Choosing the right business structure is one of the most important decisions you'll make as an Australian SME owner. It affects how much tax you pay, whether your personal assets are at risk, and how much it costs to comply with regulations. Here's a no-nonsense comparison for 2026.
1. The Four Main Structures
| Structure | Tax Rate | Asset Protection | Setup Cost |
|---|---|---|---|
| Sole Trader | Marginal rates (0–47%) | None — unlimited personal liability | Free (just ABN) |
| Company (Pty Ltd) | 25% (base rate entity) | Yes — limited liability | $500–$1,500 + $310/yr ASIC |
| Partnership | Each partner's marginal rate | Joint and several liability | Low (partnership agreement) |
| Discretionary Trust | Beneficiaries' marginal rates | Good (assets held by trustee) | $1,500–$3,000 |
2. Sole Trader: The Starting Point
Best for: Low-risk businesses earning under $100,000 per year. Freelancers, consultants, and side hustles.
- Pros: Zero setup cost. Simple tax return (added to your personal return). Full control.
- Cons: No asset protection. All business debts are your personal debts. Can't split income. Tax rate climbs steeply above $45,000.
3. Company: The Growth Structure
Best for: Businesses earning over $120,000, hiring employees, or operating in high-risk industries.
- Pros: Tax capped at 25%. Limited liability protects personal assets. Professional image. Can retain profits for growth.
- Cons: Higher compliance costs ($2,000–$5,000/year for accounting). ASIC annual review fees. Profits locked inside the company (Division 7A if you withdraw).
4. When to Switch from Sole Trader to Company
Consider switching when:
- Your taxable income exceeds $120,000 — the tax saving from the 25% company rate becomes significant.
- You're hiring employees — a company provides better liability protection.
- You're entering contracts with large clients — many corporates prefer dealing with Pty Ltd entities.
- You need asset protection — if a client sues, they can only claim company assets, not your home.
5. Trust: The Tax Planning Powerhouse
Best for: Family businesses wanting income-splitting flexibility and asset protection.
- Pros: Distribute income to family members in lower tax brackets. Good asset protection. Can stream capital gains and franked dividends.
- Cons: More complex and expensive to set up. Trust deed must be properly drafted. ATO scrutinising Section 100A arrangements. Losses are trapped in the trust.
6. The Combined Structure
Many established SMEs use a trust + company (corporate trustee) combination. The trust provides income-splitting flexibility, the company provides limited liability as trustee, and a separate "bucket company" captures excess income at 25%.
Key Takeaways
- Sole trader is fine under $100k and low risk — but no asset protection.
- Company (Pty Ltd) caps tax at 25% and protects personal assets.
- Switch to a company when income exceeds $120k or you're hiring staff.
- Trusts offer unmatched income-splitting but are complex and scrutinised.
- Get professional advice before restructuring — the wrong choice is expensive to undo.