Business Structure and Tax Planning: Company, Trust or Partnership?

At DNA Advisory, we regularly speak with owners who have outgrown their original structure. Often the trigger is a tax bill that could have been lower, a dispute between owners, a director penalty notice from the ATO, or a plan to sell. In each case, the right time to review the structure was earlier. The good news is that restructuring is usually possible if it is planned properly and the tax costs are managed.

Why structure matters more than most owners think

Your business structure is not just a piece of paperwork. It determines:

• How profits are taxed — at personal marginal rates, the company tax rate, or distributed to beneficiaries.
• Whether personal assets are at risk if the business fails or is sued.
• How easily you can bring in investors, partners or family members.
• What happens when you sell, retire or pass the business on.
• Your ongoing compliance costs and reporting obligations to the ATO and ASIC.

The structure that suits a sole trader turning over $100,000 is rarely the one that suits a growing company with employees, equipment, property and multiple owners.

The four main structures compared

Sole trader

The simplest structure. You trade in your own name, report business income on your personal tax return, and pay tax at your marginal rate. Setup is cheap and compliance is light. The downside is unlimited personal liability — if the business incurs debt or is sued, your personal assets including your home may be exposed.

Partnership

Two or more people carry on a business together and share profits according to a partnership agreement. Like a sole trader, the partnership itself does not pay tax; each partner includes their share of profit in their personal return. The risk is that partners are generally jointly and severally liable for partnership debts, meaning one partner's mistake can expose the others. Partnerships work well for professional practices and family ventures where the owners know and trust each other deeply, but a robust partnership agreement is essential.

Company

A company is a separate legal entity. It can own assets, enter contracts, sue and be sued. For many trading businesses, the key advantage is limited liability — shareholders are generally only liable for the amount unpaid on their shares. In 2026, eligible Australian base rate entities continue to pay company tax at 25%, which can be significantly lower than the top personal marginal rate. Companies also offer continuity, easier transfer of ownership, and a clearer framework for employee share schemes and external investment.

The trade-offs include more compliance, the requirement to keep proper financial records under the Corporations Act 2001, and careful management of director duties. Directors can still be personally liable for unpaid PAYG withholding and superannuation through director penalty notices, so a company is not a complete shield against poor governance.

Trust

A trust is not a legal entity in the same way as a company; it is a relationship where a trustee holds property for the benefit of beneficiaries. The most common form for family businesses is a discretionary or family trust, where the trustee has discretion about how to distribute income each year. This flexibility is powerful for tax planning because income can be streamed to beneficiaries on lower marginal tax rates.

Unit trusts work more like companies, with fixed entitlements represented by units. They are often used for joint ventures or property holding where unrelated parties want a defined share of income and capital.

Trusts must comply with the trust deed, distribute income each financial year to avoid being taxed at the top marginal rate, and navigate rules such as Division 7A when distributing to company beneficiaries or related parties. Proper trust administration is not a DIY job.

Tax planning considerations for 2026

Australian tax law rewards structure that is planned in advance and penalises structure that is changed reactively. Key considerations include:

• Income splitting: Trusts and companies can allow income to be distributed among family members or retained at the company tax rate, provided it is done within ATO rules such as the personal services income rules and the tax on split income provisions.
• Capital gains tax: Small business CGT concessions remain a valuable exit tool. Trusts and companies can access these concessions, but the eligibility rules are strict and the structure must be in place before the sale.
• Division 7A: If a private company lends money to shareholders or their associates, Division 7A can treat the payment as an unfranked dividend unless it is structured as a complying loan or repaid.
• Franking credits: Companies can attach franking credits to dividends, which reduces double taxation when profits are eventually paid to shareholders.
• Loss utilisation: Companies can sometimes carry forward tax losses, but the same business test and continuity of ownership test must be satisfied.

Asset protection and succession

For many owners, asset protection is just as important as tax. If your business operates in a litigious industry, holds significant debt, or employs staff, a structure that separates personal assets from business risk is sensible. Common strategies include holding valuable assets such as property or intellectual property in a separate entity and leasing them to the trading entity.

Succession planning also benefits from the right structure. A company with clean shareholding and a shareholders agreement is generally easier to sell or pass on than a partnership. A family trust can facilitate intergenerational transfers, but only if the deed allows it.

When to consider a restructure

You should review your structure when any of the following apply:

• Turnover has grown past $1 million or profitability has jumped significantly.
• You are taking on employees, contractors or external investors.
• You are acquiring property, plant or equipment.
• You are planning to sell the business within the next five years.
• You have received an ATO director penalty notice or are facing creditor pressure.
• There has been a dispute, death or departure of an owner.

Practical action steps

1. Confirm your current structure, the date it was established, and the current ownership arrangements.
2. Review the last two years of tax returns and financial statements to understand your effective tax rate.
3. List your personal and business assets, and identify where the risk sits.
4. Document your three-to-five-year goals for growth, profit, ownership and exit.
5. Ask a qualified adviser to model the tax, asset protection and compliance impact of alternative structures.
6. If a restructure is recommended, plan the timing carefully to manage CGT, stamp duty and GST costs.

Disclaimer: This article is general information only and does not constitute legal, financial, taxation or accounting advice. It is not tailored to your specific circumstances. Business structure and tax law are complex, and the right approach depends on your individual situation. Before acting on any information in this article, you should obtain professional advice relevant to your circumstances. Liability limited by a scheme approved under Professional Standards Legislation.