Choosing the right business structure—sole trader vs company—is a key decision that affects tax obligations, legal liability, administrative workload, and growth potential. While many businesses start as sole traders due to simplicity, increasing income and risk exposure often prompt a reevaluation of structure.
This guide outlines the key differences, with a focus on tax implications, so you can make an informed decision that aligns with your goals.
What is a Sole Trader?
A sole trader is the simplest business structure. As the sole owner, you’re legally and financially responsible for all aspects of the business. There’s no legal distinction between you and your business, meaning you are personally liable for any debts or legal issues.
Advantages
- Low setup and ongoing costs
- All income is yours
- Simple tax reporting (just one personal tax return)
- Tax offsets and deductions available for low-income earners
- No compulsory super contributions (unless employing others)
Disadvantages
- Full personal liability for debts and lawsuits
- Fewer tax planning opportunities at higher income levels
- Limited capacity for expansion or investment
- Business ceases upon your death or retirement
What is a Company (Pty Ltd)?
A proprietary limited (Pty Ltd) company is a separate legal entity. This means it can own assets, enter into contracts, sue, or be sued independently of its owners. Shareholders have limited liability, so personal assets are generally protected from business debts.
Advantages
- Limited liability for owners
- Greater credibility with investors and lenders
- Access to lower company tax rates (from 25%)
- Easier to raise capital or transfer ownership
- Greater options for employee incentives and tax planning
Disadvantages
- Higher setup and compliance costs
- Complex administration and legal obligations
- Separate tax return required for the company
- Profits distributed as dividends are also taxed
Sole Trader vs Company: Comparison Table
| Feature | Sole Trader | Company (Pty Ltd) |
| Setup Cost | Low — No ACN or ASIC registration required | Consult with your accountant. |
| Tax Rate | Personal income tax rates (0%–45%) | 25% (base rate entity) or 30% (others), no tax-free threshold |
| Tax Reporting | Income declared on personal tax return | Separate company tax return plus personal tax return for directors |
| Legal Liability | Unlimited — personal assets at risk | Limited liability — personal assets usually protected |
| Control | Full control by the owner | Control shared among directors and governed by company constitution |
| Profits | All profits go to the sole trader | Profits belong to the company; can be paid as wages, dividends, or retained |
| Super Contributions | Optional (unless employing others) | Compulsory super for employees, including director wages |
| Business Continuity | Business ends with the death or retirement of the owner | Company continues to exist independently of changes in ownership or directorship |
| Administrative Burden | Minimal — fewer reporting and compliance obligations | High — financial reports, ASIC compliance, tax returns, record-keeping |
| Growth Potential | Limited — cannot issue shares or raise capital easily | High — can raise capital by issuing shares, easier to attract investors |
| Employee Hiring | Owner cannot employ themselves or split ownership | Can employ directors, issue shares to staff, and offer stock-based incentives |
Taxation: Sole Trader vs Company
Sole Trader Taxation
- Taxed at individual marginal tax rates
- Can access the tax-free threshold (up to $18,200 in 2024–25)
- Simpler reporting: all income and deductions included in personal tax return
- Tax planning opportunities are limited at higher incomes
Company Taxation
- Company is taxed as a separate legal entity
- No tax-free threshold — taxed from the first dollar earned
- Base rate company tax is 25% for businesses with under $50 million turnover and 80% passive income
- Directors/shareholders may be taxed on dividends or wages in addition to company tax
Which Business Structure Is Right for You?
Choosing between a sole trader and company structure depends on factors like income level, business risk, growth plans, and desire for asset protection.
| Criteria | Best Suited Structure |
| Just starting, low income | Sole Trader |
| Need for asset protection | Company |
| Desire for tax planning flexibility | Company |
| Want to keep costs low | Sole Trader |
| Planning to attract investors | Company |
| Need to build a business legacy | Company |
Conclusion: Balancing Simplicity and Strategy
Both structures have their place, and neither is better in all situations. A sole trader setup offers ease and cost-efficiency, ideal for startups or freelancers. In contrast, a company provides greater scalability, risk protection, and tax flexibility, making it the structure of choice for growing businesses.
Key Takeaways:
- Sole traders benefit from simplicity, but bear full liability and higher personal tax as income grows.
- Companies offer lower tax rates and asset protection but come with higher costs and complexity.
- Consider your income, risk exposure, long-term goals, and admin capacity before choosing.
- Seek advice from a qualified accountant or lawyer to ensure your structure aligns with your business plan.
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How can we help?
If you have any questions or would like further information, please feel free to give our office on 08 9221 5522 or via email – info@camdenprofessionals.com.au or arrange a time for a meeting so we can discuss your requirements in more detail.
General Advice Warning
The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.
Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.
Although every effort has been made to verify the accuracy of the information contained on this page and on this website, Camden Professionals, its officers, representatives, employees, and agents disclaim all liability [except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.
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