Sole Trader vs Company – Which Structure Is Right for You?

Sole trader or company – the structure you choose affects how much tax you pay, whether your personal assets are protected, and how much admin you deal with every year. For most Australian small businesses starting out, sole trader is the simpler and cheaper option. But there are clear situations where a company structure makes more sense, and getting this wrong can cost you significantly over time.

What is the difference between a sole trader and a company?

A sole trader is you, the individual, operating a business. There is no legal separation between you and the business. Your business income is your personal income, you file a single tax return each year, and you’re personally responsible for everything the business does – including its debts.

A company is a separate legal entity. It has its own ABN, its own tax file number, and its own tax obligations. You as the director and shareholder are separate from the company. The company earns income, pays company tax, and then pays you either a salary or dividends.

That legal separation is the core difference. Everything else flows from it – the tax treatment, the liability, the setup cost, the admin requirements.

How does the tax work for each structure?

As a sole trader, your business profit is added to any other income you earn and taxed at your individual marginal tax rate. In Australia, that starts at 0% on income up to $18,200, then 15% up to $45,000, 30% up to $135,000, 37% up to $190,000, and 45% above that. If your business is profitable and you have no other income, you could be paying 30% in tax on anything above $45,000 in profit.

A company pays a flat rate of 25% on its profits (for base rate entities with turnover under $50 million). That sounds lower – and it is, at higher income levels. But it is not a simple win, because the company still needs to get money to you, and that creates a second layer of tax. You pay yourself a salary (taxed at your personal rate) or receive dividends (taxed at your personal rate, though you get a franking credit for the company tax already paid).

Quick tip: The tax rate comparison only tells part of the story. What matters is your overall effective tax rate after accounting for how you extract money from the company, your personal circumstances, and whether you have other income. This is worth running through with an accountant before you decide.

There is one genuine tax advantage a company has that a sole trader does not – the ability to retain profits inside the company at the 25% rate rather than distributing them immediately. If your business is generating more profit than you personally need to live on, leaving money in the company and paying 25% on it instead of 37% or 45% is a real advantage. But this only applies once you are earning enough that you are in the higher marginal tax brackets.

What happens to your personal assets if something goes wrong?

This is where the difference is most significant. As a sole trader, your personal assets – your home, your savings, your car – are at risk if your business incurs a debt it cannot pay or faces a legal claim. There is no separation. If someone sues your business and wins a $200,000 judgment, they can come after your personal assets to recover it.

As a company, the company’s debts are the company’s debts. If the company cannot pay, the creditors generally cannot pursue you personally – unless you’ve given a personal guarantee (which banks almost always require) or you’ve acted as a director in a way that breaches your legal duties.

For many small businesses, this distinction is theoretical. If you’re a sole trader running a low-risk service business with no staff and no physical premises, the liability risk is manageable. But if you’re in construction, food service, or any industry where accidents or product defects are a real possibility, the liability protection of a company is genuinely valuable.

What does each structure cost to set up and run?

Setting up as a sole trader is almost free. You register an ABN (free), you may need to register a business name ($47 a year or $108 for three years through ASIC), and that’s mostly it. You file one tax return each year, which you can do yourself or have an accountant handle.

Setting up a company costs more upfront. ASIC registration costs $636 for a proprietary limited company in 2026-27. You’ll also need a registered office address, directors’ consent forms, and a company constitution. Once running, companies must lodge an annual ASIC review ($342 a year for most small companies) and maintain proper company records. You’ll need to file a separate company tax return each year in addition to your individual return, which adds to your accounting costs.

The ongoing admin is meaningfully higher for a company. You need to keep minutes of director decisions, maintain a share register, and comply with your duties as a director under the Corporations Act. Most small business owners with a company structure end up spending more on accounting and compliance each year – often an extra $1,000 to $3,000 annually depending on the complexity of the business.

Who is a sole trader structure suited to?

Sole trader works well when you are:

• Just starting out and testing whether the business will work before committing to the cost and admin of a company
• Running a low-revenue business where the higher company compliance costs outweigh any tax benefit
• In a low-liability industry where your personal assets are not meaningfully at risk
• The only person involved and not planning to bring in investors or partners
• Earning below the point where the 25% company tax rate would save you money after accounting for how you’d extract it

Most freelancers and consultants start as sole traders and that’s entirely appropriate. The simplicity is a genuine advantage when you’re focused on building the business rather than managing a corporate structure.

