Deciding Between Sole Trader vs Company in Australia
Choosing your business structure is like picking your wardrobe. You wouldn’t wear a designer suit on a building site, nor would you go to a dinner party in a high-vis jacket. The right choice is about practicality, suitability, and protection … not status.
As you adapt your clothing to suit your circumstances, your business structure needs to evolve alongside your growth. Many owners start with something simple and upgrade when their needs demand. The challenge is this … picking what you need right now, while keeping an eye on where you’re going.
For many businesses in Australia, that choice usually comes down to two options … being a Sole Trader vs being a Company.
What Is a Sole Trader?
If you’ve recently gained an ABN and started billing clients or customers under your name, you’re already a sole trader. It’s the most straightforward commercial structure … you and your business are legally the same thing.
It’s the most popular way to start up because it’s low-cost and demands little paperwork. You use your individual Tax File Number (TFN) to lodge your annual returns, so you don’t need a separate one for your tax … everything comes in is personal income.
Obviously, it’s not all benefits. Since you and your business are theoretically one, there are no liability barriers. Therefore, if your commercial enterprise gets into debt or faces court action, you face all the consequences … which could mean that personal assets such as your vehicle or home could be at risk.
At a Glance – What Is a Sole Trader in Australia?
- You and the business are the same legal entity.
- Business income is taxed as personal income.
- You keep all profits after tax.
- You’re personally responsible for debts and liabilities.
- Minimal set-up costs and paperwork.
- Best suited for small businesses or those in low-risk industries.
What Is a Company?
A company is a completely different legal entity from you. It’s probably easiest to think of it as being its own ‘person’ … it can do everything a person can. So, it can own property, sign contracts, borrow money, employ staff, and more.
Since it’s separate from you, it’s responsible for its own debts and legal obligations. That’s why companies have Proprietary Limited in their name … the shareholders’ risk extends only to the value of their shares and their personal assets are protected … unless directors have provided personal guarantees or broken their legal duties.
Incorporating (starting) a company in Australia involves more paperwork than being a sole trader. You need an ACN (Australian Company Number) from ASIC, and the company must lodge its own separate tax return every year, together with strict accounting and compliance reporting.
At a Glance – What Is a Company in Australia?
- Legally, the company is its own entity.
- It’s responsible for paying its own tax and lodges a separate return.
- Shareholder liability is limited in most situations.
- Profits belong to the company.
- Strict compliance and reporting requirements.
- Better suited for growth and risk management.
Why Sole Trader/Company Tax Treatment Might Shape Your Choice
A key difference between a sole trader and a company is how the ATO treats profits.
The Sole Trader – Personal Tax Rates
Since you and the business are one, there’s no separation of profits. Everything you make with your operation is added to your personal tax return and treated and taxed as your income.
- Advantage – you enjoy the $18,200 tax-free threshold, which makes being a sole trader attractive when your income is modest.
- Disadvantage – as your profits grow, you will move into higher personal tax brackets … 37% and 45% plus Medicare. The more your business earns, the more profit is taxed at higher rates.
The Pty Ltd Company – Company Tax Rate in Australia
The company is the taxpayer. Most small businesses will qualify as Base Rate Entities and pay the company tax rate, currently 25% (or 30% for other businesses).
- Advantage – the company structure permits you to keep profits in the business and reinvest them at a lower tax rate, rather than paying personal tax on the full amount immediately.
- Disadvantage – company profits aren’t yours! To access this money, owners must pay themselves a salary or dividends or both. Dividends come with franking credits, which prevent double taxation … but they still require planning and proper expert accounting.
From a tax perspective, what’s best for your income, the company’s interests, and when or where the tax ‘tipping point’ occurs is complex. It’s best to seek the advice of a qualified accountant.
Who Carries the Risk? Company vs Sole Trader
While your business will undoubtedly have years of trouble-free trading, you need to consider what could happen if things go wrong.
Sole Trader Liability
If you’re a sole trader, there’s no legal separation between you and your business. If the business takes on debt, incurs legal action, or can’t pay its bills when they fall due … it’s you who has to face the music.
