Sole Trader vs Company vs Trust: How Your Business Structure Changes Your Tax Bill

Most people select their business structure in around five minutes, generally half way through the process of filing for an ABN. It’s not administration work; it’s more than that. The structure will determine how the profits are taxed, the level of personal liability and how easy it is to attract partners in the future.

Sole Trader  

When a person acts as a sole trader, there is no distinction between that individual and his or her business in law. It is run by using your name or a business name registered to yourself, along with your ABN. There’s no separate business tax return.

The catch is unlimited personal liability for business debts and legal claims. Progressive tax rates also mean a strong year can bring a painful bill, which is often when people start typing ‘tax consultant near me’ into Google.

Company  

A company is a separate legal entity. It owns the business, earns the income and pays its own tax, with you behind it as director and shareholder.

Companies pay a flat rate on taxable profit, with a lower rate for eligible base rate entities. Retaining profit within the business is one of the most widely used tax planning strategies for growing businesses. Any money taken out will typically be paid either through salary, which is deductible by the company, or as franked dividends.

Trust  

In a trust, a trustee holds assets or runs the business for beneficiaries, usually family members. For small businesses, it’s normally a discretionary or family trust.

If all the net income is distributed, the trust itself generally pays no tax. Beneficiaries pay tax at their own rates instead, and the trustee can direct income to adult family members on lower rates. That flexibility is why trusts feature in so many family tax planning strategies. It’s also why the ATO watches them closely. The distributions should go with the deed and the law, and the decision should be made not later than 30 June.

When to Review Your Structure  

If two or more of these ring true, ‘find a tax consultant near me’ probably belongs near the top of your to-do list. Just don’t rush the switch. Changing structure can trigger capital gains tax and stamp duty. Tax isn’t the only factor either. Risk, flexibility, succession and cost all count.