Sole Trader vs Company vs Trust: Which Business Structure Saves You the Most Tax?

Choosing the Right Structure Could Save You Thousands

One of the most consequential decisions you’ll make as a business owner is choosing your business structure. It affects how much tax you pay, how you protect your personal assets, and how easy it is to bring in partners or investors down the track. Yet many Queensland business owners set up as a sole trader on day one and never revisit that decision — even as their income grows well beyond the point where a different structure would be more tax-effective.

As a CPA and Registered Tax Agent advising businesses across North Lakes, Mango Hill, and Griffin, I regularly help clients restructure to save tax and manage risk. Here’s what you need to know about each option.

Option 1: Sole Trader

How It Works

As a sole trader, you and your business are legally the same entity. All business income is included in your personal tax return, and you pay tax at individual marginal rates. There’s no separation between business and personal assets.

Tax Implications

For the 2025-26 financial year, individual tax rates in Australia (after Stage 3 tax cuts) are:

• $0 – $18,200: Nil
• $18,201 – $45,000: 16%
• $45,001 – $135,000: 30%
• $135,001 – $190,000: 37%
• $190,001+: 45%

Plus the Medicare levy of 2%. If your business profits exceed $135,000, you’re paying 30 cents or more on every additional dollar. That’s where alternative structures start to make sense.

Pros

• Simplest and cheapest to set up (just an ABN)
• Minimal ongoing compliance requirements
• Full control over all business decisions
• Losses offset against other personal income

Cons

• Unlimited personal liability
• Higher tax rates as income grows
• No income splitting opportunities
• Less attractive to lenders and clients for larger contracts

Best For

New businesses with income under $80,000-$100,000, freelancers, and those testing a business idea before committing to a more complex structure.

Option 2: Company (Pty Ltd)

How It Works

A company is a separate legal entity. It has its own TFN, ABN, and pays tax at the company rate. Profits after tax can be distributed to shareholders as dividends (with franking credits) or retained in the company.

Tax Implications

The base rate entity company tax rate is 25% for companies with aggregated turnover under $50 million, provided no more than 80% of assessable income is passive. For comparison, a sole trader earning $150,000 would pay a marginal rate of 37% on income above $135,000 — so the company rate offers a clear saving at higher income levels.

However, when you extract money from the company as salary or dividends, personal tax applies. The real benefit is in timing: you can choose when to take dividends, potentially spreading income across lower-tax years. You can also split dividend income with a spouse who is a shareholder.

Pros

• Flat 25% tax rate (base rate entities)
• Limited liability — personal assets are generally protected
• Tax planning flexibility through salary/dividend mix
• More professional image for larger contracts
• Can retain profits for business growth at 25% rate

Cons

• Higher setup costs ($800-$1,500) and annual compliance (ASIC fees, tax return, financial statements)
• Company losses are trapped — they can’t offset your personal income
• Stricter regulatory obligations (director duties, ASIC compliance)
• Extracting money requires careful planning to avoid Division 7A issues

Real-World Example

Consider a Mango Hill healthcare professional moving into private practice, earning $180,000. As a sole trader, they’d pay approximately $51,667 in tax (plus Medicare levy). Operating through a company, they could pay themselves a salary of $90,000 (tax: ~$19,822) and retain $90,000 in the company (tax: $22,500), for total tax of $42,322 — a saving of over $9,000, before considering any further planning strategies.

Option 3: Trust (Discretionary/Family Trust)

How It Works

A discretionary trust (commonly called a family trust) holds business assets and income on behalf of beneficiaries. The trustee decides how to distribute income each year, allowing flexible allocation among family members.

Tax Implications

A trust itself doesn’t pay tax on distributed income — instead, each beneficiary includes their share in their personal tax return. The power of a trust lies in distributing income to beneficiaries in lower tax brackets. For example, distributing $18,200 to an adult family member with no other income results in zero tax on that amount.

Undistributed trust income is taxed at the top marginal rate (45% plus Medicare), so trusts must distribute all income annually to be effective.

Pros

• Flexible income distribution among beneficiaries
• Asset protection (trust assets are not personally owned)
• Can distribute to a company beneficiary (bucket company) at 25%
• Capital gains tax discount flows through to individual beneficiaries
• Effective for families with a non-working or lower-earning spouse

Cons

• Complex and expensive to establish ($1,500-$3,000 for trust deed and setup)
• Annual compliance costs (trust tax return, financial statements)
• Trust losses cannot be distributed — they’re trapped until the trust has income
• ATO scrutiny on income splitting arrangements (Section 100A)
• Not suitable for very small or start-up businesses

Real-World Example

A Griffin-based property investor with rental income of $80,000 and a spouse earning $40,000 could distribute $60,000 to themselves and $20,000 to their spouse through a family trust. Compared to declaring all $80,000 personally, the tax saving through income splitting could exceed $5,000 per year — completely legally.

Which Structure Is Right for You?

There’s no one-size-fits-all answer. The right structure depends on your income level, risk profile, family situation, and growth plans. Here’s a quick guide:

Situation	Recommended Structure
Just starting out, income under $100K	Sole Trader
Growing business, income $100K-$200K+	Company
Family business, income splitting possible	Family Trust (with corporate trustee)
High-risk industry (construction, trades)	Company (liability protection)
Investment portfolio or rental properties	Trust or Trust + Company

Get Expert Advice Before You Decide

Restructuring your business has both tax and legal implications. It’s not a DIY decision. At Tax Serve, we provide comprehensive business advisory services to help you choose and implement the right structure. Our business accounting packages include ongoing strategic advice — because the right structure today might need to evolve as your business grows.

Book a consultation to discuss your options with a qualified CPA who understands Queensland businesses.