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MJE Business Services

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

Last reviewed: 2026-06-15Business Advisory

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

Short answer: if you are starting out, earning modest profits and the work carries low risk, a sole trader is usually the simplest and cheapest way to begin. As profits grow and the work carries more risk, a company - with its flat tax rate and limited liability - often starts to make sense. Neither is automatically "better"; the right choice depends on your income, your risk, and your plans.

Choosing how to structure your business is one of the first big decisions you make, and one of the most common questions we get from people starting out around Mortdale, Hurstville and the wider St George area. Here is a plain-English comparison to help you think it through.

Sole trader: simple and low-cost

As a sole trader, you and the business are legally the same person. You trade under your own name (or a registered business name) using your individual Tax File Number and ABN.

The good:

  • Cheap and quick to set up - you just need an ABN, and there is no separate company registration fee.
  • Simple admin - you report your business income and expenses in your individual tax return; no separate company return.
  • You keep full control and all the profits. (Either way, once your turnover hits the threshold you must register for GST - see GST registration and turnover.)

The trade-offs:

  • Unlimited liability. With no legal separation, your personal assets (home, savings) can be exposed if the business runs into debt or is sued.
  • Tax is at individual marginal rates. All business profit is added to your other income and taxed at your personal rate, which rises as income rises. Once profits are substantial, this can mean a higher bill than a company would pay.

Company: more protection, more formality

A company (a Pty Ltd) is a separate legal entity registered with ASIC. The company earns the income, pays its own tax, and is owned by shareholders and run by directors.

The good:

  • Limited liability. Generally your personal assets are separated from the company's debts (though directors can still be personally liable in some cases, such as unpaid super or certain ATO debts, and many lenders ask directors for personal guarantees).
  • A flat company tax rate. A company that is a base rate entity pays 25% company tax for the 2025-26 income year; otherwise the rate is 30%. A base rate entity is broadly a company with aggregated turnover under $50 million that earns no more than 80% of its income as passive income (such as interest, rent or dividends). For most active small businesses, the 25% rate applies.
  • Easier to bring in investors or partners and to plan how profits are paid out.

The trade-offs:

  • More cost and admin. There is an ASIC registration fee, an annual ASIC review fee, a separate company tax return each year, and stricter record-keeping. Our ASIC compliance service takes the annual obligations off your plate, and our guide to company tax return deadlines covers the lodgment dates.
  • Profits are not freely yours. Money in the company is the company's. To access it personally you pay yourself wages or dividends, which has its own tax consequences (though dividends generally carry franking credits for the company tax already paid).
  • Director duties apply, and there are rules about loans from the company to you (Division 7A) that need careful handling.

A quick comparison

Sole traderCompany
Set-up costLow (ABN only)ASIC fee + adviser fees
Ongoing adminSimpleHigher (annual return, ASIC review)
LiabilityUnlimited - personal assets at riskGenerally limited
Tax on profitYour individual marginal rates25% (base rate entity) or 30%
Best suited toLower-risk, lower-income, starting outHigher profit, higher risk, growth plans

Is there a profit level where a company starts to pay off?

Everyone wants a number, so here is the honest version. There is no fixed dollar line in the tax law - but as a rough rule of thumb, once your profit climbs past the point where your personal marginal rate sits well above the 25% company rate (often talked about somewhere in the six figures), the flat rate and the ability to retain profits can start to outweigh the extra cost and paperwork.

Treat that as a prompt to get advice, not a trigger to incorporate. The "saving" only counts if you genuinely leave profits in the company; the moment you draw the money out as wages or dividends, it is taxed in your hands. For many owners who spend most of what they earn, a company saves little and costs more. Your real figures decide it.

So which one is right?

There is no one-size-fits-all answer. Many people start as a sole trader because it is simple and cheap, then look at a company once profits grow, the work carries more risk, or they want asset protection. But tax is only one piece - cash flow, your industry, family circumstances and your long-term plans all matter. A trust is sometimes a better fit again, which is why this is worth a proper conversation rather than a rule of thumb.

When to consider switching

Common triggers to revisit your structure include:

  • profits climbing into higher marginal tax brackets
  • taking on work with more liability or larger contracts
  • bringing in a business partner or investors
  • wanting to separate business risk from your personal assets.

Changing structures has tax and legal consequences (including possible capital gains tax on transferring assets), so plan the timing. Our business advisory and new business setup services are built for exactly these decisions.

FAQ

Is a company always more tax-effective? No. A company's 25% or 30% rate can look attractive next to higher individual rates, but you still pay tax when you draw the money out as wages or dividends. For lower profits, a sole trader can work out simpler and no more expensive. It depends on the numbers.

Do I need a company to protect my personal assets? A company offers limited liability - a key reason people choose it - but it is not bulletproof. Directors can still be personally liable in certain cases, and lenders often require personal guarantees. Good insurance matters whichever structure you pick.

What does a company actually cost to run each year? On top of set-up, a company pays an annual ASIC review fee and lodges its own company tax return, and the bookkeeping is more involved than a sole trader's. ASIC fees are reviewed each year, so check the current amount before you budget. We can give you a realistic all-in figure as part of our ASIC compliance service.

Can I change later? Yes. Many businesses start as sole traders and incorporate later. There can be tax consequences when you transfer the business into a company (including possible capital gains tax on assets), so plan the move with us rather than do it on the fly.

Let's find the right fit

The best structure is the one that suits your numbers, your risk and where you are heading. If you are weighing up sole trader versus company anywhere around Mortdale or the St George area, get in touch or call us on (02) 9580 1167 and we will run through the options with your actual figures.

Written by the team at MJE Business Services, a registered tax agent (No. 26313222) serving the St George area since 2000.

This is general information, not personal advice. Tax rules and dates change - please check your situation with us or at ato.gov.au.

Sources (ATO)

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