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In Australia, business structures are often discussed in isolation, as sole traders, partnerships, companies, or trusts. In practice, however, there is a tendency for advisors to recommend a combination of business structures for the one small and medium enterprise (SME).

It has been argued that it is naïve to consider business structures in isolation, as it is common for a business to use multiple structures. This combination could have many variations – a company could hold the shares in a subsidiary company, or a company could be used as the trustee and/or a beneficiary of a trust, or there could be a partnership between a company and the trustee of a trust.

There are no known data on business structures that provide information about the prevalence of the combination of structures. Instead, the available data are on business structures in isolation. In considering the business structures used by SMEs in Australia (with an annual turnover of less than $100 million), trusts account for 12% of SMEs, partnerships for 9% of SMEs, with companies and sole proprietors representing the largest percentages of 34% and 45% respectively.

Small and medium enterprises in Australia

While there are a multitude of ways that SMEs may be defined, for the purpose of our research, an SME is defined as a business employing less than 200 full-time equivalent employees with an annual turnover of less than $100 million.

The reason for focusing on SMEs is that they are considered a fundamental component of the Australian economy. Overall, SMEs represent over 99% of all businesses, and they significantly contribute to the Australian economy in terms of employment and gross domestic product (GDP): SMEs account for 67% of employment and 57% of GDP. It was estimated that there were approximately 2.4 million trading businesses operating at the end of June 2021. The majority 2,233,770 (93%) had an annual turnover of less than $2 million; whereas, 130,547 (5.4%) had an annual turnover of $2 million to less than $10 million, and a smaller small portion (37,937 businesses, 1.6%) had an annual turnover of $10 million or more.

SMEs are considered to play a key role in economic growth and business innovation. They can contribute to larger businesses by being customers or suppliers. SMEs may stimulate economic growth by creating employment opportunities across geographic areas and sectors, employing extensive segments of the labour force.

Although the SME sector can face several impediments, this does not undermine the competitive advantages of the sector, including its ability to respond rapidly to market changes. Impediments that SMEs can face include (but are not limited to): access to finance and equity, complexity of the regulatory system (including tax) and compliance costs, assets protection and risks, and family succession. The business structure utilised by SMEs could aid or hinder how they deal with these potential impediments.

Previous research highlights that the factors influencing business structure choice include regulatory compliance, managerial functions, asset protection, limited liability, tax treatment, business expansion and equity raising, succession planning, complexity, and compliance costs. However, this prior research does not examine the reasons for the use of combinations of business structures, and largely considers the business structures in isolation. This means that our understanding about the reasons concerning business structure choice is incomplete, as the existing research does not examine the contemporary use of combination of business structures for the one enterprise.

In our research, interviews were conducted with 10 SME advisors (accountant and lawyers) to gain some insights into what they are aiming to achieve through the use of a combination of business structures and the attributes of an effective business structure. The results indicate that enhanced tax outcomes and asset protection are central to the combination of business structures.

Reasons for combining business structures

The results from the interviews indicate that advisors recommend the use of a combination of business structures for the one enterprise, with either a trading trust with a corporate trustee, or a trading company with a shareholding trust. The reason for this combination of discretionary trust and company is to achieve more favourable tax outcomes (such as tax rate, the distribution of profits, and benefiting from tax concessions such as the CGT discount).

Additionally, the combination of structures can achieve greater asset protection through several mechanisms, such as separating business assets from business operation risk, as well as protecting personal assets from the business risk.

Tax and asset protection were the two key attributes of an effective business structure for Australian SMEs identified by advisors. First, an effective business structure provides some tax advantages. Tax advantages encompass notions of income splitting, flexibility of distributions, accessing small business concessions, accessing the 50% CGT discount, succession planning, exiting the business, and retaining profits at a lower tax rate.

Second, an effective business structure provides better protection for personal and business assets. Other attributes considered by advisors included limited liability, the ability to raise capital and retain profit at a lower tax rate, accessing finance, facilitating succession planning, and being understood by a third party.

Our research findings are consistent with Myron Scholes and Mark Wolfson’s theory and Australian studies involving single business structures, which suggest that the choice of a business structure involves weighing up tax and non-tax factors.

Tax considerations encompass various factors that go beyond the tax rate. Similarly, the non-tax factors include many elements, with asset protection featuring predominately. Advisors perceived there are many tax and non-tax factors, which are important attributes for choosing effective business structures for SMEs.

In this respect, the combination of structures enhances these objectives that may not be possible by adopting a single structure alone.


The findings suggest that tax plays an important role in the business structure choice. This adds further weight to arguments for greater tax neutrality in relation to business structures in Australia, as well as a recommendation to aid trusts to retain income at a lower tax rate, rather than the penalty tax rates that currently apply to income to which no beneficiary is presently entitled.

We also recommend that government agencies should consider reporting on the use of combinations of business structures, rather than the current practice of reporting data on business structures in isolation. Such reporting, if possible, would provide a more accurate understanding of business formation in Australia.

Given the rationale for a combination of business structures, greater insights into what SMEs desire in terms of an effective business structure may inform future legal reform.


Journal article

Barbara Trad, Brett Freudenberg, Craig Cameron and John Minas, ‘Not in Isolation: The Rationale for a Combination of Business Structures in Australia’ (2023) 51(3) Australian Business Law Review 162.

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