When you start a business in Australia, the first decision you make — whether intentionally or by default — is your business structure. Most people begin as a sole trader because it is simple. But as income grows, the tax and liability implications of staying as a sole trader become increasingly costly. This guide explains the real differences between the two most common structures, and gives you a practical framework for deciding when a company makes sense.
Sole Trader — Simple, Fast, and Cheap to Start
A sole trader is the simplest structure. You register an ABN, and business income flows directly into your personal tax return. There are no ASIC fees, no separate company tax return, and minimal compliance overhead.
Sole Trader — Key Facts
Setup cost: Free (ABN registration is free)
Tax: All business profit taxed at your personal marginal rate (up to 47% including Medicare Levy)
Liability: Unlimited — you are personally liable for all business debts and legal claims
Compliance: Lodge a tax return annually; BAS if GST registered
Best for: Early-stage business, low revenue, low legal risk (e.g. freelancers, creatives, consultants just starting out)
Company — More Expensive, But Capped Tax and Legal Protection
A company is a separate legal entity. It files its own tax return, pays the company tax rate, and provides a legal separation between the business and your personal assets.
Company — Key Facts
Setup cost: ~$600 ASIC registration + ongoing $310/year ASIC annual fee
Tax rate: 25% for base rate entities (turnover < $50M, with conditions)
Liability: Limited — creditors generally cannot pursue your personal assets for company debts
Compliance: Annual financial statements, company tax return, possible PAYG withholding
Best for: Established business, consistent high income, businesses with legal or contract risk
The Tax Rate Comparison — Where a Company Starts to Win
Tax Comparison: Sole Trader vs Company
Net business profit of $100,000:
Sole Trader (marginal rate approx. 34.5%): tax ≈ $22,000 on the profit above $45,000
Company (25% rate): tax ≈ $25,000 flat on $100,000
At $100k, the company is marginally more expensive due to no tax-free threshold.
Net business profit of $150,000:
Sole Trader (rate into 37-45% range): tax ≈ $47,500+
Company (25% flat): tax ≈ $37,500
Company saves approximately $10,000+ at this income level.
The breakeven point (where company tax saves money) is typically around $120,000–$150,000 net profit.
The PSI Consideration — Not Every Business Qualifies for the 25% Rate
PSI Warning: A Company Is Not Always the Answer
If your income is classified as Personal Services Income (PSI) — meaning it is derived primarily from your personal skills and effort, rather than from a product, team or business system — the ATO may attribute company profits back to you personally.
PSI rules apply to many IT contractors, consultants, designers and other service professionals who work for one or two dominant clients.
A company structure still provides liability protection under PSI, but the tax rate benefit may be limited.
Professional assessment of your income profile before setting up a company is strongly recommended.
When Should You Make the Switch?
If you are not yet at these income levels, a sole trader with an ABN is usually the right starting point. Setting up a company too early creates compliance costs without meaningful tax benefit.
- Net profit consistently above $120,000–$150,000 per year
- You have multiple clients (reducing PSI risk)
- You employ or plan to employ others, or take on contractors
- Your business involves contracts, products, or services that carry legal risk
- You want to retain profits in the business rather than draw everything as personal income
General information only
This article provides general tax information only and does not constitute personal tax, legal, or financial advice. Tax rules can change and individual circumstances vary.
If you would like advice based on your situation, please get in touch with the practice.
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