Running your business

Sole trader vs company: tax, liability, cost and when to switch

Almost every Australian business starts as a sole trader because it is free and simple. At some point, usually when the accountant mentions the company tax rate, the question of switching comes up. This guide lays out the real differences so the conversation with your accountant starts from the right place.

Updated 16 September 2026. General information only, not tax advice.

How each is taxed

Sole trader. Business profit is added to your other income and taxed at individual marginal rates, with the $18,200 tax-free threshold. See sole trader tax rates. There is one tax return, yours.

Company. The company pays tax on its profit at the company rate: 25% for base rate entities (turnover under $50 million with mostly active income) and 30% otherwise. That sounds attractive against a high marginal rate, but the money is still in the company. When you take it out as wages it is taxed at your rates (with a deduction to the company), and when you take it out as dividends the franking credit system gives you credit for the company tax paid and you pay the difference at your rate. The headline saving is largely a deferral unless profit is retained in the company.

Liability

A sole trader is personally liable for business debts and claims. If a client sues or a supplier is unpaid, your personal assets are exposed. Insurance covers much of this risk for most trades and professions.

A company limits shareholders’ liability to their investment, but directors are still personally liable in several situations: personal guarantees (which banks and landlords almost always require from small companies), unpaid PAYG withholding and super through director penalty notices, and trading while insolvent. Limited liability is real but narrower than people expect.

Setup and running costs

Sole trader: an ABN is free. A business name costs a small ASIC fee if you want one. Your accountant does one return.

Company: an ASIC registration fee at setup, an annual review fee every year, a director ID, a company constitution, a separate bank account, a separate tax return, financial statements, and usually a higher accounting bill because there is more to do. Check ASIC for current fees. Budget several hundred dollars a year in fees plus more accountant time before any tax saving.

Admin and compliance

A sole trader keeps records, lodges a BAS if registered, and lodges one tax return. A company does all of that plus ASIC obligations, keeps minutes and registers, pays wages through payroll with PAYG withholding and single touch payroll reporting if you draw a salary, and must pay super guarantee on those wages. Division 7A rules also restrict taking money out of the company informally; a loan to yourself that is not documented and repaid is treated as a dividend.

Super and personal services income

As a sole trader you contribute to super voluntarily; see sole trader super contributions. As a company paying you a salary, the company must pay super guarantee at 12% on it.

If your income is mainly from your personal skills and effort (consultants, contractors, most freelancers), the personal services income rules can attribute the company’s income back to you and remove most of the tax advantage. This is the single biggest reason a company does not help many sole traders. Ask your accountant about the PSI tests before you register anything.

Losses and flexibility

Sole trader losses can generally be offset against your other income if you pass the non-commercial loss rules, which helps in a start-up year with a part-time job. Company losses stay in the company to offset future company profits. On the other side, a company can bring in shareholders, issue shares to a partner and survive a change of owner; a sole trader business is you and cannot be sold as an entity.

When to consider switching

Profit is consistently well above your personal needs and you want to retain earnings in the business at the company rate.
Liability risk is significant and cannot be insured adequately.
You are taking on a partner or investor.
You are hiring staff and want the structure to match.
Your accountant has confirmed PSI rules do not apply.

If none of those are true, the sole trader structure is usually the right one. The bookkeeping is the same either way: categorise transactions, track GST, lodge a BAS. FlowFi is built for the sole trader end of that spectrum.

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Frequently asked questions

Can I switch from sole trader to company later?

Yes. The company is registered as a new entity, gets its own ABN and TFN, and the business assets are transferred to it. There can be tax and stamp duty consequences, and clients and suppliers need to be told, so plan it with your accountant.

Do I pay less tax as a company?

Not necessarily. The company rate applies to retained profit, but money you take out is taxed in your hands. For many sole traders the extra costs and the PSI rules cancel the benefit.

Does a company protect my house?

Partly. Company debts are the company’s, but personal guarantees, director penalties and insolvent trading can still reach you. Insurance and good practice matter under either structure.

General information only, not tax advice. Check your own situation with a registered tax agent or the ATO.