Sole Trader vs Company in Australia: Tax, Liability and Costs

Short answer: As a sole trader, you and the business are the same legal person. Your profit is taxed at personal rates, from nil to 45% plus the 2% Medicare levy, and you’re personally liable for every business debt. A company (Pty Ltd) is a separate legal entity. It pays 25% tax if it’s a base rate entity (30% otherwise), generally limits your liability as a shareholder, and costs more to set up and run, with director duties and strict rules on taking money out. The tax saving only applies to profit you leave in the company, so a company tends to pay off when profits are high and steady, not in your first year.

The comparison follows business.gov.au’s guide to the difference between a sole trader and a company, with tax rates from the ATO for the 2026–27 income year (1 July 2026 – 30 June 2027). If you’re just starting, what is a sole trader covers the basics, and sole trader tax rates shows what you’d pay now.

What is the difference between a sole trader and a company?

A sole trader is an individual trading on their own account. A company is a separate legal entity that owns the business, usually with you as director and shareholder.

	Sole trader	Company (Pty Ltd)
Legal status	You are the business	A separate legal entity
Tax	Personal rates on all profit, plus the Medicare levy	25% or 30% on company profit; you’re taxed on what you take out
Liability	Unlimited: personal assets can pay business debts	Generally limited for shareholders, with exceptions for directors
Registrations	Your TFN and a free ABN	Company registration with ASIC, an ACN, its own TFN and ABN, and a director ID
Set-up cost	Low	Higher: ASIC fees, often an accountant or lawyer
Yearly admin	One individual tax return with a business schedule	Company tax return, ASIC annual review, director duties
Taking money out	It’s all yours already	Wages, dividends or a properly documented loan

How is a company taxed differently from a sole trader?

A sole trader pays individual income tax on the whole profit, whether or not they spend it. A company pays company tax on its profit, and you pay personal tax only on what you take out.

Sole trader rates, 2026–27 (ATO; add the 2% Medicare levy)

Taxable income	Rate on each dollar in the band
$0 – $18,200	Nil
$18,201 – $45,000	15%
$45,001 – $135,000	30%
$135,001 – $190,000	37%
$190,001 and over	45%

Company rates. A company that’s a base rate entity pays 25%; other companies pay 30%. To be a base rate entity, the company’s aggregated turnover must be under $50 million, and no more than 80% of its assessable income can be passive income such as interest or rent. A tradie’s trading company usually qualifies. The ATO’s 2025–26 company tax rates show the same 25% and 30%, and the $50 million threshold applies for 2021–22 and later years.

Three rules stop the company rate from being a simple discount:

• Money you take out is taxed again in your hands. Wages are taxed at your personal rates. Dividends are too, though they can carry franking credits for the company tax already paid.
• Company money isn’t your money. Under Division 7A, a payment, loan or gift from a private company to a shareholder can be treated as an unfranked dividend. A loan escapes that only if it’s repaid, or put on a complying loan agreement, by the company’s lodgment day.
• Personal services income can’t be parked in a company. If the company mainly earns money from your own labour and skills, the personal services income rules can treat that income as yours, taxed at your personal rates, unless you’re a personal services business. Contractor vs employee explains the tests.

Two things a sole trader gets that a company doesn’t: the $18,200 tax-free threshold applies to your profit, and the small business income tax offset of up to $1,000 a year is for individuals.

Does a company save tax? A worked example

Only on profit you leave in the company, and much of that saving is a delay rather than a cut.

Sam is an electrician with $150,000 of profit in 2026–27 and no other income. He needs $90,000 a year to live on and wants to leave the other $60,000 in the business for a new van and a buffer.

	Sole trader	Company
Tax on the $90,000 Sam lives on	$19,320	About $19,320, if the company pays it to him as wages
Tax on the $60,000 left in the business	$20,250 (at 32% and 39%, Medicare levy included)	$15,000 (25% company tax)
Total tax this year	$39,570	About $34,320

So the company saves about $5,250 this year. But when the remaining $45,000 is paid out to Sam later, it’s taxed at his personal rates, with a franking credit for the $15,000 of company tax already paid. Against the saving, Sam pays for a company tax return, separate accounts and ASIC’s annual fee. The sole trader figures use the ATO’s 2026–27 rates, before the small business offset. The company figures ignore super on wages and running costs, so treat them as a rough guide only.

Does a company protect your personal assets?

Mostly, but not completely. As a sole trader you have unlimited liability: business.gov.au says assets in your name can be used to pay business debts. A company is liable for its own debts, and shareholders generally aren’t personally liable for them.

As a director you lose some of that protection:

• Director duties. You must act in good faith and in the company’s best interests, use care and diligence, prevent the company trading while insolvent, and help a liquidator if it’s wound up.
• Tax and super debts. Directors are personally liable for unpaid PAYG withholding and super, according to business.gov.au.
• Personal guarantees. Lenders, suppliers and landlords often ask small-company directors to guarantee the company’s debts personally.

