Most Australian businesses start as a sole trader. It's fast, cheap, and simple — and for a lot of people, it's the right call early on. But as your income grows, the sole trader structure can quietly become one of the most expensive decisions you're making, without you ever realising it.
The question isn't really "sole trader or company?" The question is: at what point does staying as a sole trader cost you more than switching?
In this guide, we break down the key differences between the two structures — tax, liability, control, income, and more — so you can make a genuinely informed decision. And if you're already questioning whether you've outgrown your current structure, the answer might surprise you.
Quick tip: If your net business profit is consistently above $100,000, there's a strong chance a company structure would reduce your tax bill. Book a free call with Reacco and we'll run the numbers for your specific situation.
The Tax Tipping Point: Where the Numbers Diverge
Tax is usually the deciding factor — and it's where sole traders tend to get the biggest shock when they finally look at the comparison properly.
As a sole trader, your business income is treated as your personal income. That means it's taxed at individual marginal tax rates, which currently range from 16% (on income above $18,200) up to 45% — plus the 2% Medicare levy, bringing the effective top rate to 47% on income above $190,000.
A company, by contrast, is taxed as a separate legal entity. Small businesses with a turnover under $50 million pay the base rate entity (BRE) company tax rate of just 25%. Larger companies pay 30%.
That gap — between 30% (individual rate from $45,001) and 25% (company rate) — is where the conversation gets interesting. The higher your profit, the more that difference compounds.
| Factor | Sole Trader | Company |
|---|---|---|
| Tax rate | Individual marginal rate (16%–47%) | 25% (base rate entity) or 30% |
| Tax-free threshold | Yes — first $18,200 tax-free | No — every dollar is taxed |
| Tax return | Included in personal tax return | Separate company tax return required |
| FBT exposure | No | Yes — benefits to directors/associates may attract FBT |
| GST registration | Required at $75,000 turnover | Required at $75,000 turnover |
| Income splitting | Very limited | Possible via dividends to shareholders |
Control: Who Makes the Decisions?
As a sole trader, you have complete autonomy. Every decision — big or small — is yours to make, and you don't answer to anyone else. For many small business owners, that independence is worth a lot.
In a company, shareholders appoint directors to run the business. Where there's more than one director, major decisions are made collectively, and the company operates within the framework of the Corporations Act 2001. Significant decisions may require shareholder approval, with voting rights typically proportional to shareholding.
That said, if you're setting up a private company on your own or with a partner, you'll likely be the sole director and shareholder — which means you retain a strong degree of practical control while still gaining the legal and tax benefits of the company structure.
How Income Works Differently
This is an area that catches a lot of business owners off guard when they first make the switch.
As a sole trader, all business income is yours. You can draw on it freely, there's no legal requirement for a separate business bank account (though it's highly recommended), and all income and expenses are reported in your personal tax return.
In a company, the income belongs to the company — not to you personally. You cannot simply withdraw funds as you would from a sole trader account. Instead, money is accessed through:
- Director salary or fees — for work you perform for the company, subject to PAYG withholding
- Dividends — distributions of after-tax profit to shareholders, which come with franking credits attached
This separation is actually a significant advantage when it comes to tax planning — it gives you flexibility to manage when and how income is recognised in your hands. But it does require more disciplined record-keeping and a properly set-up accounting system like Xero.
Liability: What's Really at Stake
This is the part of the conversation that tends to focus people's minds — especially once they have a home, a family, or significant personal assets.
As a sole trader, you are the business. There is no legal separation between your business and personal affairs. If the business runs into debt — whether it's a supplier dispute, a client claiming damages, or an ATO liability — your personal assets are on the table. That includes your home, your car, and any jointly held assets with your spouse.
A company is a separate legal entity. In most circumstances, the company's liabilities are limited to its own assets — not yours personally. Shareholders are generally only liable for any unpaid capital on their shares, and directors enjoy limited liability provided they act appropriately.
Important exception: Directors can still be personally liable if they allow a company to trade while insolvent, breach their director duties, or sign personal guarantees (which banks and landlords commonly require). Directors are also personally liable for unpaid PAYG withholding and Superannuation Guarantee Charge — this liability can survive even after resignation.
