Your business structure decides how much tax you pay, how exposed your home is if things go wrong, and how easily you can bring someone else in later. Get the Sole Trader vs Company vs Trust decision right and you keep more of what you earn. Get it wrong and you either overpay for years or pay to unwind it later.
There is no universal winner. Your profit, your risk, and who else in your household earns an income all move the answer. This guide walks through how each structure is taxed in 2026-27, what it suits, and the point where switching usually starts to pay for itself.
Which Business Structure Pays the Least Tax in Australia?
No single structure is cheapest for everyone. A sole trader pays personal marginal rates from 15% up to 45%. A company pays a flat 25% if it qualifies as a base rate entity, or 30% if it does not. A trust pays no tax itself and passes income to beneficiaries, who pay at their own rates. Profit level and family income decide the winner.
That is the honest version. The rest of this guide shows you how to work out which one applies to you.
How Is a Sole Trader Taxed?
A sole trader and the business are the same legal person. You trade under your own ABN, and every dollar of business profit lands on your personal tax return.
The Australian Taxation Office applies the standard individual rates. For 2026-27 those are: nothing on the first $18,200, then 15% up to $45,000, 30% up to $135,000, 37% up to $190,000, and 45% above that, plus the 2% Medicare levy. Profit rises, your rate rises with it.
Note the 15%. That rate dropped from 16% on 1 July 2026, and it falls again to 14% on 1 July 2027. Small, but it shifts the sums slightly in the sole trader’s favour at the lower end.
Pros
- Cheap and quick to set up. An ABN costs nothing.
- Light paperwork and low ongoing accounting fees.
- You keep total control, and business losses can offset other personal income.
Cons
- No legal separation. A business debt or a claim reaches your personal assets, including your home.
- Your rate climbs fast once profit passes $135,000.
- Bringing in a partner or investor means restructuring, not just signing a document.
Who it suits: freelancers, contractors, tradespeople and side businesses, usually where profit sits under about $100,000 and the work carries low legal risk.
In our tax work across Western Sydney, most owners stay sole traders longer than they should. The trigger to review is not the ABN. It is the profit line.
Talk to our taxation team before your next BAS lands.
How Is a Company Taxed?
A company is its own legal entity. It owns assets, signs contracts, and carries its own debts, separate from you. You register it with ASIC, which gives it an ACN and brings ongoing reporting duties.
Companies pay a flat rate rather than a sliding one. The ATO sets the base rate entity rate at 25% and the general company rate at 30%. To get 25%, your company needs aggregated turnover under $50 million, and no more than 80% of its income can be passive income such as rent, interest, dividends or royalties. Most trading small businesses clear both tests comfortably.
Here is the part most articles skip. Company tax is not the end of the story. When the company pays profit out to you as a dividend, the tax it already paid travels with it as a franking credit, and you top up the difference at your own marginal rate. So 25% is really a deferral, not a discount, on money you take out. The saving turns real when you leave profit inside the company to reinvest.
Pros
- Flat 25% rate that beats personal rates once profit is high.
- Personal assets are generally protected from company debts.
- Far easier to sell, bring in shareholders, or reinvest profit at a lower tax cost.
Cons
- Costs more to set up and run, with ASIC fees and annual compliance.
- Money you take out is not simply “yours”, and Division 7A loan rules bite if you get it wrong.
- Losses stay trapped in the company. You cannot use them against your personal income.
Who it suits: growing businesses, anyone carrying real liability risk, and owners who reinvest profit instead of drawing every dollar out.
Our management accounting services help company owners work out what to draw and what to leave in.
How Is a Trust Taxed?
A trust holds business assets and income for beneficiaries, usually family members. A trustee (a person or a company) runs it under the rules set out in a trust deed. Most family businesses use a discretionary trust, which lets the trustee decide each year who receives what.
The trust itself normally pays no tax. It distributes profit to beneficiaries, and they pay tax at their own rates. That is what makes income splitting possible. A profit of $180,000 split across two adults on lower brackets attracts far less tax than the same $180,000 landing on one person at 37%.
Two catches matter. Undistributed trust income gets taxed at 45%, the top rate, so distributions cannot slide. And distributions to children under 18 face punitive rates, so the strategy only works with genuine adult beneficiaries. The ATO also watches trust distributions closely under section 100A, which means a distribution has to be real, not just a number on a resolution.
Pros
- Flexible income splitting across adult family members on different tax rates.