Either way, a company is no substitute for public liability insurance.

What does a company cost to set up and run?

More than a sole trader, in money and time. A sole trader needs only a free ABN, plus a business name if you trade under a name other than your own. business.gov.au puts that at $47–$108.

For a company, business.gov.au lists a company name reservation from $65 and registration at $636 for a proprietary limited company. ASIC indexes its fees each 1 July, so check the current amount before you register. Every director also needs a director ID.

Each year the company must complete its annual review: pay ASIC’s annual review fee, usually due 2 months after the review date, keep its details up to date and pass a solvency resolution. Add a company tax return, separate bank accounts and, for most owners, an accountant’s fees.

When does a Pty Ltd make sense?

When the benefits outweigh those extra costs, which usually means some of these apply:

• Profit is high and steady, and you regularly leave a chunk of it in the business rather than spending it.
• Your work carries real liability risk, or you’re taking on large contracts, leases or loans.
• You’re bringing in a partner or investor, who can take shares instead of sharing your ABN.
• A client or contract requires a company, which some head contractors and agencies do.

Staying a sole trader usually makes sense if profit is modest, you spend most of what you earn, your income is mostly your own labour (so the PSI rules may apply anyway), or you expect early losses. A sole trader’s loss may reduce your other income, subject to the non-commercial loss rules; a company’s loss stays in the company.

How do you change from sole trader to company?

business.gov.au sets out the steps to change your sole trader business to a company:

1. Get advice first. Moving assets into a company can trigger tax on the transfer, so ask an accountant before you sign anything.
2. Get a director ID, then register the company through the Business Registration Service. That covers the company name, ACN and ABN, and GST registration if it’s needed.
3. Use a new ABN. You can’t transfer your sole trader ABN to the company.
4. Transfer licences and assets, including tools, vehicles, contracts, trademarks and other intellectual property. Check whether your trade licence has to be held in the company’s name.
5. Transfer or cancel your business name, and update your bank, insurance, customers and suppliers.
6. Invoice in the company’s name from the changeover date, using the company’s ABN.
7. Finish the sole trader’s obligations, then cancel the old ABN. Lodge any outstanding BAS and returns first. Cancelling the ABN also cancels its GST registration. See how to cancel or update your ABN.

…and where does Keel fit?

Whichever structure you choose, the records are the same kind: quotes, invoices, receipts and kilometres driven.

Keel: Invoice Maker & Receipts, by Ilura Technology OÜ, is an iPhone app for people who work for themselves. An accepted estimate becomes the invoice in one tap, and every quote, receipt, expense and invoice (as a PDF) is kept under its job, along with your customers and business mileage. A “who owes you” list drafts reminders that you review and send yourself; nothing is sent automatically. Records stay on the iPhone, with no account, no bank connection and no cloud sync, and the App Store privacy label reads “Data Not Collected”.

Keel doesn’t advise on business structure, lodge tax returns or BAS, or connect to the ATO or ASIC. It’s free with no invoice limit, and free invoices carry a small “Made with Keel” footer. Keel Lifetime is a one-time purchase ($249.99 USD; the App Store shows your local price) that adds custom branding, a signature, premium templates and accountant-ready exports. Keel on the App Store. The Australia hub has more guides.

Frequently asked questions

Is it better to be a sole trader or a company in Australia? For most people starting out, a sole trader is simpler and cheaper: one tax return, a free ABN and no ASIC fees. A company can be better once profits are high and you leave money in the business, or when liability risk is significant. Weigh both the tax and the extra cost and admin, and get advice on your figures.

Do companies pay less tax than sole traders? On profit left in the company, often yes: 25% for a base rate entity, against marginal rates of 30% or more plus the Medicare levy for a sole trader earning over $45,000. Money you take out is taxed at your personal rates, though, and the personal services income rules can treat a one-person company’s income as yours. The saving is usually smaller than the headline rates suggest.

What is the company tax rate for a small business? 25% for a base rate entity: a company with aggregated turnover under $50 million and no more than 80% passive income. Other companies pay 30%. Those rates apply only to companies. A sole trader pays individual rates on all their profit.

Can I keep my ABN if I change from sole trader to company? No. An ABN belongs to the entity that holds it, so the company needs its own ABN, and you cancel the sole trader ABN once its obligations are finished. Cancelling it also cancels the GST registration attached to it, so register the company for GST if it needs to be.

Am I personally liable as a company director? Partly. Shareholders generally aren’t liable for a company’s debts, but directors have legal duties, including preventing insolvent trading, and are personally liable for unpaid PAYG withholding and super. Personal guarantees you sign for loans or leases also make you liable.

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This article is general information, not tax or legal advice. Consult a qualified Australian tax professional.