The best business structure depends on your plans for growth, your risk and your tax position. A sole trader structure is simple and cheap, but you're personally liable for everything the business owes. A company costs more to run, but it's a separate legal entity, so it can protect your personal assets and makes it easier to bring in partners, investors or staff as shareholders. Decide with your accountant and your lawyer, ideally before you start trading.
Having the right business structure matters for how your business operates, how it grows, how well your personal assets are protected, and how much tax you pay. (I don't talk tax, so that one's for your accountant.)
Many business owners don't realise they have a choice, or that the choice has consequences. I saw plenty of owners caught out during the COVID-19 period, when eligibility for government support depended on their structure. Here's how the options compare, and how to work out which is right for you.
What business structures are there in Australia?
There are four main structures:
Sole trader: you run the business in your own name, with your own ABN. You and the business are legally the same.
Partnership: two or more people (or entities) run a business together and share its income. Each partner is generally liable for the partnership's debts, including those another partner incurs.
Company: a separate legal entity, with "Pty Ltd" at the end of its name. You're a director, and usually a shareholder, and the company runs the business.
Trust: a trustee, often a company, holds and runs the business for the benefit of beneficiaries. Trusts are usually chosen for tax and asset protection reasons, and they need careful advice to set up.
For most small and service-based businesses, the most common structures I see are sole trader and company.
What's the difference between a sole trader and a company?
As a sole trader:
You and the business are the same legal person. The revenue is yours, and so are the expenses and the debts.
You're personally liable to your clients, suppliers and anyone else the business deals with. If something goes wrong, your personal assets, like your home and savings, are exposed.
You personally hold all the business's legal obligations, from licences and insurance to tax and superannuation.
It's simple and inexpensive to set up and run.
As a company:
The company is a separate legal entity. It receives the revenue, pays the expenses, enters into contracts and carries the liabilities.
Your personal assets are generally protected, because the company, not you, owes its debts (with some exceptions, see below).
As a director, you have duties under the Corporations Act 2001 (Cth), including acting in the company's best interests, and every director needs a Director ID.
It costs more to set up and run, with registration with ASIC, annual reviews and separate accounts.
It's more flexible as you grow: the company can issue shares to bring in a partner or investor, or to reward key staff.
What does limited liability actually protect?
Limited liability means a company's shareholders are generally only at risk for what they've invested in the company. If a client sues the business, or the business can't pay its debts, it's the company that's liable, and your personal assets are generally protected.
That matters for any service business, but especially for creative professionals like designers, photographers, copywriters and marketers. Disagreements about whether creative work met the brief, and claims about intellectual property, are common sources of disputes. With a company, it's the company that signs the client contract, delivers the work and licenses the IP.
But limited liability has limits. You can still be personally liable:
If you give a personal guarantee. Landlords, lenders and some suppliers ask directors to guarantee the company's obligations. A commercial lease is the most common example.
If you breach your duties as a director, for example by letting the company trade while it's insolvent.
For some unpaid tax and super. The ATO can issue directors with a director penalty notice for the company's unpaid PAYG withholding, GST and superannuation guarantee.
So a company is one part of protecting yourself, not all of it.
How do I choose the right business structure?
Start with the end in mind, as much as you can. Before you speak to your accountant and your lawyer, think about these questions.
Your long-term vision:
Is this a side hustle, or a business you want to build to support your lifestyle long term?
Do you intend to build the business and then sell it?
Do you want to bring in partners or investors?
Would you like to build a team, and perhaps offer key people shares?
What revenue are you aiming for?
Your risk profile:
Is your business in a higher-risk industry, or does it deal with high-value projects?
How important is it that your personal and family assets are protected?
Your structure is one of the three parts of your risk strategy, alongside insurance and your legal documents. The right structure won't help much without the other two.
Can I start as a sole trader and change to a company later?
Yes, and many people do. "I'll start as a sole trader and see how it goes" is fine, as long as you go in with your eyes open and understand the risk you're carrying in the meantime.
Just know that changing later takes work. The company will need its own ABN, and you'll need to move across your business name, bank accounts, insurance, licences, client contracts and supplier arrangements. There may also be tax consequences, so plan the change with your accountant. The earlier you get it right, the less there is to move.
Getting your structure right is vital for the long-term, sustainable success of your business. Get it wrong, and you can limit your growth and expose your personal assets unnecessarily. If you'd like to talk through your options, book an introduction call.
This article provides general information only and does not constitute legal or tax advice. Your obligations depend on your specific circumstances.
Frequently asked questions
Should I be a sole trader or a company?
It depends on your plans, your risk and your tax position. A sole trader structure is simple and cheap but leaves you personally liable for the business's debts. A company costs more to run but generally protects your personal assets and makes it easier to grow. Decide with your accountant and your lawyer.
Does a company protect my personal assets?
Generally, yes, because the company is a separate legal entity that owns its own debts. But you can still be personally liable if you give a personal guarantee, breach your duties as a director, or the company doesn't pay certain tax and superannuation.
What is limited liability?
Limited liability means a company's shareholders are generally only at risk for what they've invested in the company. The company, not its owners, is responsible for its own debts and liabilities.
Can I change from a sole trader to a company later?
Yes. The company will need its own ABN, and you'll need to move across your business name, bank accounts, insurance, licences and contracts. There may be tax consequences, so plan the change with your accountant.
What does a company director need to know?
Directors have duties under the Corporations Act 2001 (Cth), including acting in good faith and in the company's best interests and not letting the company trade while insolvent. Every director also needs a Director ID.