Who should consider a company structure?

A company starts to make sense when:

• Your business profit is consistently above $135,000 and you don’t need all of it personally – leaving retained earnings in a company at 25% becomes a real tax saving
• You’re in an industry with genuine liability risk – construction, food, healthcare, professional services where errors and omissions claims are possible
• You want to bring in a business partner or investors – issuing shares is much cleaner than a sole trader arrangement
• You’re planning to sell the business – a company structure is generally easier to sell than a sole trader business
• You want to employ staff and separate the employment relationship from your personal finances

The switch from sole trader to company can also have capital gains tax implications depending on how you transfer assets, so timing and method matter. This is not a decision to make without advice.

What are the most common mistakes when choosing a structure?

The most common mistake is setting up a company before you need one. Many first-time business owners set up a company because it sounds more professional or because someone told them it protects assets – without understanding that the protection is often theoretical at early stages (banks require personal guarantees anyway) and the compliance costs are real from day one.

The second common mistake is waiting too long to switch. Some business owners stay as sole traders well past the point where it makes tax sense to restructure. Every year they delay, they’re potentially paying more tax than they need to.

The third mistake is not understanding that a company doesn’t automatically save tax. The 25% company rate is only an advantage if you’re retaining profits. If you’re paying yourself everything the company earns, the overall tax position may not be better – and it’s certainly more complex. See our pricing page to understand what the additional compliance costs look like in practice.

Can you switch from sole trader to company?

Yes, and many small businesses make this transition as they grow. The process involves registering a new company, transferring any business assets, updating your ABN registration, notifying the ATO, and updating contracts and supplier relationships.

The key tax consideration when switching is what happens to the goodwill and assets of your sole trader business. If you’ve built a client base, a brand, or any physical assets, transferring them to the company may trigger a capital gains tax event. How you structure the transfer – and whether you use rollover relief provisions – matters significantly to how much tax you pay on the transition.

If you’re based in Melbourne or anywhere across Australia and thinking about making this change, getting advice before you act is worth every dollar. The cost of restructuring incorrectly is much higher than the cost of doing it right the first time.

Frequently Asked Questions

Do I need an accountant to set up a company?

You can register a company yourself through ASIC’s online portal for $636. But setting it up correctly – choosing the right share structure, understanding your director duties, and making sure the transition from sole trader is handled properly – is worth doing with professional advice. Getting the structure wrong is expensive to fix later.

Can a sole trader hire employees?

Yes. Being a sole trader does not prevent you from having employees. You would still need to register for PAYG withholding, process payroll, lodge STP, and pay superannuation. The structure refers to the ownership and tax structure, not whether you can have staff.

Does a company always pay less tax than a sole trader?

Not always. A company pays 25% on its profits, but you still pay personal tax on any salary or dividends you receive from the company. The tax advantage of a company only materialises when you retain profits inside it rather than drawing them out. At lower income levels, the difference may not be worth the additional compliance cost.

What is a trust and should I consider one?

A trust is a third structure option – commonly used in Australia for income splitting between family members and for asset protection. Trusts are more complex than either sole trader or company structures and generally only make sense at higher income levels or where specific family tax planning is relevant. They also require a trustee (often a company) which adds another layer of cost. This is a conversation to have with a tax accountant who can assess your specific situation.

How do I know when it’s the right time to switch from sole trader to company?

There’s no universal answer – it depends on your profit level, your industry’s liability risk, your personal tax position, and your plans for the business. As a rough guide, once your business profit consistently exceeds $120,000 to $135,000 and you don’t need all of it personally, it’s worth having a serious conversation about restructuring.

Does AffordBooksTax help with both sole trader and company tax returns?

Yes. We handle tax returns for sole traders, companies, trusts, and partnerships. Our pricing is based on your annual revenue, starting from $478 per year. If you’re unsure which structure is right for your situation, book a free 30-minute consultation and we can talk it through.