Navigating the decision-making process between sole trader and company structures can be confusing because both have pros and cons, and each business has its own unique needs to prioritise. Most people initially choose to start as sole traders. However, as they start to earn more and have to pay more taxes, they often find themselves contemplating whether a different structure might be more beneficial.
When deciding on a business structure, consider factors such as risk exposure, capital requirements, administrative capacity, and long-term objectives. One of the key differences between sole traders and companies is the company tax rate.
In this blog, we’ll examine the differences between a sole trader’s business structure and a company’s business structure so you can determine which is better suited to your business’s current and future goals and circumstances.
What is a Sole Trader?
A sole trader is an individual who owns and operates a business. They are the only owner responsible for controlling and managing the business. This means all decisions, from day-to-day operations to strategic planning, rest on their shoulders, offering complete autonomy and control. In contrast, companies involve shared decision-making among directors and shareholders, which can influence how the business is managed.
While a sole trader structure can be affordable and simple, it can be riskier because the owner is personally liable for the business. This structure has no legal distinction between the owner and the business. Sole traders also have fewer setup costs and lower ongoing compliance requirements compared to companies, making it an attractive option for those starting out.
Consequently, any debts or liabilities the business incurs are directly attributed to the owner. If the business faced financial struggles or legal issues, the owner’s personal assets, such as their home or savings, could potentially be at risk of settling business debts.
Advantages of Being a Sole Trader
- Less expensive to set up and maintain
- Only one tax return is required (your individual return)
- The business is entirely under your ownership, control and management
- Businesses generating a low income can receive tax benefits via the progressive individual tax system, and offsets
- You don’t need to pay workers’ compensation if you don’t employ staff
- You don’t need to make super contributions on your drawings (but consider making personal super contributions for retirement and tax planning)
Disadvantages of Operating with a Sole Trader Business Structure
- Your personal assets can be at risk if the business goes into debt
- Less flexibility for tax planning
- Businesses generating a high income have fewer opportunities to reduce taxes
- Retaining employees of a high calibre can take time and effort
- Limited capacity for growth because you can’t employ partners or co-founders as equity owners
- You keep all profits (and losses), which can push you into higher personal tax brackets
- The business ends when you pass away or retire
What is a Pty Ltd Company?
A proprietary limited company, often abbreviated as Pty Ltd, is a business structure where the company is its own legal entity. This means it has rights and responsibilities separate from those of its owners or operators. The business can enter into contracts and legal relations, have up to 50 shareholders, and shareholders are generally not held responsible for company’s debts.
Because the company has its own legal personality, it can own property, sue, and be sued in its own name. The liability of shareholders is limited, which generally protects their personal assets from the company’s debts and liabilities.
Establishing a company can be more expensive, but it offers better protection and more flexibility as a separate legal entity regarding tax. The costs associated with setting up a Pty Ltd company include registration fees and ongoing regulatory compliance, which involve additional administrative work and expenses. Increased administrative tasks and regulatory requirements must be considered when choosing a business structure.
However, the benefits—such as limited liability, potential tax advantages, greater ability to raise capital, and an enhanced perception of credibility—often outweigh these costs for many business owners.
Additionally, tax flexibility arises from the company being taxed at the corporate tax rate and having access to various concessions and incentives that might not be available to sole traders. Companies pay a flat corporate tax rate, which is often lower than personal income tax rates. The current company tax rates are 25% for base rate entities and 30% for all others in 2024–25 and 2025–26.
Advantages of Running a Company
- Your personal assets are generally protected from company losses (limited liability)
- More flexibility for tax planning, as profits can be retained in the company or distributed
- You can employ shareholders
- Ownership can be transferred by selling shares
- Raising capital is typically easier
- Company tax rates can be more favourable once profits grow
Disadvantages of Running a Company
- More expensive to set up and maintain
- Separate tax returns make compliance more time-consuming
- Winding up a company can be a slow and expensive process
- Profits distributed to shareholders (dividends) can be taxable in shareholders’ hands, with franking credits potentially offsetting some or all of the tax
Sole Trader vs Company at a Glance (2025)
Not sure whether to choose a company or a sole trader structure? Here are there key traits:
Set Up Costs
- Sole Trader: No need for an Australian Company Number (ACN) or registration with ASIC. Separate business bank accounts are recommended but not mandatory.
- Company: Registering a proprietary limited company with ASIC costs $611 in 2025 to receive your ACN. A separate business bank account is mandatory and may come with fees.
Taxation
- Sole Trader: Taxed as an individual, with business income reported on your personal tax return. Pay tax at individual income tax rates. Access to the tax-free threshold and relevant offsets.
- Company: Taxed as a separate entity, with company income reported on the company tax return. Taxed at the company tax rate (25% for base rate entities, 30% for all others in 2024–25 and 2025–26). No tax-free threshold – tax applies to all taxable income.
Admin and Ongoing Costs
- Sole Trader: Simple structure with less admin and minimal ongoing costs. No separate business tax return required.
- Company: More complex structure with more admin and increased ongoing costs (e.g., ASIC annual review fee, statutory records). Company owners must file separate individual and company tax returns.
Income
- Sole Trader: Money earned is treated as personal income. Deductions can be claimed for business running costs.
