Sole Trader vs Company vs Trust: Choosing a Business Structure (2025-26)

General information only. This is not tax or financial advice. Consult a registered tax agent or solicitor before changing your business structure.

Picking the right structure is one of the highest-leverage tax decisions a business owner makes. The choice sets your tax rate, your ability to split income with family, your exposure to personal liability, and the paperwork you’ll carry every year. With EOFY approaching, it’s worth reviewing whether the structure you set up when profits were $50k still makes sense now they’re $200k.

The three main structures

Sole trader

You and the business are the same legal entity. All business profit is added to your personal income and taxed at marginal rates up to 45% + 2% Medicare levy. Setup cost is low, ongoing compliance is a single tax return, and you use your personal TFN alongside an ABN.

• Pros: cheap, simple, losses offset other personal income
• Cons: unlimited personal liability, no income splitting, top marginal rate applies quickly

Company (Pty Ltd)

A separate legal entity that pays a flat 25% corporate rate if it qualifies as a base rate entity (aggregated turnover under $50m and no more than 80% passive income), or 30% otherwise. Profits can be retained or distributed as franked dividends.

• Pros: flat 25% rate, limited liability, retained earnings stay taxed at the company rate, franking credits flow to shareholders
• Cons: setup $500-$1,500, annual ASIC fee ($342 for 2025-26), no CGT 50% discount on company-held assets — a shrinking disadvantage, because the discount is abolished for individuals, trusts and partnerships from 1 July 2027 as well — and Division 7A rules on loans to shareholders

Discretionary (family) trust

A trustee (often a company) holds assets and distributes income each year to beneficiaries at the trustee’s discretion. Distributions are taxed at the beneficiary’s marginal rate.

• Pros: income splitting across adult family members, capital gains flow through to whichever beneficiary is presently entitled and are taxed in their hands, asset protection. Until 1 July 2027 that flow-through carried the 50% CGT discount with it; afterwards it carries cost base indexation and the beneficiary’s own rate, subject to a 30% floor (see the decision framework below).
• Cons: setup $1,500-$3,000+, annual trust tax return, must fully distribute income each year or trustee is taxed at 47%, distributions to minors taxed punitively, trust distribution resolutions must be documented by 30 June

Tax comparison at three profit levels

Assume a single operator with no other income, no super contributions, and ignoring Medicare levy reductions. All figures use 2025-26 brackets and the stage-3 tax cuts already in place.

$80,000 net profit

At this level, the big win comes from income splitting, not the structure label.

$150,000 net profit

Splitting two ways saves about $10,300 vs sole trader here.

$250,000 net profit

Above about $180k, the 25% company rate or a trust with multiple beneficiaries materially outperforms sole trader.

Decision framework

A few practical filters before running numbers:

1. Liability exposure. If you’re signing large contracts, employing staff, or holding inventory, the limited liability of a company (or a trust with a corporate trustee) is worth the setup cost on its own.
2. Will you retain earnings? If profits need to stay in the business to fund growth, a company at 25% beats any personal-rate structure.
3. Family members with low income? A trust unlocks splitting. Without adult beneficiaries earning under ~$45k, the trust advantage evaporates.
4. Asset growth? Assets likely to produce large capital gains still sit better in a trust than in a company, but the margin is much thinner than the old rule of thumb assumed, and the reason has changed. Capital gains keep flowing through a trust to the presently-entitled beneficiary — that structural pass-through is untouched. What stops flowing through is the 50% CGT discount itself: from 1 July 2027 it is abolished for individuals, trusts and partnerships and replaced with cost base indexation on assets held 12 months or more, plus a 30% minimum tax on the part of the gain accruing after that date. A company still has no discount and is outside that replacement — it pays its flat 25% or 30% on the whole nominal gain. So the trust advantage survives, but it is now an inflation advantage (indexation strips the CPI component out of the beneficiary’s gain) with a floor under it, rather than a fixed half-rate. On a low-inflation holding period against a base rate entity, it can be close to nothing. See what the final law says, cost base indexation explained and the family-trust deep dive before treating a trust as the automatic answer for growth assets.
5. Exit plan? The small business CGT concessions can wipe out the gain on sale for qualifying sole traders and trusts; companies access them less cleanly.

Model your own numbers in the business structure comparison calculator before committing. Restructuring mid-year can trigger CGT, stamp duty, and GST — the small business restructure rollover under subdivision 328-G covers some moves but not all.

EOFY actions this week

• Trusts: draft distribution resolutions now so they’re signed by 30 June 2026 — undocumented distributions default to trustee assessment at 47%
• Companies: check Division 7A loan balances and minimum repayments before 30 June
• Sole traders: decide whether to bring forward deductible expenses or defer invoices into July where cash flow allows
• All structures: confirm PAYG instalment variations if profit for 2025-26 is materially below the ATO’s estimate

Key takeaways

1. Below ~$100k profit with no family splitting, sole trader usually wins on simplicity and cost.
2. Companies shine when earnings are retained or reinvested at the flat 25% rate.
3. Trusts shine when you have adult family members on lower marginal rates who can receive distributions.
4. The right structure depends as much on liability, exit strategy, and family situation as it does on the raw tax number.

Cross-check the personal-tax side of any distribution in the income tax calculator, the corporate side in the company tax calculator, and trust distributions in the trust distribution tax calculator.