Sole Trader vs Company vs Trust: When Is It Time to Restructure Your Business?
Many Perth business owners start out as sole traders. It is simple to set up, low cost and light on paperwork. But as a business grows, the sole trader vs company question comes up, because the structure that worked in the early days may no longer suit your tax position or your level of risk.
At a Glance
Sole Trader | Company | Family Trust | |
Separate from you? | No | Yes, a separate legal entity | No, a trustee holds assets for beneficiaries |
Personal liability | Rests with you | Generally limited, with exceptions | Usually sits with the trustee (often a company) |
How profit is taxed | At your personal rates | At the company rate, then again when paid out to you | In the hands of beneficiaries, based on yearly distributions |
Set-up and compliance | Lowest | Higher (ATO and ASIC obligations) | Higher (trust deed, yearly distribution decisions) |
Often suits | Starting out or lower-risk businesses | Growing profit and risk | Family groups wanting flexibility, with ongoing advice |
This is a general comparison only. How each structure works for you depends on your circumstances.
Sole Trader: Simple, But No Separation
As a sole trader, you and your business are legally the same. That keeps things easy, but it comes with two downsides.
Personal liability. If the business cannot pay its debts or is sued, your personal assets, such as your home and savings, may be at risk.
Tax that rises with profit. All business profit is taxed at your personal rates. As profit grows, so does the rate, up to 45% plus the Medicare levy at the top end. A strong year can mean a very large tax bill.
Company: A Separate Legal Entity
A company is its own legal entity. Its owners (shareholders) are generally not personally responsible for its debts, and the company pays tax in its own right.
Most small trading companies pay tax at a flat 25%, as long as they qualify as a base rate entity. In simple terms, that means turnover under $50 million and most of the income coming from running the business, rather than from passive sources like rent, interest or dividends. Other companies pay 30%.
A company can be a good fit, but there are things to keep in mind:
Getting money out is not tax-free. Profit kept in the company is taxed at the company rate, but when you take it out as wages or dividends, it is taxed again in your hands. If you pay yourself a wage, the company also takes on payroll and super obligations, including the new Payday Super rules. Withdrawals that are not properly recorded can also be treated as dividends under the ATO's Division 7A rules.
Limited liability has limits. If you sign a personal guarantee for a loan or lease, you are still personally responsible. Directors can also be personally liable for certain unpaid tax and super amounts.
More compliance. A company has ongoing obligations to both the ATO and ASIC, including Director ID and company registration details, and higher running costs than a sole trader.
Family Trust: Flexible, But Strict Rules
A trust is not a separate legal entity. Instead, a trustee holds assets or runs the business for the benefit of others, called beneficiaries, who are often family members.
The main appeal is flexibility. Each year, the trustee can decide how to share the trust's income among beneficiaries, which may spread income across family members on lower tax rates. Depending on how the trust is set up and run, it can also help with estate planning and offer some protection from creditors.
But trusts come with strict rules, and getting them wrong can be costly:
The trustee must decide how the income is distributed by 30 June each year. Income that is not properly distributed can be taxed at the highest rate in the trustee's hands.
Income distributed to children under 18 is taxed at high penalty rates, so it often does not save tax.
The ATO looks closely at distributions to adult family members where the money does not actually end up benefiting them.
A trust is not a shortcut to lower tax. It needs proper bookkeeping and records, sound advice and regular review.
Signs It May Be Time to Review Your Structure
Profit is growing and staying high. Your tax bill keeps rising, and you are not using all the profit for personal spending.
Your risk has increased. You have taken on staff (and are classifying them correctly as employees or contractors), bigger contracts, business loans or commercial leases.
You have bigger plans. You want to bring in a partner or investor, sell the business, or pass it on to family.
You are worried about protecting your assets. For example, a business that carries real legal or financial risk.
If one or more of these sounds familiar, it is worth talking to an adviser before making changes.
What to Know Before You Restructure
Moving your business into a new structure usually means transferring its assets to a new entity, and that can have tax consequences:
Capital gains tax (CGT). Relief such as the small business restructure rollover may allow CGT to be deferred, but the conditions are strict and must be met carefully.
Duty in WA. Western Australia charges transfer duty on certain business assets, such as goodwill and business licences.
Practical changes. Contracts, business licences, insurance, bank accounts, ABN and GST registrations may all need updating. If employees move to the new entity, entitlements such as long service leave also need to be considered.
Restructuring is not something to leave until the last minute before 30 June. Planning early usually gives you more options and fewer surprises.
Frequently Asked Questions
Is a company always better for tax than a sole trader?
Not always. It depends on how much profit stays in the company, how much you take out personally, and the extra costs of running a company.
Can I change my business structure later?
Yes, but a change can trigger tax and duty costs. It is usually easier and cheaper to plan ahead than to fix a structure that no longer fits.
Do I need a trust to protect my home?
Not necessarily. The right protection depends on your risks, how assets are owned and any personal guarantees you have given. Get advice for your situation.
How Gordon Q.C Du & Associates Can Help
Choosing a structure is not a one-size-fits-all decision. Our Business Advisory team can review your cash flow, risks and goals, and explain which option may suit your business. We also provide accounting services in Perth, so your structure and your day-to-day accounts stay aligned. Contact us to talk about your situation before you make any changes.
Disclaimer: This post contains general information only and does not constitute specific tax or financial advice. Please consult a registered tax agent regarding your specific circumstances.
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