Sole trader vs company for tax: how it really works
Here are the core tax differences that drive the decision in Australia:
- Sole trader tax: You pay individual marginal rates on your net business profit (plus the Medicare levy). There is no separate “business” rate. You can’t pay yourself a wage from the business; you take drawings. You may claim deductible personal super contributions if you meet the rules. Business losses can sometimes offset other income, subject to non‑commercial loss tests.
- Company tax: The company pays a flat company tax rate (25% for most small base rate entities; otherwise 30%). Profits can be left in the company and taxed there until paid out. When you extract profits, you’ll usually do it via wages (with PAYG withholding and super) or dividends (which may carry franking credits). Overall tax depends on how much you withdraw each year.
- Income splitting: A company can pay a commercial wage to owners working in the business. Dividends go to shareholders. Sole traders can’t split income with a spouse unless they are a partner carrying on the business or employed on commercial terms.
- PSI rules: If Personal Services Income applies, it can limit income splitting and certain deductions whether you operate as a sole trader or through a company.
Key Australian tax rules to factor in
- Company tax rate: 25% for most small base rate entities (aggregated turnover under $50m and ≤80% passive income). Others pay 30%.
- Individuals: Marginal rates apply up to a top rate of 45% (plus Medicare levy, usually 2%). This is what a sole trader pays on business profits.
- Dividends and franking: Company tax paid can be passed to shareholders as franking credits on dividends. Shareholders may pay top‑up tax if their marginal rate exceeds the franking credit, or receive a refund if it’s lower.
- Division 7A: Loans/payments from a private company to shareholders or their associates can be treated as unfranked dividends unless documented under strict loan terms.
- Losses: Sole trader losses may offset other income subject to rules. Company losses are trapped in the company and need continuity tests to use later.
- GST: Registration depends on turnover (commonly $75k), not structure. Both structures can be required to register and lodge BAS.
- Super: Sole traders don’t pay themselves SG. Companies paying wages must pay Super Guarantee for working owners and staff.
- Small business concessions: Both structures can access small business CGT concessions if eligibility tests are met. Tests differ by structure—get advice before a restructure or sale.
Need a deeper walk‑through? See our Tax Accountant hub, or compare entity options with Company vs Trust for Tax.
What to compare before you choose a structure
Profit and cash needs
If you withdraw most profits each year, total tax across a company plus top‑up can be close to a sole trader. If you can retain profits, a company may reduce personal tax now and help fund growth.
How you take money
Sole trader takes drawings and pays tax via their return. A company pays wages (with PAYG and SG) or dividends (with franking). Division 7A can bite on informal loans.
Risk and future plans
Tax is one factor. Consider liability protection, bringing in investors, employee ownership, and exit or sale. These often push businesses toward a company earlier.
Admin and cost
A company adds ASIC obligations, payroll/STP, and extra lodgements. Make sure the ongoing admin burden is justified by the benefits.
When each structure tends to fit best
- Often better as a sole trader:
- Profit is modest or variable and you withdraw most of it to live on.
- You want the simplest setup and lowest compliance cost.
- Your work is clearly personal services income and income‑splitting is restricted anyway.
- Often better as a company:
- Profits are strong and you can retain some to reinvest.
- You plan to hire, seek finance, or bring in co‑owners/investors.
- You want clearer separation between business and personal finances, plus potential asset protection benefits.
If you are unsure, we can model tax outcomes based on your expected profit and drawings.
Worked examples (directional only)
These simplified scenarios show why the answer depends on how you use profits:
- Profit $90k, owner withdraws $85k: Sole trader and company can land at similar total tax once wages/dividends and admin costs are included. Simplicity often wins here.
- Profit $220k, owner withdraws $140k and retains $80k: A company can keep $80k at the 25% rate for now, reducing the owner’s current personal tax compared with being taxed on the full $220k as a sole trader.
- Profit $300k, owner withdraws $300k: Company tax is paid first, then dividends trigger top‑up tax. Total tax can be close to a sole trader outcome, with higher admin costs for the company.
Exact outcomes depend on your other income, offsets, franking position, super contributions, and timing. Get tailored numbers before you change structures.
Costs and compliance checklist
- Sole trader: ABN, TFN (individual), simple bookkeeping, annual tax return with business schedules, GST/BAS if registered, PAYG instalments if applicable.
- Company: ACN, ABN, ASIC registration and annual review fee, company tax return, financial statements, payroll/STP if paying wages, super (SG) for employees and working directors, GST/BAS if registered, PAYG withholding and instalments, Division 7A monitoring, franking account tracking.
Need help setting up right the first time? Visit New Business Accountant or Bookkeeping Services for ongoing compliance support. For BAS specifics see BAS Agent Services.
How to switch from sole trader to company
Restructuring can be tax‑neutral if done correctly, but it needs planning:
- Choose timing: Commonly just after 1 July to simplify year‑end splits and payroll setup.
- Consider rollovers: The small business restructure rollover (Subdivision 328‑G) or other CGT rollovers may defer tax if conditions are met.
- Transfer operations: New company ABN, bank account, software file, payroll/STP, super, insurance, and supplier/customer contracts.
- Registrations: Update GST, PAYGW, payroll, and licences. Stop issuing invoices from your sole trader ABN once the company goes live.
- Director basics: Understand director duties, ASIC requirements, and Division 7A rules before moving money.
Best next steps
1) Write down expected profit and how much you need to withdraw. 2) Decide whether you can retain profits for growth. 3) Check PSI risk, super contributions, and any upcoming asset sales. 4) Get a projection comparing sole trader vs company for tax based on your numbers.
When you are ready, connect with a Tax Accountant or use the form below for a quick structure review. If you want broader support, see Accounting Services or our comparison hub.
Frequently asked questions
Is it better to be a sole trader or a company for tax?
There is no one answer. If you withdraw most profits each year, a company’s total tax (company tax plus top‑up on dividends or tax on wages) can be similar to a sole trader, with higher admin costs. If you can retain profits, a company can reduce current personal tax and support growth.
What tax rate applies to sole traders?
Sole traders pay individual marginal rates on their net profit, plus the Medicare levy (usually 2%). There is no separate small business rate for sole traders.
What is the company tax rate for small businesses?
Most small base rate entity companies pay 25%. Other companies pay 30%. When you pay dividends, franking credits pass on company tax paid and shareholders may pay top‑up tax depending on their marginal rate.
When should I switch structures?
Common triggers include sustained profits above your personal cash needs, plans to reinvest, hiring staff, bringing in investors, risk management, or preparing for sale. Get advice on rollover relief before moving.
Can a sole trader pay themselves a wage?
No. Sole traders take drawings. In a company you can pay yourself a wage (with PAYG and SG) or dividends, or a mix.
What is Division 7A?
Division 7A prevents shareholders taking value from a private company tax‑free. Loans or payments to shareholders/associates may be treated as unfranked dividends unless they follow strict loan rules.
Do GST and BAS differ between structures?
GST registration depends on turnover, not structure. Both sole traders and companies may need to register, charge GST, and lodge BAS. See BAS Agent Services.