- Useful asset protection, especially with a corporate trustee.
- Access to the 50% CGT discount when you sell business assets. Companies do not get it.
Cons
- More expensive to set up and administer. You need a deed and yearly resolutions.
- Distribute the income each year or wear a 45% tax bill on what stays behind.
- Harder to bring in outside investors, and lenders often ask more questions.
Who it suits: family businesses with a spouse or adult children on lower incomes, and owners holding appreciating business assets.
Trusts rarely sit alone. Our cash flow management and SMSF services often work alongside one as part of a wider family plan.
Quick Comparison Table
| Feature | Sole Trader | Company | Trust |
|---|---|---|---|
| Tax Rate (2026–27) | Personal rates, 15% to 45% + Medicare levy | 25% base rate entity, 30% general | Nil at trust level; beneficiaries pay their own rate |
| Asset Protection | None | Strong | Good, best with a corporate trustee |
| Setup Cost | Very low | Medium | Medium to high |
| Ongoing Administration | Light | Heavy | Moderate to heavy |
| Income Splitting | No | Limited, via dividends to shareholders | Yes, the main advantage |
| 50% CGT Discount | Yes | No | Yes |
| Best For | Freelancers, low-risk starters | Growing, higher-risk, reinvesting businesses | Family businesses with income to split |
So Which Structure Actually Saves More Tax?
Profit and family income decide it. Below roughly $100,000 profit, a sole trader usually wins once you count setup and compliance costs. Above about $135,000, where the 37% marginal rate starts, a company’s flat 25% becomes worth the paperwork. A trust wins when you can split income with a spouse or adult child on a lower bracket.
Four questions get you most of the way there:
- How much profit do you actually make? Higher profit pushes you toward a company’s flat rate.
- Who else in your household earns, and how much? A spouse on a low income makes a trust powerful.
- How much risk does your work carry? Companies and trusts put a wall between the business and your home. Sole trading does not.
- What is the exit plan? Selling or bringing in investors is far cleaner with a company.
Plenty of owners start as sole traders, then move to a company or trust once profit and risk build. That is a normal path, not a mistake. But every change carries capital gains and stamp duty consequences, so plan the move a year out rather than scrambling in June.
Getting the Advice Right
The ATO names business structure as one of the first decisions any new business has to make, because it drives tax, asset protection and reporting for as long as you trade. Restructuring later is possible. It is just rarely free.
An hour of advice before you register usually costs less than a year of paying the wrong rate.
Frequently Asked Questions
Is a company always better than a sole trader for tax?
No. A company pays a flat 25% or 30%, but a sole trader pays nothing on the first $18,200 and only 15% up to $45,000. Below roughly $100,000 profit, a sole trader usually pays less tax overall once you add company setup and compliance costs.
At what profit should I switch from sole trader to a company?
Most owners start seriously considering a company once profit passes about $135,000, where the 37% personal marginal rate begins. The exact point depends on how much profit you draw out versus reinvest, since money you take as dividends still gets taxed at your personal rate.
Can a trust really cut my tax bill?
Yes, where you have adult family members on lower incomes. A discretionary trust lets the trustee split profit across beneficiaries so less of it hits the top brackets. Distributions to children under 18 attract penalty rates, so it only works with genuine adult beneficiaries.
What happens if a trust does not distribute its income?
Any income the trust keeps gets taxed at 45%, the top marginal rate. That is why trustees must resolve distributions before 30 June each year. Miss the deadline and you hand the ATO a large avoidable bill.
Does a company protect my personal assets?
Generally yes. A company is a separate legal entity, so its debts are its own. But directors can still be personally liable through director penalty notices, personal guarantees on loans, and insolvent trading. Protection is strong, not absolute.
Can I change my business structure later?
Yes, and many owners do. Moving assets between structures can trigger capital gains tax and stamp duty, though small business CGT rollovers may apply. Plan the change with your accountant well before the end of the financial year.
Talk to SMG Group About Your Structure
Choosing between a sole trader, company and trust is not a decision to make from a blog post, including this one. SMG is a CPA Practice with offices at Rooty Hill, Wareemba and Liverpool, and we have spent years advising business owners across Blacktown, Mount Druitt, Penrith and Greater Sydney.
Our team will look at your actual numbers, your risk and your family situation, then tell you which structure keeps the most money in your pocket over the next five years.
Contact our team or call 02 9832 2078 to talk it through.