Entity Setup
Entity Setup in Australia: Choosing Between Sole Trader, Company, or Trust
Your choice of entity affects tax rates, liability, and operational flexibility—this article helps you choose wisely with concrete examples.
By NomadicTax Research Team • 5-8 min read • November 14, 2025
## Common Business Entity Types in Australia
Here are three popular entity types and their core characteristics:
| Entity | Key Features | Pros | Cons |
|--------|----------------|-------|------|
| Sole Trader | One-person business under your TFN | **Simple setup**, low ongoing cost, full control | Unlimited liability, personal risk, less tax planning flexibility |
| Company (Pty Ltd) | Separate legal entity taxed at **corporate rate** | Limited liability, can access concessional tax rates for profits retained, easier to scale | More complex setup and compliance, double taxation if profits distributed as dividends |
| Trust (Discretionary/Bare/Special) | Legal arrangement to hold assets & distribute profits | Flexibility in allocating income among beneficiaries, potential tax savings | Complex compliance, trust rules, record-keeping burden, possible trust tax issues |
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## Tax Rates & How They Compare
Australia’s company tax rate generally hovers around **25-30%**, depending on turnover and whether a base-rate entity. Sole traders pay marginal tax rates up to **45%**, plus Medicare levy. Trusts distribute income generally taxed in hands of beneficiaries.
**Example**:
- A sole trader earning AU$150,000 pays personal tax rates, high marginal bracket.
- A company retains profits taxed at corporate rate; dividends subject to **franking credits** when distributed.
- A trust can distribute profits to beneficiaries on lower marginal rates, reducing overall tax burden.
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## Liability and Risk Considerations
- **Unlimited liability** for sole traders means personal assets are exposed.
- Companies protect personal assets; trust structures limit direct exposure but introduce trustee duties and legal obligations.
- Regulatory and administrative costs:
* Annual ASIC fees and company annual statements
* Trusts require bookkeeping for beneficiaries, distributions; may attract audits if complex.
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## Practical Scenario: Tech Startup Structured as Trust vs Company
Sarah and Tom launch a software business. Revenues for Year 1: AU$500,000, net profit AU$200,000.
- If they set up a **company**, tax is paid at corporate rate, then any dividends taxed in hands of shareholders (with franking credits).
- If they use a **discretionary trust**, profits could be distributed: e.g., Sarah is in lower tax bracket, Tom invests in other ventures; profits get allocated — possibly bringing overall tax down and aiding flexibility.
- Sole trader: they divide business hours, but still taxed at individual rates — likely higher total tax.
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## Key Steps to Set Up Properly
1. Decide your risk appetite and growth expectations.
2. Assess turnover thresholds, eligibility for **base-rate entity status**; recent ATO focus on correctly applying these rules.
3. Register for ABN, GST (if required), and set up company/ trust deed accordingly.
4. Maintain formal documentation: shareholder agreements, trust deeds, minutes.
5. Plan for compliance: lodging, taxation of distributions or dividends, record-keeping.
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Choosing the right structure is more than tax—it’s about risk, control, and future plans. Evaluate your needs now, but be ready to restructure if business grows.