Choosing the right business structure is one of the most consequential decisions you will make as a business owner. Whether you are just starting out or considering a change, understanding the differences between a sole trader vs company in Australia can save you thousands in tax and protect your personal assets.
At Verus Accountants, we help business owners across Sydney navigate this decision every day. Here is a plain-English breakdown of what you need to know.
What Is a Sole Trader?
A sole trader is the simplest and most common business structure in Australia. You operate as an individual and are personally responsible for all aspects of the business, including its debts and legal obligations. Your business income is treated as personal income and taxed at individual rates.
What Is a Company (Pty Ltd)?
A proprietary limited company (Pty Ltd) is a separate legal entity from its owners (shareholders). The company pays its own tax, can enter into contracts in its own name, and provides a degree of asset protection for directors and shareholders. It is registered through ASIC and involves more compliance obligations than a sole trader structure.
Sole Trader vs Company Australia: Key Differences at a Glance
| Feature | Sole Trader | Company (Pty Ltd) |
|---|---|---|
| Legal entity | Not separate from owner | Separate legal entity |
| Tax rate | Personal income tax rates (up to 47%) | 25% (small business rate, 2025-26) |
| Asset protection | Personal assets at risk | Limited liability for shareholders |
| Setup cost | Low (ABN registration only) | Higher (ASIC registration + legal docs) |
| Ongoing compliance | Simple tax return, BAS if registered | ASIC annual fees, financial statements, PAYG |
| Income splitting | Not available | Possible through dividends to shareholders |
| Superannuation | Optional (self-employed super) | Mandatory for employee-directors |
| Raising investment | Difficult | Easier through share issuance |
Sole Trader vs Company Tax Australia
Tax is usually the key driver when comparing these two structures. As a sole trader, your business profit is added to any other personal income and taxed at your marginal rate, which can reach 47% (including Medicare levy). As a company, profits are taxed at a flat 25% for base rate entities (businesses with aggregated turnover under $50 million).
Example: If your business earns $120,000 net profit: as a sole trader, you may pay up to ~$35,000+ in income tax. As a Pty Ltd, the company pays $30,000 in tax, and you only pay personal tax on salary or dividends actually paid to you.
When Should You Switch from Sole Trader to Company?
There is no single trigger, but common signs it may be time to incorporate include:
- Your net profit consistently exceeds $80,000–$100,000 per year
- You have significant business assets you want to protect from personal liability
- You want to bring in business partners or investors
- You are working in a high-risk industry where litigation is more common
- You want to retain profits in the business at a lower tax rate
Our business structuring specialists can model both scenarios based on your actual numbers before you make any decision.
Benefits of a Company Structure vs Sole Trader in Australia
The key benefits of a company vs sole trader in Australia include:
- Tax efficiency: The 25% company tax rate is lower than the top personal marginal rate of 47%
- Asset protection: Your personal assets (home, savings) are generally protected from business creditors
- Credibility: Many larger clients and suppliers prefer dealing with a registered company
- Succession planning: A company is easier to sell or transfer than a sole trader business
- Income flexibility: You can choose how to pay yourself (salary, dividends or a combination)
Drawbacks of a Company Structure
A company is not always the better choice. Consider:
- Higher setup and ongoing compliance costs (ASIC fees, annual reviews, formal financial statements)
- More complex tax obligations, including PAYG, fringe benefits tax and dividend administration
- Profits cannot be accessed freely; they must be paid as salary or dividend with the appropriate tax treatment
- If your income is low, the tax saving may not outweigh the compliance cost
Regardless of the structure you choose, staying on top of your taxation and accounting obligations is non-negotiable for any Australian business.
External resources:
Business.gov.au: Business Structures Explained
Frequently Asked Questions
Is it better to be a sole trader or company in Australia?
It depends on your income level, risk exposure and growth plans. For low-income or early-stage businesses, a sole trader structure is simpler and cheaper. As your profits grow and liability concerns increase, a company structure generally becomes more advantageous.
What is the tax rate for a company vs a sole trader in Australia?
A company pays a flat 25% tax rate (for base rate entities in 2025-26). A sole trader pays personal income tax at marginal rates, which can reach 47% including the Medicare levy.
Can a sole trader become a company in Australia?
Yes. Transitioning from a sole trader to a company is straightforward with the right professional guidance. It involves registering a new company with ASIC, updating your ABN and tax registrations, and transferring business assets.
Does a company structure protect my personal assets?
Generally yes. As a company director, your personal assets are protected from business debts unless you have provided personal guarantees or acted in breach of your directors’ duties.
What are the ongoing costs of running a company vs sole trader?
A sole trader has minimal ongoing costs beyond your tax return and BAS. A company requires ASIC annual review fees (around $296–$310 per year), formal financial statements, and potentially higher accounting fees for the additional compliance work.
Can a company income-split to reduce tax?
Yes, in some circumstances. Dividends can be paid to shareholders who are on lower tax rates, effectively reducing the overall family tax burden. However, the ATO has rules around trust and company distributions that must be carefully navigated.
Should I get advice before changing my business structure?
Absolutely. Changing business structures has tax, legal and financial implications. A chartered accountant can model the impact on your specific situation and help you restructure in a way that minimises tax and transition costs.
Not Sure Whether to Stay a Sole Trader or Incorporate?
The chartered accountants at Verus can model both scenarios based on your actual numbers and help you make the right call. Book a free consultation today.
