Entity Setup
Entity Structures for Small Businesses: Trust, Company or Sole Trader?
Choosing the right entity structure isn't just about tax—it's about risk, flexibility, and long-term goals.
By NomadicTax Research Team • 5-8 min read • August 24, 2026
## Types of Entities: Pros & Cons
Below are common options for small or micro-businesses in Australia:
| Entity Type | Tax Rate & Liability | Flexibility & Setup | Key Risks |
|-------------|-----------------------|-----------------------|------------|
| **Sole Trader / Individual** | Your personal marginal rate; no separation of assets/liability | Easiest & lowest cost to set up; simple reporting | Unlimited liability; harder to bring in partners or investors |
| **Company** | Flat rate (e.g., corporate tax around 25%-30%), franking credits on dividends | Separate legal entity; easier to reinvest; limited liability | More regulation; minimum costs; stricter compliance; double taxation if paying dividends |
| **Trust** | Income flows to beneficiaries, taxed at their rates; trustee carries liability | Very flexible for splitting income; estate planning; asset protection | Setup and ongoing costs; risk of trustee liability; strict record-keeping; risk of trust loss from mis-management |
## Key Tax Planning Aspects
- **Income splitting**: Distribute income to lower-rate family members via trust (if legal and appropriate).
- **Retaining profits**: Companies can retain profits instead of distributing; useful for reinvestment and growth.
- **Capital gains tax (CGT)**: Trusts and companies can offer more options, but only individuals can access 50% CGT discount (for assets held 12+ months).|
- **Super & payroll**: Companies and trusts employ staff—you need to meet super guarantee obligations; structure affects treatment of owner drawings vs salary.
## Case Study: Choosing a Trust vs Company for a Growing Service Business
**Scenario**: Sarah runs a consulting business as a sole trader. She's profitable but has variable income. She wants to bring on junior partners and leave room for investors.
- As a sole trader, she pays high marginal tax rates at higher income levels.
- If she incorporates a company, her profits taxed at corporate rates; she can pay herself salary + dividends. Any retained earnings benefit growth.
- Trust structure could allow distributing income among her young adult children (if they have no other income) to lower overall family tax burden—but watch for “adult” beneficiary tax rates.
- She must consider company setup costs vs simplicity of sole trader.
## Compliance & Practical Considerations
- Company and trust setups require ABNs, TFNs, ASIC registration (for companies), trust deed (for trusts).
- Corporate reporting: Annual financial statements, director duties, potentially audit (if large) and ASIC fees.
- Trust distributions must follow trust deed; failing to distribute by 30 June or not following deed may have adverse tax consequences.
- Consider GST registration, PAYG instalments, payroll where applicable.
## When to Reassess Your Structure
- Revenue growing past marginal tax bands.
- Need for external investment or partners.
- Desire for asset protection from personal liability.
- Planning for retirement, succession, or exit strategies.
## Practical Steps to Choose Well
1. **Map current & projected income**: estimate where you'll fall in marginal rates in 3-5 years.
2. **Simulate tax outcomes**: model both company and trust net of costs/fees.
3. **Talk to financial & legal advisors**: especially for trust deeds or company constitutions.
4. **Weigh non-tax factors**: like risk, liability, flexibility, administrative burden.
**Conclusion**: There’s no one-size-fits-all. Sole trader is simplest but has limits. Companies and trusts offer powerful tools for tax efficiency, risk management, and growth—but they demand more discipline, compliance and oversight. Choose based on your long-term goals, not just your posture today.