- Company: All money earned belongs to the company. Directors can be paid through wages, directors’ fees, shares, dividends, or loans (subject to Division 7A and other rules).
Liability of Debt
- Sole Trader: Personally liable for financial or tax debts. No distinction between personal and business assets.
Company: The company is liable for business debts. Company assets can be sold to pay off debts. Directors’ duties and personal guarantees can still create personal exposure in some cases.
Business Longevity
- Sole Trader: The business will generally end when the sole trader passes away.
- Company: The business can continue running if a director or shareholder passes away, enabling succession and continuity.
2025 Numbers to Know
- ASIC company registration (Pty Ltd): $611 (from 1 July 2025)
- ASIC annual review fee (proprietary company): $329 (from 1 July 2025)
- ASIC late payment fees: Up to one month late $98; more than one month late $411 (from 1 July 2025)
- Business name registration: 1-year $45; 3-year $104 (from 1 July 2025)
- Business Activity Statement (BAS) due dates: Know your upcoming ATO BAS obligations for the 2024-2025 financial year
- Company tax rates: 25% base rate entities; 30% all others (unchanged for 2024–25 and 2025–26)
- Individual tax brackets (relevant to sole traders, 2024–25 and continuing in 2025–26):
- $0 – $18,200: 0%
- $18,201 – $45,000: 16%
- $45,001 – $135,000: 30%
- $135,001 – $190,000: 37%
- $190,001 and over: 45%
What to Consider When Deciding Between Company vs Sole Trader
Consider business risk, tax implications, compliance requirements, ownership and control, and growth plans. Seek professional advice from a lawyer, accountant, or business advisor to make an informed decision based on your specific circumstances. It is essential to consult with an accountant or business advisor when evaluating which business structure fits best.
Sole Trader vs Company at a Glance
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When deciding between a sole trader and company structure, consider business risk, tax implications, compliance requirements, ownership and control, and plans.
Seek professional advice from a lawyer, accountant, or business advisor to make an informed decision based on your specific circumstances.
Key Takeaways
- Operating a business as a sole trader can be attractive because of its flexibility and low costs. However, the risk of being personally liable for business debts can cause concern.
- A company structure has limited liability and certain tax benefits, but opening and maintaining a company can be more expensive and highly regulated.
- The right choice depends on your personal and business circumstances and what you’re comfortable with. Carefully weigh the pros and cons of each option and determine which disadvantages are least concerning to you.
- If you need help making this important financial decision, it can be beneficial to engage a professional. Contact KNS today to connect with highly qualified business advisors who can guide you through the decision-making process.
FAQs
What Are 3 Disadvantages of Being a Sole Trader?
- Personal Liability: Sole traders are personally liable for all the business’s debts and liabilities. This means that personal assets, such as your home or car, could be used to cover business debts.
- Limited Capacity for Growth: As a sole trader, you may find it challenging to expand your business due to limited resources and the inability to take on partners or shareholders.
- Limited Tax Planning Opportunities: Sole traders might need more support in tax planning and may end up with a higher tax bill as their business income is taxed at personal income tax rates, which can be higher than corporate tax rates.
What Does “Separate Legal Entity” Mean?
The term “separate legal entity” refers to the concept that a business entity, such as a company, is distinct and separate from its owners (shareholders) or operators. This means the company has its own legal rights and obligations separate from those of its owners or directors.
In other words, the company continues to exist even if its shareholders or directors change, retire, or pass away; it can enter into contracts, sue, and be sued in its own name, and it is taxed separately from its owners.
When Should a Sole Trader Become a Company Structure?
The transition from a sole trader to a company often comes into consideration under a few circumstances.
When a business starts facing increased liability and risks, the limited liability offered by a company structure can safeguard the owner’s personal assets. Additionally, if a business is looking to raise capital for expansion, the ability of a company to issue shares can be a pivotal advantage.
Taxation can also play a crucial role in this decision; if the business income reaches a level where the corporate tax rate is more beneficial than the individual rate, it might be financially prudent to transition to a company.
Lastly, if the owner wishes for the business to continue beyond their involvement, a company structure that allows for business continuity might be more suitable.
Is It Better to Have a Company or Be a Sole Trader?
Choosing between a company and a sole trader structure hinges on various factors, including risk tolerance, tax implications, and administrative preferences.
A company structure can offer a shield against personal liability and provide more favourable tax rates and planning opportunities as business income grows.
However, it has a heavier administrative burden due to its stringent compliance and reporting requirements.
On the other hand, a sole trader structure allows the owner to maintain complete control over the business. It involves fewer administrative hassles, but it does not offer the same level of personal financial protection as a company.
What Are the Benefits of Being a Company Instead of a Sole Trader?
Operating as a company comes with several benefits, such as limited liability, which protects the shareholders’ personal assets from the company’s debts and liabilities. This structure can also offer certain tax advantages, potentially providing access to a lower tax rate and additional tax planning strategies unavailable to sole traders.
Additionally, a company can facilitate capital raising by issuing shares, enabling easier business expansion and development. The company structure also allows for business continuity beyond the involvement or lifespan of the initial owners and, in some contexts, may convey a perception of stability and professionalism to potential clients or partners.
Disclaimer
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.
