One of the first big decisions any Australian business owner faces is what structure to trade under. The two most common choices are operating as a sole trader or setting up a company. The right answer depends on how much you earn, how much risk you carry, and how you plan to grow. Get it wrong and you could pay thousands more in tax than you need to. Here is how to think it through.
What Is a Sole Trader?
A sole trader is the simplest business structure in Australia. You and the business are legally the same person. You trade under your own name or a registered business name, you use your individual Tax File Number, and all the profit is yours. It costs almost nothing to set up — you just need an Australian Business Number (ABN).
The downside is that there is no legal separation between you and the business. If the business runs up debts or gets sued, your personal assets — your home, your savings, your car — are potentially on the line. You also pay tax on all business profit at your individual marginal rate.
To see what your after-tax income looks like as a sole trader, run your expected profit through our self-employed tax calculator.
What Is a Company?
A company is a separate legal entity, registered with the Australian Securities and Investments Commission (ASIC). It has its own Tax File Number and ABN, it lodges its own tax return, and crucially, it provides limited liability — in most cases your personal assets are protected if the business fails.
Companies pay a flat company tax rate rather than individual marginal rates. For small businesses with turnover under $50 million (known as "base rate entities"), the company tax rate is 25%. Larger companies pay 30%. That flat rate is the key to the tax advantages a company can offer, but it comes with more cost and paperwork.
The Tax Comparison: Where the Crossover Happens
This is the heart of the decision. As a sole trader, every dollar of profit is taxed at your personal rate, which climbs as high as 45% plus the 2% Medicare Levy on income above $190,000. A company pays a flat 25% on its profit regardless of how much it earns.
That suggests a company is always cheaper — but it is not that simple. When you take money out of a company as a wage or dividend, you pay personal tax on it. The company tax already paid comes back to you as a franking credit, so you are not taxed twice. The real benefit of a company appears when you can leave profit inside the business.
Here is the rough rule of thumb:
- Profit under about $90,000 that you need to live on: a sole trader is usually simpler and just as tax-effective
- Profit above $135,000, especially if you can retain some in the business: a company often starts to win on tax
- You want to reinvest profit for growth: the 25% flat rate is far lower than the top personal rates, so a company lets you keep more to reinvest
Because the maths depends on exactly how much you draw out versus retain, it pays to model both. Our sole trader vs company calculator compares the two structures side by side for your specific income.
Liability and Risk: More Than Just Tax
Tax is only half the story. The other major difference is legal protection. As a sole trader, your business and personal finances are one and the same, so a lawsuit or unpaid debt can reach your personal assets. For low-risk businesses — freelance writers, consultants, tradespeople with good insurance — this may be an acceptable risk.
If your business involves significant liability, employs staff, signs large contracts, or carries products that could cause harm, the limited liability of a company is a powerful safeguard. Many owners decide the extra cost is worth it purely for peace of mind.
The Cost and Paperwork Trade-Off
A sole trader structure is cheap and easy. You report business income in your personal tax return, and your bookkeeping can be relatively simple. There are no separate company filings.
A company costs more to run. You will pay an ASIC registration fee, an annual review fee, and typically higher accounting fees because the company must lodge its own tax return and keep more formal records. As a rough guide, the ongoing compliance cost of a company runs to a few thousand dollars a year more than a sole trader. That cost needs to be weighed against the tax savings and liability protection.
GST and Other Registrations
Regardless of structure, once your business turns over $75,000 or more a year you must register for the Goods and Services Tax (GST) and add 10% to most of your sales. You then remit that GST to the ATO, usually through a quarterly Business Activity Statement. Our GST calculator makes it easy to work out the GST component of any price.
If you employ staff, both structures must pay the 12% Superannuation Guarantee and may need to register for payroll tax depending on your state and total wages.
Can You Change Structures Later?
Yes, and many businesses do. It is very common to start as a sole trader to keep things simple while you test the idea, then move to a company once profits grow and the tax and liability benefits start to outweigh the costs. Moving from sole trader to company is a recognised path and an accountant can guide you through the transition, including any CGT implications of transferring assets.
The reverse — winding up a company to go back to sole trader — is less common and more involved, so it is worth getting the timing of your switch roughly right.
The Bottom Line
There is no single best structure. A sole trader is ideal when you are starting out, your profits are modest, and your business carries low risk — it is cheap, simple, and just as tax-efficient at lower incomes. A company comes into its own when profits grow beyond the mid-$100,000s, when you want to reinvest earnings at the flat 25% rate, or when limited liability protection matters.
Before you decide, do the numbers for your own situation. Use our sole trader vs company calculator to compare the two head to head, check your sole-trader take-home with the self-employed tax calculator, and speak to a registered accountant before locking anything in. A one-hour conversation now can save you thousands over the life of your business.