Sole Trader vs Company: What’s Best for Your Business?

Choosing between a sole trader vs company structure affects how you manage money, take on risk and build your business. The best choice depends on what you do, who owns the business and what you can afford to maintain.

This guide is for small business owners in Australia. I suggest starting with three questions: what could go wrong, how much profit do you expect, and how much of that money will you need personally? Use the comparison below to prepare for a conversation with your accountant.

Updated 3 November 2026. General information only; get advice on your own tax and legal circumstances before choosing or changing a structure.

Sole trader vs company: a quick comparison

Consideration	Sole trader	Company
Legal identity	You and the business are the same legal person.	A separate legal entity owned by shareholders.
Setup and administration	Usually simpler and less costly.	Registration, annual review and more formal records.
Income tax	Net business income is included in your individual return.	The company lodges its own return; company tax rules apply.
Business money	You can take personal drawings; these are not wages or a deductible expense.	Company money must be kept separate; payments to owners need proper treatment.
Personal risk	You are personally responsible for business debts.	Separation can reduce risk, but directors and guarantors can still be personally liable.
Ownership and growth	One owner; can employ people.	Shares can support shared ownership and investment.

For an official overview, see business.gov.au’s comparison of sole traders and companies.

What is a sole trader?

A sole trader runs a business in their own name or under a registered business name. There is no separate legal entity between the owner and the business. This makes the structure relatively straightforward, but it also means business debts can put personal assets at risk.

A sole trader structure may suit someone testing a modest business idea, working alone and keeping initial administration manageable. It can also support an established business. Becoming a company is not a requirement for taking your work seriously.

Photo: Bench Accounting / Unsplash. Used under the Unsplash Licence.

What is a company?

A company is legally separate from its owners. Shareholders own it, while directors oversee its affairs. One person can hold both roles. Registering a company brings ongoing obligations, even when the business is small or you are its only director.

ASIC explains these responsibilities in its guide to becoming a company director. Understand the role before agreeing to it.

Personal liability: a company is not a complete shield

Limited liability does not mean a director has no personal exposure. Personal guarantees, insolvent trading, breaches of directors’ duties and certain unpaid tax or superannuation obligations can create personal consequences.

Before signing a lease, supplier agreement or business loan, ask who is giving the guarantee and what assets could be exposed. Review insurance separately: the structure alone does not replace suitable cover.

Tax differences: compare the total outcome

Sole traders are taxed at individual income tax rates on their net business income, alongside other assessable income. A company pays tax separately. The full company tax rate is 30%, while eligible base rate entities use 25%. Eligibility includes aggregated turnover below $50 million and no more than 80% of assessable income being base rate entity passive income.

A lower company tax rate does not automatically mean a lower total tax bill for you. Consider how profits will reach you, your other income, the amount retained for business use and the cost of administration. Ask your accountant to model both structures using the same forecast.

If most revenue comes from your own skills or labour, ask whether the personal services income rules affect the expected outcome. Also discuss how losses, capital gains and any future sale would be treated.

Photo: Scott Graham / Unsplash. Used under the Unsplash Licence.

Paying yourself and managing cash flow

Keep a clear boundary between sales, profit and money you can spend. For a sole trader, drawings do not reduce taxable profit. Set aside money for tax and other commitments before treating the account balance as available income.

For a company, agree with your accountant how wages, directors’ fees, dividends, reimbursements or loans will be handled. Do not treat the company account as a personal wallet. Private payments or loans can have tax consequences.

Build these payments into your forecast. The IBO Finance for Small Business hub helps you work through cash flow and everyday money management.

Setup costs and ongoing work

Compare the annual cost of each option before choosing. Include registration and renewal fees, bookkeeping, tax returns, professional advice and the time you will spend keeping records. Request a written quote for both structures rather than assuming the difference is small.

For a company, budget for ASIC annual review requirements and formal records. Check current fees directly before registering because fees change. For either structure, keep registrations, business details and financial records up to date.

Your business name and brand

Registering a business or company name does not give you the same protection as a registered trade mark. If the brand matters to your plans, check existing marks and consider protection through IP Australia. See ASIC’s guide to business names and trade marks.

Which structure fits your next stage?

Use these prompts as a starting point for advice, rather than a scorecard that makes the decision for you.

• Testing an idea: Compare the benefit of simpler administration with the actual risks of the product or service.
• Taking on larger commitments: Review liability before signing a lease, borrowing or accepting a significant contract.
• Sharing ownership: Decide how ownership, decisions, profits and exits would work before involving another person.
• Retaining profits: Model what stays in the business and what you need for household expenses.
• Planning a sale: Discuss the likely sale method and tax implications well before you expect to sell.

Photo: Jud Mackrill / Unsplash. Used under the Unsplash Licence.

Can you change from sole trader to company later?

Yes, a structure can change as a business develops. The government’s business structure guide explains why owners review their options over time.

Treat the change as a planned transition. Ask your advisers to check registrations, asset transfers, contracts, insurance, licences and tax consequences. Simply registering a company does not transfer every part of the old business automatically.

Questions to take to your accountant

• What would each structure cost to set up and run for the next 12 months?
• What is the total tax outcome after paying me the money I need?
• Could personal services income rules affect the comparison?
• What personal guarantees or other exposures would remain?
• How would hiring, another owner or a future sale change the decision?
• If I change later, what needs transferring and what could that cost?

Common questions about sole traders and companies

Can a sole trader employ staff?
Yes. Employing people does not itself require a company. Your employee, tax, superannuation and insurance obligations still need attention.

Is there an income level where I must become a company?
There is no single profit figure in this guide that decides the answer. Use a forecast and professional advice to assess tax, risk and ongoing costs together.

Does a company automatically look more professional?
Clients also judge your service, reliability, contracts and communication. Check any specific procurement requirements with the client rather than assuming you need to incorporate.

Choose your next step

Write down your expected sales, expenses, personal income needs and three biggest business risks. Take that page to an accountant and ask for a comparison you can understand. Choose a structure you can manage now, and set a review date when the business changes.

Keep working on your foundations with IBO’s Start Here guide and small business finance resources.