Sole Trader vs Company in Australia: Which to Choose

Sole trader vs company: the short answer

As a sole trader, you and your business are the same legal person, so your profit is taxed at your individual marginal rates: nil below the $18,200 tax-free threshold, up to 45% (plus the 2% Medicare levy) over $190,000. A company is a separate legal entity that lodges its own tax return and pays a flat 25% if it is a base rate entity. The company gives you limited liability and a lower headline rate, but it costs more to run, and because of dividend imputation it rarely cuts your total tax unless you leave profit in the business. Most people start as a sole trader and move to a company when profit, risk, or reinvestment make the extra cost worth it.

What a sole trader is, and what a company is

A sole trader runs the business as an individual. You register for an ABN, trade under your own name or a registered business name, and report the business result on your personal tax return. There is no legal line between you and the business: its income is your income, and its debts are your debts.

A company is registered with the Australian Securities and Investments Commission (ASIC), which issues it an ACN, and it exists as a separate legal person. It owns its own assets, signs its own contracts, and is liable for its own debts. You might hold all its shares and be its only director, but the company's money is not your money until you pay yourself a wage or a dividend. (If the difference between the two identifying numbers is what is tripping you up, we walk through it in ABN vs ACN.)

Whether the business is a separate legal person drives everything else: how the profit is taxed, who is on the hook for the debts, what it costs to run, and how easily you can bring in a partner or sell later.

How each structure is taxed

A sole trader's profit is taxed at the resident individual rates. For the 2026-27 income year those rates are:

These rates come from the ATO's resident tax rates and exclude the 2% Medicare levy. The second bracket used to be 16%; the Treasury Laws Amendment (More Cost of Living Relief) Act 2025 cut it to 15% from 1 July 2026 and drops it again to 14% from 1 July 2027. If you are lodging your 2025-26 return, that bracket is still 16% for the year that ended on 30 June 2026.

A company is taxed differently in three ways. It pays a single flat rate: 25% if it is a base rate entity, meaning its aggregated turnover is under $50 million and no more than 80% of its assessable income is passive income such as dividends, interest, or rent. Every other company pays 30%. It has no tax-free threshold, so the first dollar of profit is taxed. And its profit is taxed at the company level first, then again in your hands when you take it out as a wage or dividend. That third point is where most of the confusion lives.

When does a company save tax?

Australia runs a dividend imputation system. When a company pays tax on its profit and then distributes it to you as a franked dividend, you receive a franking credit for the tax already paid, gross the dividend back up, work out the tax at your own marginal rate, and subtract the credit. If your rate is above the company rate you pay the difference; if it is below, you get a refund. The practical result: pay all the profit out to yourself and your combined company-plus-personal tax lands at roughly your personal marginal rate anyway. The company has not saved you tax on that money. It has added a step.

The company starts to help when you do not need all the profit to live on. Say your business makes $180,000 profit in 2026-27 and you can live on $100,000, leaving $80,000 to reinvest in stock, equipment, or a cash buffer.

• As a sole trader, you are taxed on the whole $180,000 whether you spend it or not. The income tax is $47,670, plus $3,600 Medicare levy, for $51,270 total.
• Through a company, you take a $100,000 wage (a deductible cost to the company, taxed in your hands like any salary) and leave $80,000 in the company. That $80,000 is taxed at 25%, which is $20,000.

The same $80,000, sitting on top of a $100,000 salary in the sole-trader case, would have been taxed at 30% and 37% plus the Medicare levy, around $28,750. So this year the company keeps roughly $8,750 more working in the business.

Read that saving correctly: it is a deferral, not a discount. When you eventually pay the retained profit out as a dividend, the franking credit tops the tax up to your marginal rate. The benefit is the years the money stays invested at 25% instead of being taxed at your top rate the moment it is earned. For a business that reinvests heavily, that compounding matters; for one where you draw everything each year, it does not.

Low profit favours the sole trader outright. Your first $18,200 is tax-free and the next slice is taxed at 15%, while a company pays from the first dollar, so below roughly $100,000 of profit that you fully draw, a sole trader usually keeps more after tax and costs less to run.

What a company costs to set up and run

The running costs shift the calculation as much as the tax rates do.

The registration and business-name figures come from business.gov.au; the ASIC review fee is indexed every 1 July. On top of those fees, a company usually means paying an accountant to set it up and lodge the extra return, plus a separate business bank account and its own bookkeeping. That is not a reason to avoid a company, but a reason to make sure the tax or liability benefit is real before you take it on.

Liability and asset protection

For many owners the risk matters more than the tax. A sole trader is personally liable for the business's debts, so a creditor or court can pursue assets in your own name, your home included in the worst case. A company limits that: its debts are generally its own, and your loss is usually capped at what you put in.

