Entity Setup
Entity Setup for Start-Ups: Choosing Between Trusts, Companies, and Partnerships in Australia
Selecting the right business entity early can save you thousands—this guide breaks down the tax, liability, and compliance trade-offs between companies, trusts, and partnerships.
By NomadicTax Research Team • 5-8 min read • November 19, 2025
## The Main Entity Types and Their Tax Implications
| Entity Type | Taxation Overview | Liability & Compliance | Ideal Use Cases |
|-------------|---------------------|---------------------------|--------------------|
| **Company** | Taxed separately—flat corporate rate; profits dividends carry franking credits. Foreign income treated per Australian rules. | Limited liability; must lodge annual returns and financial reports. | High growth ventures, investor funding, intending to retain profits, larger operations.
| **Trust** (e.g. discretionary or unit trusts) | Trust isn’t taxed; beneficiaries taxed on distributions. Need clear trust deed. | Trustees hold responsibility; must hold meetings, maintain records. | Family businesses, those wanting profit distributions flexibility, asset protection.
| **Partnership / Sole Trader** | Partners or sole trader taxed individually on share of net income. | Unlimited liability (unless limited partnership). Simpler compliance. | Small operations, service-based, testing ideas with low capital.
## Key Tax Planning Opportunities with Each Entity
- **Company**: Access to lower company tax rates (e.g. **base rate entity** rules), accumulate profits, distribute dividends with franking credits to avoid double taxation.
- **Trust**: Flexibility to distribute income in tax-efficient ways among beneficiaries (e.g. lower tax rate individuals). Also used for asset protection and income splitting.
- **Partnership**: Each partner reports income; losses pass through. Useful when individuals bring capital or expertise, distributing losses while funding growth.
## Compliance Costs and Risks to Weigh
- **Companies**: Higher compliance—ASIC registration, financial reporting, possible audit; director duties; taxation on corporate profits even if not distributed.
- **Trusts**: Must follow trustee obligations; trust deeds must allow desired distributions; risk of beneficiary paying tax on distributions even if not received.
- **Partnerships/Sole Traders**: Simpler, but risk exposure personally; taxable obligations expected even if cash flow low.
## Example Scenario
Imagine cofounders Jane and Mark want to launch a tech‐platform. They expect fast revenue growth and want to seek investors.
- If they set up as a **company**, they can raise investment, issue shares, preserve profits for reinvestment, and use franking credits when paying dividends.
- If they go with a **trust**, perhaps a unit trust structure, investors can participate via units; but trust deed and distribution rules must be clearly crafted to align with investors’ expectations.
- Partnership would be ill-suited if growth and external equity are needed; risk and perceptions among investors are different.
## Actionable Steps for Making the Right Choice
1. Determine **scope and funding** needed—do you plan to bring in external capital?
2. Estimate income and profit projections—higher profits often favor company structure.
3. Consider tax rates for beneficiaries/investors—what are their rates?
4. Plan for exit strategies—how easy is winding up or selling shares?
5. Draft all legal documentation properly: company constitution, trust deed, partnership agreement.
6. Regularly review the entity as business evolves—what works at start may need changing.
Choosing the right entity isn’t just a tax decision; it affects how your company operates, raises funds, and grows. Take the time to get it right from the start to avoid expensive restructuring later.