Sole Trader or Company? Choosing the Right Business Structure

Starting a business, or growing one, means deciding how it should be set up. The two most common choices are operating as a sole trader or through a company. The right answer depends on how much you expect to earn, the risks you take on, and what you plan to do with the profits.

Operating as a sole trader

As a sole trader, you and the business are the same legal person. You use your own tax file number, apply for an ABN, and report business income in your individual tax return.

• Simple and cheap: there's no separate entity to register or maintain, and no separate tax return.
• Taxed at your personal rates: all business profit is taxed in your hands in the year it's earned.
• Unlimited liability: business debts are your personal debts, so your house and savings can be at risk.
• Losses: business losses may be offset against your other income, subject to the non-commercial loss rules.

2026–27 resident tax rates

For sole traders, every extra dollar of profit is taxed at your marginal rate:

• $0 – $18,200: nil
• $18,201 – $45,000: 15%
• $45,001 – $135,000: 30%
• $135,001 – $190,000: 37%
• $190,001 and over: 45%

The 2% Medicare levy is generally added on top.

Operating through a company

A company is a separate legal entity. It owns the business, signs contracts, earns the income and pays its own tax.

• Company tax rate: 25% for a base rate entity, which is a company with aggregated turnover under $50 million and no more than 80% passive income (such as rent, interest and dividends). Other companies pay 30%.
• Limited liability: shareholders are generally only liable for what they've put into the company, although directors have legal duties and banks and landlords often ask for personal guarantees.
• More paperwork and cost: ASIC registration and annual review fees, a separate tax return, proper financial records and company registers.
• Director ID: every director needs a Director ID before they're appointed.

The company's money isn't your money

Profits stay in the company until they're paid out as wages, directors' fees or dividends. Dividends usually carry franking credits for the tax the company has already paid, and you're taxed at your own marginal rate with a credit for that company tax. If you take money out of the company any other way, such as a loan or paying private expenses, Division 7A can treat it as an unfranked dividend unless it's handled correctly.

Which structure saves more tax?

When profits are modest, a sole trader is often simpler and costs less overall. As profits grow and your personal marginal rate climbs above the company rate, a company can make sense, particularly if you want to keep profits in the business to fund growth. Tax on those profits is deferred until they're paid out to you, not avoided.

A different structure won't change everything. If most of your income comes from your own personal skills or effort, such as contracting or consulting, the personal services income rules may tax that income in your hands whatever structure you use.

What about trusts?

Many family businesses use a discretionary trust, often with a company as trustee. Trusts can offer flexibility in distributing income to family members, but they come with their own rules and costs. They're worth discussing if you have family members on different tax rates.

Changing structure later

You can start as a sole trader and move to a company later. Moving business assets can trigger capital gains tax and other costs, although small business restructure rollovers and concessions may be available. Plan the move before you make it.

Ready to set up a company?

Waycorp Advisors is an ASIC registered agent. You can register your company with us online in a few minutes, and we can look after your company secretarial, tax and accounting from day one.

Not sure which structure suits you? Call Waycorp Advisors on 1300 323 410 or email team@waycorp.com.au. Australian tax returns are lodged through our registered tax agent partner, OM Tax Services (Tax Agent No. 26072249).

This article is general information only and doesn't take your personal circumstances into account. Tax rates are from the ATO for the 2026–27 income year and may change.