influence many other aspects of your commercial activities, including operational management and personal liability, which will also be important considerations.

Here are the four business structures in Australia and how they impact your tax:

Sole Trader

A sole trader is the simplest and most common structure for emerging businesses, where the owner and the business are a single legal entity. This means professional insurance is essential for protecting personal assets. Sole trader status is affordable and straightforward to set up — you just need to register an Australian Business Number (ABN) under your name.

Business income is part of your personal tax return, often taxed at marginal individual rates, which is usually OK as you're starting. However, as you begin earning more, your tax bracket will also rise. It's common for a business to outgrow this structure as operations and profits rise — especially compared with a company structure, which is taxed at a flat rate.

The ATO allows sole traders a 50% capital gains tax discount if they sell assets after one year.

Partnership

A partnership involves two or more individuals jointly running a business, where both individuals share income and losses. It's generally low-cost and easy to set up by registering an ABN under the partnership name. General partners have unlimited liability, meaning professional insurance, again, is necessary.

Similar to sole traders, each partner must lodge their share of the partnership income at their individual tax rate as part of their personal tax return. Each partner is personally liable for their declarations. However, a separate partnership tax return is also required.

Company

A company is a separate legal entity from its owners, providing limited liability that protects personal assets from business debts. This structure is more complex, with higher setup and administration costs, as well as additional reporting requirements.

The company's income and assets belong to the entity, rather than its shareholders, making it suitable for established businesses seeking growth or facing higher risks. Companies pay a flat 25% tax rate on profits, which is generally lower than the tax rate for individuals. Notably, this flat rate and the aggregated turnover threshold are subject to change.

The company may distribute profits to shareholders as dividends — a strategy that can help the business owners reduce personal income tax.

Trust

A trust is a more complex and costly legal arrangement wherein a trustee holds assets on behalf of beneficiaries. Discretionary trusts are common among families, offering the flexibility to distribute profits through dividends for tax efficiency. However, it's necessary to discuss this strategy with an accounting expert to understand the implications fully.

While a trust is suitable for asset protection and estate planning, this model is generally not ideal for operating a small business due to its tax implications. Trusts must distribute all income to beneficiaries annually, who then pay tax at their individual marginal rates. The trustee managing operations must also lodge an annual tax return for the entire trust.

WMC Accounting helps small and medium businesses optimise their taxes. Whether you need help understanding the right structure to set up a new business or to manage taxes more efficiently for an existing one, we're here to help. Contact us today to ensure your business is tax-efficient and compliant.