Plain-English guide
Sole trader vs company: which should you pick?
It's the first real decision every Australian business owner makes, and one of the most expensive to get wrong. Here's the honest comparison — tax, protection, cost, paperwork — and the signals that it's time to switch from one to the other.
The short answer
Start as a sole trader if you're testing an idea, earning modest income, and the work is low-risk. Move to (or start with) a company when real money, real risk, or other people get involved — roughly when profits push past what you need to live on, when a customer could plausibly sue you, or when you're taking on partners, staff or investors.
That's the one-paragraph version. The rest of this guide is the detail behind it — because the right answer depends on your numbers, your risk, and your plans, which is exactly why this decision is worth an hour with an accountant before you commit.
What each structure actually is
- Sole trader — you are the business
One ABN, your personal TFN, income taxed at your marginal rate. Free to set up, minimal paperwork, and every dollar of profit is legally yours the moment you earn it. The flipside: every debt and lawsuit is also personally yours — there is no legal line between you and the business.
- Company (Pty Ltd) — a separate legal person
The company owns the business, holds the contracts, and carries the liability; you own shares in it and typically work as its director. It pays its own tax (25% for most small companies), files its own return, and answers to ASIC. More protection and flexibility — bought with more cost and admin.
The comparison that matters
| Factor | Sole trader vs company |
|---|---|
| Set-up cost | Free (ABN) vs roughly $600 ASIC registration |
| Ongoing cost | Your tax return vs company return + ~$320/yr ASIC fee + accounting |
| Tax rate | Your marginal rate (up to 45%) vs flat 25% for most small companies |
| Asset protection | None — personal assets exposed vs company liability generally stays in the company |
| Taking money out | It's simply yours vs salary, dividends or loans — each with tax rules (Div 7A) |
| CGT discount | 50% discount on assets held 1yr+ vs companies get no CGT discount |
| Losses | Can offset your other income (rules apply) vs locked inside the company |
| Credibility & investors | Fine for services vs expected for contracts, staff, investors |
The tax maths people get wrong
The headline comparison — "45% personal versus 25% company" — is real but misleading. A company's 25% rate only helps on profit you leave inside the company. The moment you pay yourself the profits as salary or dividends, they're taxed in your hands at your marginal rate anyway (with a credit for tax the company already paid). If you need every dollar the business makes to live on, a company often saves you little tax while costing more to run.
Where a company genuinely shines: profits well beyond your living costs that can stay in the business and be reinvested at 25%; income splitting done properly; and capping exposure as revenue grows. Where the sole-trader structure quietly wins: the 50% CGT discount if you one day sell an asset or the business, losses offsetting your salary in early loss-making years, and radically lower running costs.
There's also a trap for one-person consultants: the personal services income (PSI) rules can tax company income as if it were your salary anyway, wiping out most of the benefit. This is precisely the kind of thing a structure conversation with an accountant sorts out in minutes.
The signs it's time to switch to a company
- Profit beyond your living needs
You're consistently earning more than you draw out — the retained-profit tax gap starts paying for the company's running costs many times over.
- Real liability
Clients could sue over your advice or work, you're signing bigger contracts, or you're hiring — the day one employee or one contract goes wrong, the corporate veil earns its keep.
- Partners or investors
Shares are how you split ownership cleanly. Handshake partnerships between sole traders end friendships and businesses.
- You're winning bigger clients
Many corporates and government buyers simply prefer (or require) contracting with a Pty Ltd.
Don't decide this alone
Restructuring later is doable — there are CGT rollovers designed for exactly this — but it's paperwork, advice fees and risk you can avoid by getting it right early. An hour with an accountant who sees dozens of businesses like yours costs a few hundred dollars, is generally tax-deductible, and settles the question with your actual numbers instead of a generic table.
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Is it better to be a sole trader or a company in Australia?
Neither is universally better. Sole trader suits low-risk, early-stage or modest-income businesses: free to set up, simple, and losses can offset other income. A company (Pty Ltd) suits growing profit, real liability, staff, partners or investors: 25% tax on retained profits and asset protection, in exchange for ~$600 setup, annual ASIC fees and more accounting.
How much tax does a sole trader pay vs a company?
A sole trader pays personal marginal rates (up to 45% plus Medicare) on all business profit. A base-rate company pays a flat 25% — but only profit retained in the company stays taxed at 25%; anything paid to you as salary or dividends is taxed in your hands at marginal rates with franking credits. The advantage depends on how much profit you can leave in the business.
How much does it cost to set up a company in Australia?
ASIC's registration fee is roughly $600, and most people pay an accountant or formation service a little more to set it up correctly (constitution, shares, registers). Budget also for the ongoing annual ASIC review fee (~$320) and company tax return and accounts each year.
Can I change from sole trader to a company later?
Yes — it's one of the most common restructures, and CGT rollover concessions exist so moving your business into a company doesn't automatically trigger tax. But you'll re-paper contracts, bank accounts, insurances and registrations, so if a company looks likely within a year or two, talk to an accountant about starting there instead.
Wondering about ongoing fees? Company tax return cost calculator →
General information only — not financial, tax or legal advice. Accountants cannot recommend specific financial products; that requires a licensed financial adviser (AFSL). Consider your own circumstances and seek professional advice before acting.