For many Perth business owners — particularly tradies, contractors and those in higher-risk industries — the liability protection alone makes the company structure worth the additional compliance cost.
Employing Staff
Both sole traders and companies can employ staff, and both are subject to the same obligations: workers' compensation insurance, PAYG withholding, superannuation, Single Touch Payroll (STP) reporting, and employee entitlements under the Fair Work Act.
The key difference is that as a director of a company, you face personal liability for any unpaid or unreported PAYG withholding or Superannuation Guarantee Charge. This liability exists regardless of the company's separate legal status, and it continues even if you resign as director. It is therefore critical that companies stay on top of payroll obligations — lodging and paying on time, every time.
Need help setting up payroll properly from day one? See our payroll services for Perth businesses.
Raising Capital to Grow
If your ambition is to grow, bring in a business partner, or attract outside investment, the sole trader structure will eventually become a roadblock.
A sole trader cannot offer equity in the business. If you need capital to fund growth, your only options are personal funds or traditional debt finance — loans that must be repaid from cash flow regardless of how the business performs.
A company can issue shares to investors in exchange for capital. This brings in funds without creating a debt obligation and allows others to become part-owners in a clearly defined, legally governed way. It also makes the business significantly more attractive to sophisticated investors and business partners.
Succession: What Happens to Your Business When You're Gone?
It's not a comfortable topic, but it's an important one — particularly if you're building something you want to protect for your family.
As a sole trader, the business ceases to exist when you do. Any assets and liabilities pass through your estate, handled according to your will — but the business itself cannot continue operating without you. For clients and employees who depend on it, that can be a significant problem.
A company enjoys what's called perpetual succession — it continues to exist as a legal entity regardless of what happens to its directors or shareholders. Shares can be transferred, left in a will, or sold to a successor. The business keeps running. This makes a company far better suited to long-term planning and legacy building.
The Cost of Running a Company
It wouldn't be an honest comparison without acknowledging the additional costs involved in operating as a company.
- ASIC registration and annual review fee — there is a fee to register a company and an annual review fee payable to ASIC each year
- Company tax return — a separate income tax return must be prepared and lodged each year
- Financial statements — companies are required to maintain proper financial records
- Higher bookkeeping complexity — the separation of company and personal funds requires more diligent record-keeping
- Accountant fees — company compliance typically costs more than a sole trader return, though the tax savings often far outweigh this
These costs are real, but they need to be weighed against the benefits — and for most established businesses, the numbers stack up clearly in favour of the company structure.
Not Sure Which Structure Is Right for You?
The answer depends on your income, your industry, your goals, and your personal circumstances. At Reacco, we run a proper structure review — not a generic recommendation. We'll look at your numbers, explain the options clearly, and tell you exactly what the difference would mean in dollar terms. Free consultation, no obligation.
Book a Free Structure Review →Signs It's Time to Review Your Business Structure
You don't need to wait until something goes wrong to review your structure. Here are the common triggers our clients come to us with:
- Your net business profit is consistently above $80,000–$100,000
- You're paying tax at 30% or higher on business income
- You want to bring a business partner or investor on board
- You're concerned about personal liability — especially if you work in construction, trades, or professional services
- You're thinking about what happens to your business if you couldn't work
- You want to start retaining profits in the business rather than drawing everything out
- You've been told the ATO is scrutinising your industry for income splitting or PSI issues
If two or more of these apply to you, a structure review should be at the top of your list — not something you get around to next year.
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Reacco: Business Structure Advice for Perth Small Businesses
At Reacco Chartered Accountants, business structure reviews are one of the most common — and most valuable — conversations we have with Perth small business owners. The difference between the right and wrong structure, over a 5–10 year period, can run into tens of thousands of dollars in tax.
We'll look at your situation holistically: your income, your industry, your growth plans, your personal circumstances, and your long-term goals. We won't push you toward a company structure if it doesn't make sense for where you are right now — but if the numbers stack up, we'll show you exactly why and walk you through the transition step by step.
For more on our services and pricing, visit our small business accountant Perth page. Or if you're specifically a sole trader weighing up your options, read: Do I Need an Accountant as a Sole Trader in WA?
Book a free consultation today — no obligation, no jargon, just a straight conversation about what makes sense for your business.