The Freelancer’s Guide to Setting Up a Tax-Efficient Business Structure

As a freelancer or contractor, the way you set up your business can have a significant impact on your tax efficiency. By choosing the right structure, you can minimize your tax burden, increase your flexibility, and set your business up for long-term success. In 2025, understanding your options is more important than ever.

Why Your Business Structure Matters

The structure you choose for your business determines how you pay taxes, your personal liability, and how you can grow your business. Whether you are a freelancer, contractor, or small business owner, choosing the right structure can make or break your financial success. Let's break down the most common business structures and how they affect your tax situation.

1. Sole Trader: The Simple Choice for Freelancers

For many freelancers, the most straightforward option is operating as a sole trader. This structure is easy to set up, has minimal paperwork, and is often preferred by those just starting out. However, there are both advantages and disadvantages to consider.

Advantages:

• Simple Taxation: As a sole trader, your business income is treated as personal income. This means you pay tax at your personal income tax rate, which can be advantageous if you’re just starting out.

• Full Control: You are your own boss and have full control over your business decisions.

Disadvantages:

• Personal Liability: You are personally liable for any debts or legal actions taken against your business. This can be risky if your business faces any legal or financial issues.

• Limited Growth Potential: Sole traders may find it harder to raise capital or scale their business compared to other structures.

Tax Tips:

• Sole traders can deduct business expenses, such as office supplies, tools, and equipment. However, it's essential to keep accurate records of all business expenses to maximize deductions.

• The ATO allows sole traders to contribute to their superannuation, which can help reduce taxable income.

2. Partnership: Sharing the Load

For freelancers or contractors working with a business partner, a partnership may be the right choice. This structure allows you to share the responsibility for running the business and its profits.

Advantages:

• Shared Resources: Partnerships can provide access to more resources, both in terms of expertise and capital.

• Flexible Taxation: Partners report their share of the business’s profits or losses on their individual tax returns. This can lead to tax efficiency if structured correctly.

Disadvantages:

• Joint Liability: Partners are jointly liable for the business's debts. If one partner fails to meet their obligations, the other partners can be held responsible.

• Disputes: As with any business partnership, disagreements can arise over how profits are split or decisions are made.

Tax Tips:

• Partnerships can also deduct business expenses such as wages, rent, and utilities. It's essential to agree on how profits and losses will be split between partners.

• Ensure you keep detailed records of shared expenses and income to avoid disputes during tax time.

3. Company: Limited Liability and Tax Benefits

If you want to grow your business or protect your personal assets, incorporating as a company may be the best option. A company is a separate legal entity, meaning it can own property, enter into contracts, and be taxed independently of its owners.

Advantages:

• Limited Liability: The key benefit of setting up a company is limited liability. This means your personal assets are protected from any business debts or legal issues.

• Tax Efficiency: Companies are subject to a flat tax rate of 25% (for small businesses) on their profits, which can be lower than the individual income tax rate for high earners. This can provide significant tax savings.

Disadvantages:

• Complexity: Setting up and maintaining a company is more complex than being a sole trader or in a partnership. There are additional administrative requirements and costs associated with compliance, including bookkeeping, financial statements, and reporting to the Australian Securities & Investments Commission (ASIC).

• Double Taxation: If you decide to pay yourself a dividend, the company’s profits will be taxed, and you may also pay tax on the dividends you receive.

Tax Tips:

• Companies can claim deductions for a wide range of expenses, including salaries for employees, business travel, and even company car expenses.

• Directors can pay themselves a salary or dividends, but each option has different tax implications, so it’s important to choose wisely.

4. Trust: Asset Protection and Flexibility

A trust is another option that offers asset protection, tax flexibility, and can be used to distribute profits among beneficiaries in a tax-efficient manner. Trusts are commonly used by families and business owners who want to protect their assets.

Advantages:

• Asset Protection: A trust can protect your assets from creditors, lawsuits, or divorce settlements.

• Flexible Tax Distribution: Trusts allow profits to be distributed to beneficiaries, who are taxed at their individual rates. This can be highly tax-efficient, especially if beneficiaries are on lower income tax rates.

Disadvantages:

• Complexity: Setting up and managing a trust is more complicated than other structures. There are higher administrative and legal costs involved, and the trust must comply with specific tax laws.

• No Direct Control: The trustee controls the trust’s assets and decisions, which may limit your ability to make decisions if you're a beneficiary.

Tax Tips:

• Trusts can distribute income to beneficiaries to minimize the overall tax burden. Proper structuring is critical to ensure tax efficiency.

• Trustees must keep accurate records of all transactions and distributions.

Which Structure is Right for You?

Choosing the right structure for your freelance business depends on your specific needs and goals. If you’re just starting out, a sole trader structure may be the easiest and most cost-effective option. However, if you want to protect your assets, minimize tax, and set yourself up for growth, a company or trust may be a better choice.

It's essential to seek professional advice when deciding on your business structure to ensure you’re making the right choice for your personal situation and business goals.

Next Steps

• Consult a Tax Professional: Speak with an accountant or tax professional to determine the best structure for your freelance business.

• Revisit Your Structure Annually: As your business grows, your needs may change. Regularly review your structure to ensure it remains tax-efficient and aligned with your goals.