Best Business Structure for a Startup in Australia

Why structure matters for startup founders

A startup structure should support the commercial plan for the business, not only the cheapest registration option on day one. Founders often start by asking whether they should be a sole trader, company or trust. The better starting point is to identify what the business will need to do over the next 12 to 36 months.

The structure should be tested against likely startup events: bringing in co-founders, issuing shares, raising angel investment, signing customer contracts, hiring employees, creating an ESOP, protecting intellectual property, adding a board or adviser, licensing software, expanding overseas, or selling the business.

The main business structures are sole trader, partnership, company and trust. Each has different tax, legal and reporting consequences. For startups, the main legal distinction is that a company is a separate legal entity with shares, directors and statutory obligations. A sole trader is the individual. A partnership is a relationship between two or more persons carrying on business together. A trust is a relationship under which a trustee operates or holds assets for beneficiaries.

Those differences become practical very quickly. If a software developer creates code before the company exists, the code may need to be assigned to the company. If two friends build a product without a company or founder agreement, they may later disagree about who owns the product, the brand, the customer list and the first revenue. If a trust operates the business, an investor may need to review the trust deed, trustee powers, beneficiary classes, unit terms and distribution rules before deciding whether the investment can proceed.

Company, trust, sole trader and partnership compared

Each Australian business structure can be useful in the right setting. The issue for founders is whether the structure supports a startup’s intended ownership, risk and funding model.

Why startups usually use companies

A company gives founders a legal and commercial framework that matches how startups usually grow. ASIC registers companies on the Australian companies register, and a proprietary company limited by shares can issue shares to founders, investors and other shareholders in a way that is widely understood by lawyers, accountants, investors and acquirers.

For an early stage startup, the company structure usually helps with five practical issues.

1. Founder shares. Each founder can hold shares that reflect the agreed ownership split, subject to vesting, transfer restrictions and leaver rules in a shareholders agreement or founder agreement.
2. Investor readiness. Angel investors and venture capital investors usually expect to invest in shares, preference shares, convertible notes or SAFE-style instruments issued by a company, not in a discretionary trust distribution arrangement.
3. Cap table management. A company can maintain a share register, record share issues and transfers, and create a clearer path for future investment rounds.
4. Employee incentives. A company is usually better suited to employee share schemes or option plans, subject to Corporations Act and tax requirements.
5. Exit planning. A buyer can acquire shares or business assets from a company using familiar transaction documents and due diligence processes.

Company directors also have duties under the Corporations Act 2001 (Cth), including duties relating to care and diligence, good faith, use of position and use of information. Those duties should be treated as part of the startup’s governance system, especially once external investors, creditors, employees or customers are involved.

In practice, many technology startups use a proprietary company limited by shares at the trading level, then consider whether founder shareholdings, intellectual property or investment assets should sit in separate personal, trust or holding structures. That analysis should be done before incorporation where possible, because later transfers can have tax, duty, consent and documentation consequences.

Should a startup be a company or trust?

A company is usually better for an investor-ready startup. A trust may be useful for tax planning, family wealth, asset holding or particular joint venture arrangements, but it can be a difficult primary trading structure for a startup that wants external capital.

The practical difficulty is that a discretionary trust does not have shareholders in the ordinary company sense. The trustee operates the business for beneficiaries under the trust deed. That may work for a family-controlled business where income distribution flexibility is important, but it rarely matches the legal and economic expectations of startup investors.

An investor considering a trust structure may need to ask several extra questions: who is the trustee, who controls the trustee, what powers are in the trust deed, whether new units or interests can be issued, whether the trust can admit external investors, whether distributions are discretionary or fixed, and whether the structure creates tax or transfer duty issues.

A trust can still play a role around the startup. Some founders hold their shares through a family trust. Some groups use a separate IP holding entity or investment entity. Those decisions need coordinated legal and tax advice because the legal owner, beneficial owner, controller, tax consequences and investor disclosure position may all matter.

Is a sole trader or partnership suitable for a startup?

A sole trader structure can be suitable for a founder testing a low-risk idea before meaningful contracts, employees, intellectual property or investment are involved. It is simple and inexpensive, but the founder is personally responsible for the business. It also has no share structure for co-founders, investors or employee equity.

A sole trader may be acceptable for a consultant validating demand, a founder building a prototype before launch, or a small side business with limited risk. It becomes less suitable once the founder signs material customer contracts, hires staff, processes sensitive data, develops valuable software, takes on debt or wants another person to own part of the business.

A partnership can arise when two or more persons carry on business together with a view to profit. Partnerships are governed by state and territory laws, and the default legal position may not match what the founders think they agreed. If two founders begin trading together without a company, written founder agreement or partnership agreement, disputes about ownership, contributions, decision-making and exits can become expensive.

For a serious startup, a partnership is usually a temporary risk rather than a final structure. Founders who are already collaborating should document who owns existing intellectual property, who is entitled to equity, what happens if someone leaves, and when the business will incorporate.

When should a founder incorporate?

A founder should consider incorporating before the business signs material contracts, receives revenue, employs staff, takes on co-founders, raises investment, develops valuable intellectual property or exposes the founder to meaningful liability. Incorporation should happen early enough that the company’s ownership and asset position are clean when the startup becomes valuable.