The protection has holes. Directors stay personally liable for the company's unpaid PAYG withholding and superannuation guarantee through director penalty notices, and for debts incurred while trading insolvent. A bank or landlord will usually want a personal guarantee too. That puts your own assets behind the debt, so limited liability helps a risky trade without being a wall, and it does not replace proper insurance.

Which structure should you choose?

Start as a sole trader if your profit is modest, your risk is low, and you value simplicity, for example when you are testing an idea, running a side business, or freelancing on your own skills. You keep more of a small profit, and you can register in a day for the cost of a business name.

Look harder at a company when one or more of these is true: you consistently reinvest profit and want the 25% rate on the part you retain; you run a trade with real liability exposure that insurance alone does not cover; you want to bring in co-owners or outside investment, which shares make straightforward; or a client or industry requires you to contract through a company. A trust or a partnership can also fit and sits outside this guide, so it is worth a conversation with an accountant first.

You do not have to decide forever on day one. Plenty of Australians run as a sole trader first and incorporate once profit and risk justify it, and switching can trigger capital gains tax, GST, and asset-transfer questions, so get advice on the timing.

Common mistakes people make choosing a structure

Assuming a company automatically cuts your tax. Because of imputation, paying all the profit out to yourself lands at your personal rate regardless. The saving is deferral on retained profit, not a lower rate on money you spend.

Ignoring the personal services income rules. If most of your income rewards your personal skills or effort rather than a product, tools, or a team, the PSI rules can attribute it back to you at your personal rate even inside a company, cancelling the split you counted on.

Treating company money as your own. Taking cash out as informal "drawings" does not work in a company. An amount a company lends or pays to a shareholder or their associate can be taxed as an unfranked Division 7A dividend unless it is a proper wage, a declared dividend, or a documented complying loan.

Forgetting the CGT discount. Individuals and trusts that hold an asset for more than 12 months get a 50% CGT discount; companies cannot use it. If you expect to build and sell an appreciating asset, holding it in a company can mean tax on the full gain.

Keeping clean records under either structure

Whichever structure you pick, the ATO expects you to keep records that substantiate every dollar of income and every deduction, for five years as a sole trader and seven as a company, and to store them so you can produce them if asked. We cover the detail in the ATO record-keeping requirements guide.

You can make this part painless. SparkReceipt scans a receipt the moment you get it, reads the merchant, GST, and line items, and files it in the right category, so your records build as you go instead of piling up in a shoebox. It tracks income alongside expenses, matches entries to your bank statements, and turns the lot into a tax-ready report with the original images attached. If you run on Xero, it publishes categorised receipts straight to Xero with the tax codes intact. The same workflow works before and after you incorporate. See pricing for the plans.

For the deductions worth capturing under either structure, see sole trader tax deductions; for writing off equipment you buy, the instant asset write-off; and for GST reporting once you cross $75,000 in turnover, BAS due dates.

Frequently asked questions

Does a company pay less tax than a sole trader? Not automatically. A base rate company's flat 25% is lower than the top personal rates, but dividend imputation means that once you pay the profit out to yourself, the combined tax matches your personal marginal rate. The real saving is deferring tax on profit you leave in the company to reinvest.

How much does it cost to set up a company? Registering a company with ASIC costs $636, and every company then pays a $342 annual review fee (standard proprietary company, 2026-27) to stay registered. Most owners also pay an accountant to set it up and lodge the separate company return.

Do I need an ABN and an ACN? A sole trader needs only an ABN. A company gets an ACN from ASIC when it registers, then an ABN built from that ACN, as the ABN vs ACN guide explains.

Can I switch from sole trader to company later? Yes, and many people do once profit and risk grow. You register the company and transfer the business into it, which can raise capital gains tax, GST, and asset-transfer issues, so plan the timing with an accountant.

Is my house safe if I run a company? A company limits your liability, but not completely. Directors stay personally liable for unpaid PAYG withholding and super and for insolvent trading, and a personal guarantee to a bank or landlord puts your own assets behind that debt. Treat limited liability as a partial shield, not a substitute for insurance.

Key takeaways

• A sole trader is taxed at personal marginal rates (nil below $18,200, up to 45% plus 2% Medicare); a base rate company pays a flat 25% with no tax-free threshold.
• Dividend imputation means a company rarely cuts your total tax on profit you draw out; the benefit is deferral on profit you retain and reinvest.
• In the worked example, reinvesting $80,000 of a $180,000 profit defers about $8,750 of tax through a company, until it is later paid out as a dividend.
• A company costs more to run: $636 to register, $342 a year to ASIC, a separate return, and seven-year record keeping, so the tax or liability benefit has to be real.
• Watch the traps: the PSI rules, Division 7A on money you take out, and the loss of the 50% CGT discount that individuals keep.
• Start as a sole trader when profit and risk are low; move to a company for reinvestment, real liability exposure, or outside owners, and keep clean records either way.