Business structures: sole trader, partnership, company, trust (QCE Business Unit 1)
“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”
The four main Australian business structures are sole trader (one owner, unlimited liability, marginal tax), partnership (multiple partners, joint and several unlimited liability, marginal tax), company - Pty Ltd or Ltd (separately incorporated, limited liability, corporate tax 25-30 percent), and trust (trustee holds assets for beneficiaries, flexible income distribution). The choice depends on size, growth ambition, liability exposure, tax position, capacity for outside investment, and the family context. Many Australian family businesses use a company-trust combined structure to capture both limited liability and tax flexibility.
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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
| Implication | Sole trader | Partnership | Company | Trust |
|---|---|---|---|---|
| Liability | Unlimited personal | Joint and several unlimited | Limited (shares) | Limited (trustee) |
| Tax | Owner's marginal rate | Partners' marginal rates | Corporate (25-30%) | Beneficiaries' rates |
| Capital raising | Difficult | Difficult | Easy (shares) | Moderate (units) |
| Compliance cost | Very low | Low | Moderate | Moderate-high |
| Ownership transfer | Difficult | Requires agreement | Easy (share sale) | Trust deed dependent |
| Continuity | None | Partnership ends | Continues | Continues |
| Setup cost | Free-$500 | $500-$2,000 | $500-$2,000 | $1,500-$3,000 |
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.
"Recommend a business structure for two siblings launching a fast-growing Brisbane food-truck chain. They plan to take on staff and seek outside investment by year three. (5 marks)"
Analysis.
- Growth ambition. Fast-growing, planning to scale and seek outside investment - rules out sole trader and partnership.
- Liability. Food businesses carry consumer-safety risk (food-poisoning claims) and vehicle-operations risk. Limited liability matters.
- Outside investment by year three. Investors typically require a company structure to invest.
- Tax. Most early profits will be reinvested into new trucks; the 25 percent base-rate corporate tax on retained earnings is favourable.
Recommendation. Pty Ltd company structure, with the two siblings as the initial directors and shareholders.
Additional consideration. If the siblings expect to take significant dividend income to family members, they might consider a discretionary family trust as the shareholder of the trading company (a "company-trust" combined structure). This is common for family businesses and provides additional tax flexibility on distributions, at the cost of additional set-up and annual compliance.
Practical sequence. Engage an accountant and a small-business lawyer in Brisbane to structure correctly from the start. The cost of restructuring later (transferring assets, recapitalising, reissuing contracts) significantly exceeds the cost of getting it right at establishment.
Treating sole trader as a "small" structure and company as a "big" structure. They are not size categories. Some sole traders earn over $500,000; some Pty Ltd companies have one shareholder.
- Confusing Pty Ltd and Ltd
- Pty Ltd is private (max 50 non-employee shareholders, cannot list). Ltd is public (open to public ownership, must list to take public funds).
- Forgetting that a trust needs a trustee
- The trustee can be a person (rare for businesses) or a Pty Ltd company (most common). The trustee company has director duties.
- Treating tax as the only consideration
- Liability, capital raising, continuity and compliance cost all matter, often more than tax.
- Recommending a structure without a justified rationale
- QCAA marking criteria explicitly reward justification linked to the scenario.
Exam-style questions
Questions in the style of QCAA exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
Practice5 marksCompare a partnership and a private limited company as business structures. Recommend the best structure for two co-founders launching a small Brisbane-based technology consultancy.Show worked answer →
A 5-mark answer needs both structures, the comparison, and a justified recommendation.
- Partnership
- Two or more partners (typically up to 20). Profits and losses shared per the partnership agreement. Partners have unlimited personal liability for partnership debts and for each other's actions. Simple set-up; minimal ongoing compliance.
- Private limited company (Pty Ltd)
- A separately incorporated legal entity. Shareholders have limited liability. Company pays corporate tax (25 percent for small businesses under $50m turnover). ASIC compliance (annual review, corporate records).
- Comparison
Liability: company protects personal assets; partnership exposes them.
Tax: partners pay personal income tax on their share (marginal rates up to 47 percent); company pays 25 percent base-rate on retained profit, with dividends attracting franking credits.
Capital raising: company can issue shares to outside investors; partnership cannot.
Compliance cost: company has ongoing ASIC fees ($310 annual review FY25) and corporate-records obligations; partnership has minimal ongoing legal compliance.
Continuity: company exists independently of owners (shares can be sold without disrupting the business); partnership ends automatically if a partner exits without agreement.
Recommendation. For two co-founders launching a Brisbane tech consultancy, Pty Ltd is the better choice. Limited-liability protection matters in B2B consulting (professional-indemnity risk). The corporate tax rate is favourable on retained profits that fund growth. The company structure also enables share-based staff incentives and outside investment later.
Markers reward (1) clear definition of both structures, (2) at least three points of comparison, (3) a justified recommendation linked to the scenario.
Practice4 marksExplain why an owner-operator might choose a trust structure rather than a sole trader structure for an established business.Show worked answer →
A 4-mark answer needs both structures, the contrast, and the reasons for choosing a trust.
- Sole trader
- One owner-operator. The owner and the business are the same legal entity. Owner has unlimited personal liability. Profit taxed at the owner's marginal rate (up to 47 percent for high-income earners).
- Trust
- A trustee (often a Pty Ltd company specially incorporated as a "trustee company") holds business assets on behalf of beneficiaries (typically family members in a discretionary or "family" trust). Income can be distributed flexibly to beneficiaries, who pay tax at their own marginal rates.
- Reasons to choose a trust over sole trader
Asset protection. The trustee holds the assets, not the underlying owner. If structured carefully, business creditors cannot access the owner's personal assets in the same way they could a sole trader's.
Tax flexibility. Trust income can be distributed to beneficiaries with lower marginal tax rates (a spouse not in the workforce, an adult child at university), reducing the total tax burden across the household.
Continuity. A trust can continue operating across changes in ownership; a sole trader business ends when the owner stops trading.
Estate planning. Trusts can be a vehicle for passing a business to the next generation.
Costs. Trusts are more expensive to establish (typically $1,500-$3,000 legal cost) and require ongoing trustee duties, annual trust accounts and ATO trust tax returns. They are typically inappropriate for very small businesses but become viable as profitability grows.
Markers reward (1) clear definition of both, (2) at least three reasons for choosing a trust, (3) acknowledgement of the higher cost of the trust structure.