Sole trader or company: how to choose

Almost every Australian small business starts as a sole trader, because it’s free, immediate, and requires no decision. Then at some point someone - a client, a mate at a barbecue, an accountant - says “you should really be a company”, and it becomes a question you can’t answer because you don’t know what the question is made of.

Here’s the shape of it. The decision itself belongs with your accountant, because it depends on numbers and circumstances that are specific to you. But you’ll get much more out of that conversation if you arrive understanding what’s being traded off.

General information, not tax advice. The ATO is the authority - see ato.gov.au or ask a registered tax or BAS agent.

Sole trader

You and the business are the same legal entity. You trade under your own tax file number, register an ABN, and report business income in your personal tax return.

What’s good: It’s free to start and nearly free to run. There’s no separate tax return, no annual review fee, no company constitution, and no directors’ duties. You keep everything after tax, and you can move money between business and personal as you like - there’s no legal distinction. Business losses can generally be offset against your other income, subject to the non-commercial loss rules, which genuinely matters in a first year.

What’s not: You are personally liable for everything. If the business is sued or can’t pay its debts, your personal assets - house, savings, car - are exposed. Insurance covers a lot of this, and should be in place regardless, but it doesn’t cover everything.

You’re also taxed at individual marginal rates. That’s an advantage while income is modest and becomes progressively less attractive as profit grows.

And you can’t really share it. Bringing in a partner or an investor means restructuring, because there’s nothing to own a share of.

Company

A company is a separate legal entity. It has its own tax file number and ABN, lodges its own tax return, and - importantly - its debts are its own.

What’s good: Limited liability. If the company fails, creditors generally pursue the company’s assets, not your personal ones. There are real exceptions - director penalty notices for unpaid PAYG and super, personal guarantees on leases and finance (which lenders routinely require from small companies), insolvent trading, and fraud - so limited liability is genuine but not absolute.

Companies pay a flat tax rate, which is lower than the top personal marginal rates. That creates planning flexibility: profit can be retained in the company and taxed at the company rate rather than flowing straight onto your personal return. Note the word deferral - when the money comes out as a dividend, the franking system broadly evens things up. The advantage is control over timing, not a permanent discount.

Ownership is divisible, so bringing in a partner or investor is straightforward. And some clients - particularly larger organisations and government - prefer or require contracting with a company.

What’s not: Cost and administration. There are incorporation fees, ASIC’s annual review fee, and higher accounting fees for a separate return and financial statements. Realistically you’re adding somewhere in the low thousands a year in compliance costs before you’ve made a dollar.

Directors have legal duties, including a duty to prevent insolvent trading, and a Director Identification Number is required.

The rule that surprises people most: the company’s money is not your money. You take it out as wages, dividends, or a properly documented loan. Simply transferring company funds to your personal account creates a loan that must be dealt with under Division 7A, or it’s treated as a deemed dividend and taxed accordingly. Sole traders who are used to moving money freely find this the hardest adjustment, and it’s where a lot of accidental non-compliance happens.

Partnership and trust, briefly

Partnership - two or more people carrying on business together. Cheap to set up, but partners are jointly and severally liable, meaning you can be personally liable for your partner’s business debts. That’s a lot of exposure to accept on the basis of a good relationship. Get a written partnership agreement.

Trust - a trustee holds and operates the business for beneficiaries. Discretionary trusts allow income to be distributed among beneficiaries, which offers flexibility, and they can offer asset protection. They’re also more complex and more expensive, come with their own compliance regime, and the rules on distributions have tightened. Trusts are a legitimate structure for established businesses with genuine reasons, and a common way for early-stage businesses to pay for complexity they don’t yet need.

The three triggers

Most businesses that should change structure are pushed by one of three things.

Risk. Your work could plausibly cause serious loss - physical, financial, or professional. If a bad day on site or a bad piece of advice could produce a claim larger than your insurance, personal liability is a real exposure rather than a theoretical one. This is the strongest reason to incorporate, and the one most worth acting on before the fact.

Profit. Consistent profit well above what you need to live on means you’re paying top personal marginal rates on money you’re not spending. A company lets you retain earnings at the company rate. The threshold where this outweighs the extra compliance cost depends on your numbers, but it’s the sort of thing that becomes clearly worth modelling once profit is comfortably into six figures. Note this is a separate question from GST - see GST registration and BAS for sole traders for that $75,000 turnover threshold, which applies regardless of structure.

Other people. You want a business partner, an investor, or an eventual sale. Selling a sole trader business means selling assets and goodwill; selling a company can mean selling shares, which is usually simpler and often has better capital gains outcomes.

Notice what isn’t on that list: revenue, image, and what someone told you at a barbecue. High revenue with thin margins doesn’t make a case for a company. Neither does “Pty Ltd” looking more professional, which is a real but small effect and an expensive way to buy it.

Traps

Incorporating too early. People incorporate at the idea stage, then spend three years paying compliance costs on a business making very little - and lose the ability to offset early losses against other income, which for many is worth more than everything the company structure provides at that stage.

Incorporating too late. Restructuring an established business can trigger capital gains tax and stamp duty. There are rollover concessions for genuine restructures, but they have conditions and they’re much easier to satisfy with planning than in a hurry. If you can see a trigger coming, deal with it before it arrives.

Assuming a company solves everything. It doesn’t fix a business that isn’t profitable, it doesn’t remove the need for insurance, and it won’t stop a bank asking for a personal guarantee - which quietly puts your personal assets back on the line for the largest debt you’re likely to have.

Forgetting it’s revisitable. Structure is not permanent. The right structure at $60,000 of profit with no employees may be wrong at $400,000 with four staff, and that’s normal. Reviewing it every couple of years, or whenever something material changes, is the correct approach.

What to do with this

Come to your accountant with your actual numbers - revenue, profit, what you draw personally - plus an honest assessment of your risk exposure, and where you expect to be in two or three years. That conversation costs a fraction of what the wrong structure costs over a decade, and it’s substantially more productive when you’ve already thought about the trade-offs rather than hearing them for the first time.

Whatever you choose, the day-to-day discipline is the same: keep business and personal separate, keep records you could produce on request, and know your numbers well enough to answer the question when it comes up. Those habits matter more than the structure, and they’re what make changing it straightforward when the time comes.