Business structures - sole trader, partnership, company (Pty Ltd, Ltd), trust - and the implications of each for liability, taxation, capital raising, regulatory compliance and ownership transfer

What this dot point is asking

QCAA wants you to know the four main Australian business structures, their key implications, and to be able to recommend the right structure for a scenario business. Both IA1 and the EA frequently include short-response questions on business structure choice.

The answer

The four main structures in Australia

Sole trader

One owner-operator. The owner and the business are the same legal entity. The owner has unlimited personal liability for business debts. Profit is taxed at the owner's marginal income-tax rate (up to 47 percent including Medicare levy).

Pros

Simple and cheap to set up. Minimal ongoing compliance. Owner keeps all profit. Full control.

Cons

Unlimited personal liability. Limited capacity to raise capital. Business ends if the owner stops trading. Reliance on the owner's personal credit for borrowing.

Common use

Trades (plumbers, electricians), small retail, freelance professionals, food trucks, contractors.

Partnership

Two or more partners (typically up to 20; some professions allow more). Partners share profits and losses per a partnership agreement. Partners have joint and several unlimited personal liability - any partner can bind the partnership, and creditors can pursue any individual partner for the full debt.

Pros

Simple to set up. Shared decision-making, capital and risk. Combined skills and contacts. Minimal ongoing compliance.

Cons

Unlimited personal liability for actions of all partners. Partnership ends on a partner's exit (unless the partnership agreement provides otherwise). Joint liability can mean one partner bears the cost of another's poor decisions.

Common use

Legal firms (though many now use incorporated practices), accounting firms, medical practices, architectural firms.

Company

A separately incorporated legal entity under the Corporations Act 2001, regulated by ASIC. Two main subtypes.

• Private limited company (Pty Ltd). Up to 50 non-employee shareholders. Cannot list on the ASX. Most common Australian company form.
• Public limited company (Ltd). Open to public ownership. Required if listed on the ASX. Greater disclosure and governance obligations.

Shareholders have limited liability (only the value of their shareholding is at risk for business debts). The company pays corporate tax - 25 percent for businesses under $50 million turnover, 30 percent otherwise.

Pros

Limited liability for shareholders. Lower corporate tax rate on retained profit. Easier to raise capital (issue shares). Continuity beyond the owners. Can offer share-based remuneration to staff.

Cons

ASIC compliance (annual review, corporate records). Director duties under the Corporations Act. Higher set-up cost (around $500-$2,000 with legal advice). Dividends to shareholders carry franking credits but are taxed at the shareholder level.

Common use

Mid-sized businesses, businesses with outside investors, businesses planning growth or future sale.

Trust

A trustee (an individual or, more commonly, a Pty Ltd company specially incorporated as a "trustee company") holds assets on behalf of beneficiaries. The trust deed sets the rules.

Two main subtypes.

• Discretionary trust (family trust). Trustee has discretion over which beneficiaries receive income each year. Common for family-owned businesses.
• Unit trust. Beneficiaries hold fixed units (similar to shares). Common for investment vehicles.

Pros

Asset protection. Tax flexibility (income can be distributed to beneficiaries with lower marginal rates). Estate-planning vehicle. Continuity.

Cons

Complex to set up ($1,500-$3,000 legal cost). Trustee duties. Annual trust accounts and ATO trust tax returns. Anti-avoidance rules limit some tax-planning strategies.

Common use

Family-owned businesses, businesses with multiple family beneficiaries, businesses holding significant assets, investment-property businesses.

Implications matrix

Choosing the right structure

The choice depends on:

• Size and growth ambition. Sole trader fine for small; company better for mid-size with growth plans.
• Liability exposure. Anyone in a sector with material professional-indemnity or product-liability risk should consider a company or trust.
• Tax position. Trusts shine where income can be distributed to lower-rate beneficiaries; companies shine where profit is retained for reinvestment.
• Outside investors. Companies are the only structure that easily accepts external equity.
• Family business. Trusts are common for family businesses with multiple generation or non-trading beneficiaries.

Many established Australian businesses use a combined structure - a trust holding the shares of a trading company - to combine the tax flexibility of a trust with the limited liability of a company.

Worked Queensland examples

• A solo Brisbane tradesperson - sole trader is appropriate; low overhead, simple compliance.
• Two co-founders launching a Brisbane tech consultancy - Pty Ltd company; limited-liability protection in B2B engagements, tax benefits on retained earnings, easier to bring on staff with share-based incentives.
• A Sunshine Coast family running a 200-hectare cattle station - often a discretionary trust with a trustee company; combines liability protection, tax flexibility across family beneficiaries, and estate-planning capability.
• A Townsville mining-services business taking outside investment - Pty Ltd company; required to take outside equity, supports growth-stage governance.