Sole Trader or Company: How to Compare Them for Your Business

Sole trader or company: neither wins until you test four things

Neither structure is better for every business. The answer turns on four things: how much profit stays in the business, how the owner takes money out, how much personal liability the company actually removes, and what the company costs to keep running.

According to the Australian Taxation Office (ATO), a sole trader is the simplest and cheapest way to run a business, while companies have higher set-up and administration costs and extra reporting requirements. The ATO also says a company's income and assets belong to the company, not its shareholders. That one rule explains most of what follows.

The tax result can flip either way. In the worked year below, a company pays more tax than a sole trader at $80,000 of profit and less at $180,000 when all the profit stays in the company. When all the profit is paid out, the company comes out $1,000 behind at both levels.

This guide is general information only. The right structure depends on your circumstances, so take the decision to a registered tax agent.

The differences at a glance

A sole trader is an individual running a business. A company is a separate legal entity, run by its directors and owned by its shareholders. The table draws on the ATO and business.gov.au. No single row decides the question.

Do you pay more tax as a sole trader? A worked year

A sole trader can pay more or less tax than a company, depending on the profit and how much of it stays in the company. The table below is an illustration, not a break-even rule, and is arithmetic on ATO rates for 2026-27.

The assumptions are one Australian resident owner with no other income, aggregated turnover under $5 million, the company paying the 25% rate as a base rate entity and franking dividends at 25%. The table ignores super, the Medicare levy surcharge and all running costs.

The $1,000 gap on the last row is the small business income tax offset. The ATO limits that offset to people carrying on a small business as a sole trader, or with a share of net small business income from a partnership or trust. Franked dividends otherwise bring the total back to the owner's individual rates, because the shareholder includes the dividend and the franking credit as income, then gets a tax offset equal to the credit.

A mixed year: $180,000 profit, part taken out

Taking only part of the profit shows where a company's tax saving comes from, and why it may not last. The company pays $45,000 tax and pays the owner a $75,000 dividend with a $25,000 franking credit, so $100,000 goes on the owner's return.

That total is $7,750 below the sole trader figure, but the $60,000 still belongs to the company. Suppose it comes out later as a franked dividend with a $20,000 credit, at today's rates. In a year with no other income, the owner gets a further $3,880 refund. On top of another $100,000 of income, the owner pays a further $8,750, which more than erases the saving. The result depends on the owner's income in the year the money comes out, which nobody can know for certain today.

A lower company rate does not put money in your hand

The 25% rate applies to the company, not to the owner's spending money. According to business.gov.au, money the company earns belongs to the company even if you own it, and you cannot simply withdraw it as personal drawings. A company may pay a director a salary, wages or director's fees, and money can also come through dividends or loans. A loan that meets the Division 7A rules below is not treated as a dividend.

Division 7A is the rule that catches shortcuts. The ATO says a payment or benefit from a private company to a shareholder or their associate can be treated as a dividend, even if the parties call it a loan, advance, gift or written-off debt. A payment treated this way is called a deemed dividend. It is generally unfranked, so the owner gets no credit for tax the company has already paid. The ATO says the most effective way to provide money to a shareholder is a normal dividend, with a franking credit if available, which the shareholder includes as income.

When a loan from the company avoids a deemed dividend

The ATO says a payment is not treated as a dividend if it is repaid or converted into a complying loan by the company's lodgment day. A complying loan needs a written agreement in place before that day, minimum interest and a maximum term of 7 years, or 25 years if secured by a mortgage over real property. The ATO also notes it is reviewing its loans page after a recent court decision, so check the current version.

Complying loans carry real repayments. The ATO's benchmark interest rate is 8.77% for the income year ending 30 June 2027. Under the ATO's formula at that rate, a $60,000 balance with 7 years remaining needs a minimum yearly repayment of about $11,830.

What a company costs to run, and what it costs to set up

A company costs more to start and adds a yearly fee that a sole trader does not pay. The figures below come from business.gov.au, which states the $636 and $342 amounts as applying from 1 July 2026. The Australian Securities and Investments Commission (ASIC) raises some fees each 1 July in line with the consumer price index (CPI), so check the current amounts before relying on these.

The yearly fee is one of three annual jobs. According to ASIC, after receiving the annual statement a company must pay the fee, usually within 2 months of the annual review date, check its details and pass a solvency resolution. Late fees apply if these are not done on time.

The ongoing cost also includes extra compliance work, such as the company return, financial records and written records of meetings and resolutions. The guide to what accountants charge small businesses explains how to compare a fee for that work.

Liability: a company does not remove every personal risk

A company separates business debts from the owner's assets only in part. According to business.gov.au, a sole trader is personally liable for business debts, and assets in the sole trader's name can be used to pay them. Sole traders are also not covered by workers' compensation insurance. A company is generally liable for its own debts, and a member is not liable beyond any amount unpaid on their shares. Three gaps remain for a director.

• Tax and super debts. The ATO says it can recover a company's unpaid pay as you go (PAYG) withholding, GST and super guarantee charge from a current or former director personally. Recovery can start 21 days after a director penalty notice is issued.
• Personal guarantees. According to ASIC, lenders and trade suppliers often require personal guarantees or security, such as over a family home, when a company borrows money. If the company cannot repay, the director may have to.
• Director duties. Business.gov.au lists duties to act in good faith, act in the company's best interests, exercise care and diligence, and prevent insolvent trading. Directors who breach their legal obligations may be held personally liable.

When neither answer is clear

Some situations change the comparison enough that the worked year stops being a guide. These are the ones to raise with a registered tax agent, or with a lawyer on the legal side.

• Most of your income comes from your own labour. The ATO's personal services income rules cover income that is mainly a reward for your personal effort or skill, in almost any trade. They exist to stop that income being diverted to an associated entity that pays less tax, and income earned through a company may need to be attributed when the rules apply. If 80% or more of that income comes from one client and its associates, you fail the 80% rule, and can then self-assess as a personal services business only through the ATO's results test.
• You expect to sell a business asset at a gain. According to the ATO, companies cannot use the 50% capital gains tax discount. The ATO says the first stage of the government's capital gains tax reform is now law. From 1 July 2027 the reform replaces the 50% discount for resident individuals, trusts and partnerships with cost base indexation on gains that accrue on or after that date, and introduces a minimum 30% tax for individuals on certain net capital gains accruing from that date. Some exemptions apply, so the comparison for a future sale depends on when the gain accrues and how those rules apply to the asset.
• You already run the business as a sole trader. The ATO says transferring an asset to your company is a capital gains tax event, though an optional small business restructure rollover can defer the tax for eligible businesses. Trading stock, debtors and employee leave also need attention, and incorporation costs such as legal and lodgment fees may be deductible over five years.

Next steps

If you are staying a sole trader for now, read how sole traders pay tax. If a trust is also on your list, read the family trust guide. To price the work either way, use the guide to accountant costs.

Lomandra Accounting's structuring work, described on the services page, maps out how options such as sole trader, partnership, company or trust would apply to a business, including setup, ongoing costs and the way profit flows to owners. See business accounting on the Sunshine Coast, local pages for Mooloolaba and Kawana Waters, or contact Lomandra Accounting. Lomandra Accounting is a virtual firm working by phone, video and email.