Last Updated on 13/08/2025 by Damin Murdock
Selecting the right legal structure is one of the most important decisions a founder will make when launching a tech startup in Australia. The structure you choose affects your tax obligations, fundraising ability, liability, control, and compliance responsibilities. Whether you’re wondering what the best legal structure for startups in Australia is, or comparing options like sole trader, partnership, trust, or company, this guide breaks down each structure’s suitability for emerging technology ventures.
Sole Trader: Simple and Full Control
Operating as a sole trader is the most straightforward and low-cost option. It is ideal for solo founders testing an idea or offering freelance services. However, a key drawback is that there is no legal separation between the individual and the business. This means the owner is personally liable for debts and legal claims of the business, which is a risk if the business scales quickly or enters into contracts.
Sole traders pay tax at personal income tax rates and may register an Australian Business Number (ABN) for invoicing and GST purposes. While simple, this model offers little appeal to investors or co-founders.
Partnership: Shared Responsibility and Limited Flexibility
In a general partnership, two or more individuals carry on a business together. Each partner shares responsibility for management and liabilities, unless a formal partnership agreement specifies otherwise. Partnerships can be efficient for small ventures, but like sole traders, they offer no asset protection and limited appeal to investors.
Startups with high growth ambitions or plans to raise capital are generally better suited to a corporate structure, as partnerships lack the legal framework required for shareholding and scalable governance.
Company (Pty Ltd): Preferred for Growth and Investment
The private company structure is the most common legal vehicle for startups in Australia. Registering a proprietary limited company (Pty Ltd) through the Australian Securities and Investments Commission (ASIC) establishes the business as a separate legal entity and this offers founders protection from personal liability.
Startups incorporated as companies can raise capital from investors by way of issuing new shares and selling those shares in the company to an investor. We generally do not recommend transferring existing shares as this can result in capital gains tax implications. For more information on this, please visit our Youtube channel and have a look for video on SAFE Notes, Convertible Notes and Issuance of Shares.
A company assists in attracting co-founders and employees as the company can issued shares or options on vesting conditions by way of share or option incentive schemes that are most commonly structed by way of an employee share option plan. Vesting conditions means that a person needs to earn the shares or options by working in the business, before the options are converted into shares, or before the shares are secured without restrictions, such as the right to cancel or forfeit the shares.
Finally, there are benefits under the company structure in receiving government grants that are often times not available to sole traders, and further, the company may qualify for research and development incentives. For more information regarding these research and development incentives, please visit our website and review our articles on this topic.
While a company structure has many positive aspects, it also comes with the directors having certain statutory duties under the Corporations Act 2001 (Cth) and fiduciary duties. For instance, a director must act in the best interests of the shareholders as a whole, using care, skill and diligence and must not misuse company information for the benefit of another and to the detriment of the company. These ongoing compliance requirements also include filing financial reports and maintaining corporate records. While administrative costs are higher, this structure aligns best with scalable businesses.
Trusts: Tax Planning but Not Startup-Friendly
Discretionary or unit trusts can be used to hold business assets for asset protection or distribute profits efficiently for tax purposes. Trusts can be complex to set up and administer, and there are limitations on the governance mechanisms needed to attract investors or issue equity. Therefore, generally speaking, trusts are not recommended to be the trading entity and instead is used to hold shares on behalf of the founder. If you intend to establish a trust, you should definitely talk to a lawyer and accountant before you do so.
Key Takeaways
Sole traders are best for early testing, but not necessary ideal for growth or raising capital.
Partnership are low-cost and flexible, but do not come with the asset protections and are not investor-friendly.
Companies (Pty Ltd) offer liability protection, equity flexibility, and investor readiness, normally being the recommend structure for a new business looking to grow with investment.
Trusts are useful for asset protection, and can provide assistance with income splitting or other tax strategies but we recommend obtaining legal and accounting advice for this.
Startups aiming to grow, scale, or seek investment typically benefit from starting with or transitioning to a company structure. It provides the flexibility and legal protections necessary for operating in the competitive Australian startup ecosystem.
Feel free to contact Damin Murdock at Leo Lawyers via our website, on (02) 8201 0051 or at office@leolawyers.com.au. Further, if you liked this article, please subscribe to newsletter via our Website, and subscribe to our YouTube , LinkedIn, Facebook and Instagram. If you liked this article or video, please also give us a favourable Google Review.
DISCLAIMER: This is not legal advice and is general information only. You should not rely upon the information contained in this article and if you require specific legal advice, please contact us.
Damin Murdock (J.D | LL.M | BACS - Finance) is a seasoned commercial lawyer with over 17 years of experience, recognised as a trusted legal advisor and courtroom advocate who has built a formidable reputation for delivering strategic legal solutions across corporate, commercial, construction, and technology law. He has held senior leadership positions, including director of a national Australian law firm, principal lawyer of MurdockCheng Legal Practice, and Chief Legal Officer of Lawpath, Australia's largest legal technology platform. Throughout his career, Damin has personally advised more than 2,000 startups and SMEs, earning over 300 five-star reviews from satisfied clients who value his clear communication, commercial pragmatism, and in-depth legal knowledge. As an established legal thought leader, he has hosted over 100 webinars and legal videos that have attracted tens of thousands of views, reinforcing his trusted authority in both legal and business communities."
