Sole Trader vs Partnership vs Trust vs Company | Small Business Structures Explained

Running a small business comes with its fair share of financial responsibilities, and choosing the right tax structure can significantly impact your business's bottom line. In today's blog post, we'll provide a brief overview of the four main small business tax structures commonly used in Australia to help you make an informed decision.
1. Sole Trader
The sole trader structure is the simplest and most common for small business owners just starting. When operating as a sole trader, you're essentially trading under your personal name. You apply for a personal Australian Business Number (ABN) at a minimal cost or even for free on the government website. Taxes are paid on the profits generated within your business at your individual marginal tax rates, which vary based on your income level. This structure is straightforward and easy to set up, making it a popular choice for initial business ventures.
2. Partnerships
Partnerships involve two or more individuals, companies, or trusts coming together to run a business jointly. While it offers some flexibility, we typically don't recommend this structure to most clients due to potential liability issues. In a partnership, the profits generated within the business are split among the partners. Each partner is then taxed individually based on their share of the profits at their respective marginal tax rates.
3. Trusts
A trust is a separate entity that provides more flexibility when distributing profits among beneficiaries. It allows for strategic tax planning and is well-suited for family businesses or businesses involving multiple stakeholders. A trust can distribute profits to beneficiaries according to specific arrangements outlined in the trust deed. Each beneficiary is then taxed individually based on their share of the distributed profits at their respective marginal tax rates.
4. Company
The company structure is a popular choice for small businesses, mainly because of its flat tax rate of 25%. This rate is advantageous for businesses earning higher profits as it caps the tax liability and provides tax efficiency. In a company structure, the business's profits are taxed at 25%, and dividends can be paid to directors or shareholders, allowing for tax minimization strategies.
Choosing the right tax structure for your small business is essential for optimizing tax efficiency and minimizing potential risks. It's crucial to consider your business's size, profit projections, and long-term goals when making this decision. While each structure offers distinct advantages, the most suitable option depends on your specific circumstances.
For a more comprehensive understanding of each tax structure and its implications, we recommend checking out our in-depth video on our website. Remember that it's essential to get it right from the start, but there's also the option to adjust your tax structure later as your business evolves.
If you're unsure which tax structure is right for your business or need professional advice tailored to your unique situation, feel free to reach out to our team. We're here to help you make the best financial decisions for your small business journey. Thanks for reading, and remember, good tax planning can make a world of difference!
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Elephant Advisory is an award-winning accounting and mortgage brokering firm in Melbourne, with a long history of helping our clients achieve their business and property goals.
We believe that the key to financial and business success comes from a few good decisions and sound money management. This is why it is our goal to provide free educational resources to help Australians make informed decisions for their family, their business and their mortgage.
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DISCLAIMER: The material provided is for information purposes only and is not to be considered financial advice. It is to be used as a guide in purchasing a home and attaining the finance needed to do so. The information offered by us has been given in good faith. As lenders reserve the right to change the terms and conditions of loans without notice to us it is advised that you carefully check the legal and commercial documentation provided by the lenders before formally agreeing to a loan.