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.

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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.

Setting up a new business is an exciting, but it is critical to consider how you structure your business correctly to gain the maximum tax benefits. Many Australians initially set up the small business as a sole trader. This article looks at what your tax obligations are when choosing this structure. Before we examine the tax issue, let’s review this entity.

Sole Trader – Advantages

First, let’s consider the simplest of the various business structures, starting a business as a sole trader or as part of a partnership (which is treated for tax purposes as basically a collection of individuals).

The main advantage of this structure is its simplicity and some of the benefits include:

• less red tape to negotiate to start your business
• the associated legal and professional costs are minimal
• you simply record the business’s income and expenses in your own personal tax return
• any tax losses incurred in the early years of trading can usually (subject to some anti-avoidance rules) be applied at the individual level, against all your other forms of assessable income.

This may include income such as salary and wages, and income from other business activities. Alternatively, if there is no other source of current year income, the losses can be carried forward and applied against income generated in future years.

Therefore, for those with relatively simple tax affairs, the easy access to loss relief can make operating as a sole trader very attractive. In addition, the availability of the 50% Capital Gains Tax discount  when you ultimately sell can also make this a desirable way to invest.

There are however some disadvantages of this structure. Once you start trading at a profit, you’ll pay income tax at your applicable marginal tax rate (which could be up to 47% for those earning more than $180,000). The potential to split income between family members, which is often available where a trust is used as the business vehicle, does not exist. There is also no form of asset protection from creditors or protection in the event of family break-ups.

This means you are the only owner of the business and fully control and manage it yourself. You’re legally responsible for all aspects of the business and any profit or losses sit 100% with you and nobody else. You can hire employees to work in your business, but you can’t employ yourself, and you’re fully responsible for paying super for any workers and for yourself.

There are many benefits to this set up if your business is relatively small, as it’s the simplest and cheapest business structure and the process of filing taxes as a sole trader is straightforward. However, if your business is larger to begin with or grows after opening, then you might want to instead register it as a company.

Sole Trader versus Company Structure | Tax Free Thresholds and Tax Rates

If you choose to work as a sole trader then you benefit from a tax-free threshold of $18,200 – so if you’re running your business as a small side hustle, then this is a smart way to go. Companies do not benefit from a tax-free threshold, so every dollar of profit is taxed.

However, if the annual turnover of your business is substantial then a company set up is worth considering, as companies pay a set tax rate of between 27.5% and 30% (depending on the company) whereas sole traders pay an individual tax rate

Sole traders also need to lodge individual tax returns, whilst a company must file a business tax return each year in addition to individual tax returns for company directors and employees.

There are benefits to both set ups and it is worth discussing your situation in detail with your accountant to make sure you choose the best one for your business. When you create a company, you are able to bring on shareholders and investors, which can be beneficial to the growth of the business. You are also able to limit personal liability.

However if your business as a sole trader turns over more than $75,000 in a year, you are required to register for GST and lodge a quarterly Business Activity Statement (BAS). The good news is that your BAS covers both GST and your PAYG instalments, so you won’t have to worry about doing both.

What are Sole Trader tax rates?

As noted above, sole traders need to file an individual tax return. So after deducting any business expenses, they apply the same rates as personal taxes to their income. Potential deductions for a sole trader include operating expenses such as rent, accounting fees and travel expenses; vehicle expenses; working from home expenses (if this is relevant) and instant asset write off.

Below is a brief summary of the tax rates for 2021-22. Bear in mind that this does not include the 2% Medicare levy, so this might also need to be factored in.

Taxable income	Tax payable on this income
0 – $18,200	Nil
$18,201 – $45,000	19 cents for each $1 over $18,200
$45,001 – $120,000	$5,092 plus 32.5 cents for each $1 over $45,000
$120,001 – $180,000	$29,467 plus 37 cents for each $1 over $120,000
$180,001 and over	$51,667 plus 45 cents for each $1 over $180,000

How do you pay tax as a Sole Trader? – PAYG

Paying taxes as a sole trader is easy, thanks to the PAYG (Pay-as-you-go) instalments system. This process allows you to pay your taxes quarterly, so you don’t end up with a hefty tax bill at the end of the financial year.

When you’re first starting out, you need to estimate how much income you expect to receive as a sole trader and nominate an instalment amount to pay every three months based on this. Once your business is established, the ATO will simply use your previous year’s income to estimate the amount of tax that needs to be paid in each PAYG instalment.

Your PAYG instalments can be paid directly through the myGov website via your personal account, where you can view all of your current tax information. It’s also possible to pre-pay instalments into a tax bill account and to pay using BPay.

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.

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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.