How to Choose a Business Structure

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Davide Di Prossimo
Last updated:
May 2023

Decide between the different business structures available in Australia: Sole Trader, Pty Ltd or Partnership.

You’ve gone through the previous stages of this course and you’ve done a lot of brainstorming about your business; it’s now time to start making things official.

At this point, to formalise your new business, you’ll need to decide if you want to be a Sole Trader, a Pty Ltd, or a Partnership.

These are the three only structures that the Australian government uses to classify businesses. 

It’s not always easy to understand which one of these structures is best for you, and you should definitely consider speaking to a tax accountant.

However, let's see how they differ from each other.

Difference between Sole Trader, Pty Ltd and Partnership

  • Sole Trader: As a sole trader, you, as an individual, will operate as the same entity as your business. In the eyes of the Australian Tax Office (ATO), you and your company are one and the same.
  • Pty Ltd: The Pty Ltd structure means that you, as an individual, will operate separately from your business. In the eyes of the ATO, you and your company are not one and the same.
  • Partnership: The Partnership is a structure for any business that is owned and operated by more than one person.

You can read more about the difference between a sole trader and a company on the Australian business website. 

There’s really no need to look into the Partnership structure now if you’re starting small and nimble. 

The pros and cons of the Sole Trader designation

Let’s first take a look at the pros of the Sole Trader designation:

  • Simplest setup: This is the simplest business structure to set up and will require you very little time and capital to start.
  • Easiest tax filing: You will only need to file taxes once, rather than filing both personal taxes and taxes on behalf of the company like in the case of the Pty Ltd.
  • $0 to low tax rate (at the beginning): You will not be required to pay any taxes up to $18,200 / year, and then pay a low tax rate in the following bracket. If you’re starting out a side hustle, this is the perfect spot to test out things and become profitable before starting to scale.
  • No super obligations: You are not required to make super contributions for yourself or any employee; if you decide to employ anyone under your business as a sole trader.

Let’s now take a look at the cons of the Sole Trader designation:

  • Legal liability: Should your business run into financial or legal difficulties, you, with your personal assets, will be at risk as well.
  • Higher taxes (as you scale): As you scale your business, you’ll pay a higher personal income tax, which can go up to 45%. At some point, it’s better to switch to a Pty Ltd structure, which has a full tax rate of 30%.
  • No super requirements: You are not required to pay super contributions but that also means that you have to be very disciplined and set aside funds to make those contributions yourself.

The pros and cons of the Pty Ltd designation

Let’s first take a look at the pros of the Pty Ltd designation:

  • Personal asset protection: With Pty Ltd, your personal assets will not be in danger if your business runs into legal or financial trouble.
  • Lower taxes: Pty Ltds pay a tax rate of 30%.
  • Superannuation: Pty Ltds are required to make regular super contributions; even if you are the only employee in the company.

Let’s now take a look at the cons of the Pty Ltd designation:

  • Increased complexity: Pty Ltds have a more complicated setup process than a sole trader. You’ll need to have a tax account to do that on your behalf.
  • Multiple tax filing: Each year, you will need to file taxes for both yourself and your Pty Ltd.
  • Super requirements: With a Pty Ltd, you are required to make super contributions for yourself and your employees, if any. If you’re just starting out your side hustle, this is a big commitment that you want to avoid if possible.

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