That means creditors can go after you personally … for your savings, your vehicle, and your home. For a low-risk business, this may not be a primary concern. But if you have employees, deal with the general public, work in a hazardous industry, or could face professional negligence accusations … it’s a crucial consideration.
Company Liability
There’s a reassuring legal barrier between you and your business, known as the corporate veil. Since it’s the company that owns the debts, in most situations, the shareholders are only liable for the value of their shares. And, if it faces legal action, it’s usually the company that bears the responsibility.
Bear in mind, this shield isn’t impenetrable. Company Directors still have significant legal duties. And, if they have taken out personal guarantees … such as for leases or loans … they could still be pursued personally if they fail in their obligations.
Sole Trader or Company – How Much Does Each Option Cost?
While tax and liability are probably the primary factors when choosing a business structure, the start-up and running costs are also important considerations.
Set-Up Costs
Sole Trader
Undoubtedly, becoming a sole trader is the most cost-effective way to start a business. Registering for an ABN is free. The only cost could be registering a business name, if you aren’t trading under your own name.
Company
It costs more to be a company than be a sole trader. You need to pay for ASIC registration to receive your Australian Company Number (ACN). Most business owners also wisely pay for professional set-up … including the company constitution and legal documents.
Annual Maintenance Costs
Sole Trader
The ongoing costs are low, apart from renewing your business name every one or three years (if you registered one). As your business income is lodged as part of your personal tax return, accounting fees are generally lower than for a Company.
Company
Maintenance and compliance make costs go up. You must pay an ASIC Annual Review Fee to keep the company registered. And, accounting fees are higher since a company needs its own complex tax return and must meet stricter record-keeping standards.
Planning for What Comes Next – Structure Versatility
The choice you make on your business structure doesn’t have to remain the same forever.
In the early days of a business … when your income can be modest, and paperwork is relatively light … many entrepreneurs opt to go with a sole tradership. Then, as income rises and risk and liability increase … they take the next step and move to a company set up.
That being said, changing structures isn’t as simple as adding Pty Ltd at the end of your business name.
It can involve complex legal, ownership, tax, accounting, and compliance considerations, mainly around your assets, contracts, and liabilities. But, when done properly, with the advice of a professional accountant, it’s a straightforward process that can bring reassurance, tax efficiencies, and personal protection.
A Simple Decision Checklist … Sole Trader or Company?
If you’re still unsure about your business’s ideal set-up, our simple checklist could help clarify which structure may be most appropriate:
A Sole Tradership Could Be Suitable for You, If:
⬚ You’re trying out a business idea or just starting up.
⬚ Your income is unpredictable or minimal.
⬚ Risks to your business are low.
⬚ You want minimal bookkeeping, administration, and set-up.
⬚ You’re happy to be personally responsible for your operation’s legalities and financials.
⬚ At the moment, simplicity is more important than tax planning.
A Company May Be Suitable for You, If:
⬚ You’re seeing consistent growth in your profits.
⬚ You want more flexibility over your tax timing and strategy.
⬚ You employ staff and/or work with larger contracts.
⬚ Your business is exposed to high legal or financial risks.
⬚ You want separation between your personal and business assets and affairs.
⬚ You’re planning to scale, reinvest, or pivot.
Choosing Your Business Structure With Confidence
The checklists above are a good starting point … but they’re just a guide. Nothing can replace advice that’s tailored to your business circumstances, personal situation, ambitions, and risk tolerance.
The most powerful way to choose the ideal structure is to talk to a qualified accountant. By looking at your position holistically, they can advise on the most opportune route for a new venture or navigate you through a restructure if you’re already established.
The Bottom Line … Sole Trader or Company?
Deciding between a sole trader or a company isn’t something you need to do alone. Whether you’re taking your first tentative steps in business … or an established sole trader now thinking your structure isn’t quite right for your needs … the right advice is just a phone call away.
At DSV Partners, we deliver no-nonsense, jargon-free guidance on what’s best for you and your operation. Experts in small business accounting, we give you the deep insight that allows you to choose the structure that best supports growth, manages risk, and brings tax efficiencies.