Waiting too long can create avoidable work. The founder may need to transfer business names, assign intellectual property, novate customer contracts, move bank accounts, update supplier terms, change insurance, amend privacy documents, transfer software subscriptions and explain the history to investors.

Before registering a company, founders should decide:

• the company name and whether a separate business name is needed;
• who the directors and shareholders will be;
• how many shares will be issued and for what price;
• whether shares will be held personally, through trusts or through other entities;
• whether the company will adopt a constitution;
• whether founder vesting or leaver rules are needed;
• how existing intellectual property will be assigned to the company; and
• what tax registrations, accounting setup and insurance will be required.

ASIC’s company registration process is only one part of incorporation. For a startup, the more valuable work is usually the ownership, governance and asset transfer work around the registration.

Should founders own shares personally or through a trust?

Founder share ownership should be decided before shares are issued. Some founders hold shares personally for simplicity. Others use a family trust or other entity for tax, asset protection or succession reasons. There is no single correct answer for every founder.

Personal ownership is simple and often easier for early documents. Trust ownership may offer planning benefits in some circumstances, but it can add administration and due diligence questions. Investors may want to know who controls the shareholder, who the beneficial owners are, whether the trustee can enter the shareholders agreement, and whether any later change of trustee or distribution arrangement could affect control.

Founders should avoid issuing shares first and asking tax questions later. Moving shares from a person to a trust after value has increased may trigger tax, stamp duty or contractual issues. A shareholders agreement may also restrict transfers.

Before issuing founder shares, ask: who should legally own the shares today, who should benefit from the shares in the long term, and will that ownership structure remain acceptable to investors during due diligence?

Where a founder uses a trust, the startup’s documents should identify the correct legal shareholder, signing party and notice details. The founder should also check whether the trustee has power to hold startup shares and sign investment or shareholder documents.

Tax and asset protection issues

Tax should be addressed with a qualified tax adviser, but founders should understand the structural issues that usually require advice. ATO guidance identifies different tax obligations for sole traders, partnerships, companies and trusts. A company is a separate taxpayer. From the 2021-22 income year onwards, base rate entity companies apply a 25% company tax rate, while other companies may be taxed at the full company rate.

A low company tax rate does not mean a company is always the lowest-tax structure for a founder. When profits are paid out as salary, dividends, trust distributions or capital proceeds, the tax result depends on the recipient, timing, retained earnings, franking credits, losses, capital gains tax rules and other facts. Personal services income rules, small business CGT concessions, Division 7A, trust distribution rules and employee share scheme rules may also need attention.

Asset protection also needs careful treatment. A company can limit shareholder liability, but it does not remove all risk. Directors may have personal exposure in some circumstances, including under guarantees, tax obligations, insolvent trading rules, employment obligations or misleading conduct claims. Founders should also avoid placing valuable intellectual property, trading risk and personal wealth in the same risk pool without a reasoned plan.

For technology startups, intellectual property ownership is often more important than the registration form. The company should usually own or have enforceable rights to the software, brand, domain names, trade marks, designs, data, documentation and confidential information needed to operate the business. This may require IP assignment deeds from founders, employees and contractors.

Certain startups also need regulatory planning at the structure stage. A fintech, crypto, healthtech or AI business may need licences, regulatory permissions, data governance, AML/CTF controls, privacy documents or product-specific compliance before investment. Structure cannot fix a regulated business model after the fact, but it can make accountability and contracting clearer.

Can you change business structure later?

A founder can often change business structure later, but the change is usually a transfer or restructure rather than a simple edit. For example, moving from sole trader to company generally means setting up a new company and transferring the business into it. Moving from partnership to company usually requires a new company, partnership dissolution or restructuring steps, and transfer of assets and contracts.

The legal work can include business name changes, asset sale or transfer documents, IP assignments, contract novations, employment transfer steps, privacy notices, lease consents, licence changes, tax registrations and accounting changes. Some transfers may trigger tax, duty or consent issues.

Restructuring can be sensible if the business has outgrown its original setup. The cost is usually lower before the startup has external investors, valuable assets, complex customer contracts or employees. A founder who expects to incorporate eventually should consider doing it before value accumulates in the wrong place.

Startup structure checklist

Before choosing a startup legal structure, founders should work through the commercial decisions that the structure needs to support.

• Confirm whether the startup will have one founder, multiple founders or external investors.
• Decide whether founder shares should be held personally or through a trust or other entity.
• Prepare a founder agreement or shareholders agreement before ownership expectations diverge.
• Assign pre-incorporation intellectual property to the company.
• Check whether the company needs a constitution tailored to future investment.
• Build a simple cap table that can support future share issues, convertible notes, SAFE-style instruments or options.
• Ask an accountant or tax adviser to model expected income, losses, retained earnings and founder distributions.
• Check whether an ESOP is likely and whether the company can meet relevant legal and tax requirements.
• Confirm whether the startup operates in a regulated sector such as financial services, credit, crypto, health, AI, privacy-heavy data services or AML/CTF reporting.
• Review insurance, director obligations, customer contracts and data governance before trading risk increases.

Creo Legal’s startup and structuring work commonly sits across these issues, including startup legal advice, business structuring and asset protection, intellectual property protection and corporate governance. The structure should be settled with legal and tax input before investment documents or major customer contracts are signed.

Frequently asked questions