Key takeaways
- Sole traders are the simplest and cheapest to run, but you're personally liable for business debts.
- A company is a separate legal entity, generally taxed at 25% if it's a base rate entity, but money you take out is taxed again in your hands.
- Switching makes most sense when profits are consistently above what you need to live on, or when risk is rising.
- Changing structure can have tax and stamp duty consequences, so plan it before you move assets.
Most businesses start as sole traders, and for good reason: it's quick, cheap and simple. But as the business grows, the questions start. Am I paying too much tax? What happens if something goes wrong? Here's how the two structures compare, and the signs it may be time to change.
How they compare
| Sole trader | Company | |
|---|---|---|
| Setup and running costs | Lowest | Higher: ASIC registration and annual review fee, a company tax return and more bookkeeping |
| Liability | Unlimited. Your personal assets are at risk | Generally limited to the company, though directors can still be personally liable in some cases |
| Tax on profit | Your personal marginal rates, up to 45% plus the Medicare levy | 25% for base rate entities, 30% otherwise |
| Getting money out | All profit is yours | Through wages or dividends, which are taxed in your hands (with franking credits for dividends) |
| Admin | Business income goes on your individual return | Separate tax return, bank account, records and director duties |
Signs it may be time to switch
- Your profit is well above what you need to live on. A company lets you leave profit in the business at the company rate, rather than paying your top marginal rate on all of it.
- Your risk is growing. Bigger contracts, staff, premises or debt mean more to lose if something goes wrong.
- You want to bring in a partner or investor, or eventually sell. Shares are much easier to transfer than a sole trader business.
- Customers or tenders expect it. Some larger clients prefer to deal with a company.
Things to watch
- The tax saving isn't automatic. Money you take out of a company is taxed again as wages or dividends. Read dividends or wages for how that works.
- Personal services income rules can mean income earned mainly from your own skills is still taxed as yours, even through a company.
- Company money isn't your money. Taking money out without the right paperwork can trigger Division 7A.
- Moving the business across can involve capital gains tax, stamp duty, new registrations and contracts. Small business restructure rollover relief may help, but it needs planning.
Many owners end up with a company owned by a family trust. Watch our short video on how a trust-owned trading company works.
Get the timing right
A change of structure is easiest at the start of a financial year, and best planned a few months ahead. We help Melbourne business owners compare the numbers and handle the whole move. See company and trust setup, or book a free first consultation.
Sources
Last reviewed November 2026. This article is general information only and doesn't take into account your personal circumstances. It isn't tax, legal or financial advice. Tax laws change, and proposed measures may change before they become law. Talk to us before acting on anything here.
