Family Trust vs Company vs Sole Trader: Which Structure Actually Wins?

 Family trust, company, or sole trader — which business structure suits you best? Compare the real pros, cons, and tax implications for Australian business owners.

Family Trust vs Company vs Sole Trader: Which Structure Actually Wins?

Picking a business structure in Australia feels a bit like choosing a coffee order at a Melbourne café with a 12-page menu — there are plenty of options, they all look appealing, and making the wrong call is going to cost you. The three most common structures Australian business owners land on are sole trader, company, and family trust. Each one plays differently when it comes to tax, liability, and long-term wealth building. Here's how they actually stack up.

Sole Trader: Simple, But Limited

The sole trader structure is the easiest to set up and the cheapest to run. There's minimal paperwork, no separate tax return, and you're in full control. It's the default starting point for most freelancers, tradies, and small operators just getting off the ground.

The catch? You and your business are legally the same entity. That means your personal assets — your car, your home, your savings — are on the line if something goes wrong. There's also no flexibility in how income is taxed. Everything you earn flows straight to your personal tax return and gets taxed at your marginal rate, which climbs steeply as income grows.

For someone just starting out with modest turnover, sole trader works fine. But once revenue starts building, the structure quickly becomes expensive and exposed.

Company: Flat Tax Rate, But Less Flexibility

A company is a separate legal entity, which immediately gives you a layer of liability protection that a sole trader doesn't have. It also comes with a flat company tax rate — currently 25% for base rate entities with turnover under $50 million — which can be attractive once your business is turning solid profit.

However, companies have their own set of limitations. Profits distributed to shareholders as dividends are subject to personal income tax on top of the company tax already paid (though franking credits help offset this). Companies also miss out on the 50% CGT discount available to individuals and trusts when selling assets held for more than 12 months. And the administrative load — ASIC fees, company tax returns, director obligations — adds up.

A company suits businesses that plan to retain profits and reinvest, or those seeking a clean corporate structure for external investors. It's less ideal for owners who want to draw income flexibly or pass wealth to family members in a tax-effective way.

Family Trust: Flexible, Tax-Smart, and Protective

A family trust (or discretionary trust) is where things get strategically interesting. Unlike a company or sole trader, a family trust lets the trustee decide each year how income is distributed among beneficiaries — typically family members. This means you can direct profits to whoever sits in the lowest tax bracket that year, which is called income splitting, and it's completely legitimate under Australian tax law.

The result? Instead of one person paying a higher marginal rate on the full amount, the income is spread across multiple people each taxed at lower rates. For a business generating strong revenue, that difference can be substantial — we're talking thousands of dollars annually.

Family trusts also offer solid asset protection. Because assets are legally held by the trust rather than you personally, they're generally shielded from personal creditors and legal claims. And unlike companies, trusts can access the 50% CGT discount on assets held for more than 12 months — a significant advantage for families holding investment properties or shares alongside their business.

If you're weighing up your options and want to understand how to create a family trust in Australia, it's worth getting across the setup requirements before making any decisions.

So Which One Is Right for You?

There's no universal answer — the right structure depends on your income level, family situation, risk exposure, and long-term goals. But here's a rough guide:

  • Sole trader suits those just starting out with lower income and minimal asset exposure
  • Company works well for businesses retaining profits, seeking outside investment, or operating at scale
  • Family trust is ideal for business owners with a family to distribute income to, those building long-term wealth, and anyone wanting flexibility alongside asset protection

It's also worth noting these structures aren't mutually exclusive. Many business owners use a company as trustee of a family trust — combining the liability protection of a company with the income flexibility of a trust. It sounds complex, but with the right advice it's a widely used and effective setup.

Don't Set and Forget Your Structure

Business structures aren't a once-and-done decision. As your income grows, your family situation changes, or your business evolves, your structure should evolve with it. What worked as a sole trader at $80k revenue might be costing you significantly at $400k.

At Future Advisory, we help Melbourne business owners review their structures and make sure they're not leaving money on the table. Book a call with our team and we'll help you figure out which setup actually makes sense for where you're headed.

Location: Suite 26/68 Victor Cres, Narre Warren VIC 3805, Australia

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