Sole Trader vs Company vs Trust: Choosing a Business Structure (2025-26)
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Primary tax-year context: 2025-26
This article is general information only. We maintain pages using primary-source checks and date-based reviews. See editorial policy.
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 ($310 standard), no CGT 50% discount on company-held assets, 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, CGT 50% discount flows through, asset protection
- 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
| Structure | Tax | After-tax | Notes |
|---|---|---|---|
| Sole trader | $16,288 | $63,712 | 2025-26 personal tax + 2% Medicare |
| Company (retained) | $20,000 | $60,000 in company | Flat 25% |
| Company + fully franked dividend | $16,288 | $63,712 | Personal tax offsets franking credit — neutral result |
| Trust to single adult beneficiary | $16,288 | $63,712 | Same as sole trader |
| Trust split $40k each to two adults | $7,576 | $72,424 | Each beneficiary in lower brackets |
At this level, the big win comes from income splitting, not the structure label.
$150,000 net profit
| Structure | Tax | After-tax |
|---|---|---|
| Sole trader | $40,288 | $109,712 |
| Company (retained) | $37,500 | $112,500 in company |
| Trust split $75k/$75k to two adults | $29,576 | $120,424 |
| Trust split $90k/$60k | $30,664 | $119,336 |
Splitting two ways saves about $10,700 vs sole trader here.
$250,000 net profit
| Structure | Tax | After-tax |
|---|---|---|
| Sole trader | $84,788 | $165,212 |
| Company (retained, used for reinvestment) | $62,500 | $187,500 in company |
| Trust split $125k/$125k to two adults | $61,576 | $188,424 |
| Trust split $100k/$100k/$50k to three adults | $49,052 | $200,948 |
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:
- 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.
- Will you retain earnings? If profits need to stay in the business to fund growth, a company at 25% beats any personal-rate structure.
- Family members with low income? A trust unlocks splitting. Without adult beneficiaries earning under ~$45k, the trust advantage evaporates.
- Asset growth? Assets likely to produce large capital gains sit better in a trust (50% CGT discount flows through) than a company (no discount).
- 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
- Below ~$100k profit with no family splitting, sole trader usually wins on simplicity and cost.
- Companies shine when earnings are retained or reinvested at the flat 25% rate.
- Trusts shine when you have adult family members on lower marginal rates who can receive distributions.
- 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 and the corporate side in the company tax calculator.