Sole Trader vs Company in Australia: Which Structure Is Right for You?

What is a sole trader?🔗

A sole trader is the simplest structure and the most common starting point. The key thing: you and the business are the same legal entity. You trade under your own ABN, you do not register with ASIC, you keep all the profit, and you carry all the risk personally. Your business profit is added to your personal income and taxed at your marginal rate. Our sole trader tax guide covers how that works, plus GST and deductions.

A few things that surprise people: a sole trader can register a business name and can have employees, but cannot have a co-owner (for that you need a partnership or company). The structure suits people starting out, testing an idea, freelancing, or running a low-risk business.

What is a company (Pty Ltd)?🔗

A proprietary limited company (Pty Ltd) is a separate legal entity from you. It has its own TFN and ABN, earns income, pays its own tax, owns assets, and signs contracts in its own name. You are usually both a director (you run it, with legal duties under the Corporations Act) and a shareholder (you own it through shares). The company can pay you as salary (deductible to the company, taxed to you personally) or as a franked dividend (a distribution of after-tax profit with franking credits attached). That separation is the source of both the tax and liability differences, and of the extra admin: companies register with ASIC and must keep proper records and lodge annual reviews.

The tax difference (the big one)🔗

As a sole trader, your profit is taxed at personal marginal rates, up to 45% plus the 2% Medicare levy on the top slice. A company pays a flat 25% if it is a base rate entity (aggregated turnover under $50m and no more than 80% passive income), which covers most small businesses, otherwise 30%.

That flat 25% sounds like a huge win, and it can be, but it is not free money. When the company distributes profit to you as a franked dividend, the franking credit represents the 25% already paid, and you pay top-up tax to reach your personal marginal rate. The genuine benefit is the ability to retain profit inside the company at 25% to reinvest, rather than drawing it all out and paying up to 47% personally in the year it is earned.

Legal liability🔗

As a sole trader, you and the business are one, so a judgment against the business is a judgment against you personally, and your home, savings and car are exposed. A company is a separate entity, so shareholders generally lose only what they invested. That is the "limited" in proprietary limited.

But the exceptions matter a lot. Banks and landlords often require personal guarantees, which make you personally liable regardless of the company. The ATO can issue director penalty notices making directors personally liable for unpaid PAYG, super guarantee and net GST. And insolvent trading (letting a company incur debts it cannot pay) exposes directors personally. Limited liability matters most when there is real risk of being sued (trades, professional services, products, employees) or significant business debt.

Setup and running costs🔗

The bottom line: a company costs meaningfully more every year, and that overhead only makes sense once the tax or liability benefits clearly outweigh it. Earning $60,000 profit and spending $3,000 a year on company compliance is a hard sell.

Other differences worth knowing🔗

• Credibility and investors. Some larger clients prefer dealing with a company, and only a company can issue shares to bring in co-owners or investors. A sole trader cannot have co-owners at all.
• Super. Both arrange their own, but a company must pay the 12% super guarantee (from 1 July 2025) on a director's salary, whereas a sole trader contributes voluntarily.
• Losses. A sole trader may offset business losses against other personal income (subject to the ATO's non-commercial loss rules); company losses are trapped in the company and only offset future company profits. Early-stage, loss-making ventures can be more tax-efficient as a sole trader.
• Asset protection and estate planning. A company can separate business from personal assets and its shares transfer more cleanly, which matters more as the business grows in value.

Sole trader vs company, side by side🔗

When does a company make sense? The switch point🔗

Stick with sole trader if you are starting out or testing an idea, your profit is modest (roughly under $100,000), your liability risk is low (a freelancer with no employees or products), you want to keep things cheap and simple, or you expect early losses to offset against other income.

Consider a company when your profit consistently exceeds what you need to draw (so you can retain and reinvest at 25%), your liability risk is real, you want to bring in investors or co-owners, credibility with larger clients is affecting your work, or you are planning to sell the business.

Many accountants float the $100,000 to $120,000 profit mark as the point a company starts to pay off, but it is a rough guide, not a rule, because your full tax picture matters. And yes, you can switch from sole trader to company, but it involves registering the company, transferring assets (with possible CGT and stamp duty), and updating contracts and registrations, so make that call with an accountant, not on a Sunday afternoon with a coffee and a search engine.

Frequently asked questions🔗

Sources🔗

1. ATO, Business structures, ato.gov.au
2. ATO, Company tax rates, ato.gov.au
3. business.gov.au, Business structures
4. ASIC, Register a company, asic.gov.au
5. ATO, Non-commercial losses, ato.gov.au

General information only, not personal, tax or legal advice. Tax laws and ASIC fees change regularly. Verify current figures with the ATO and ASIC and speak to a registered tax agent or accountant before deciding.