When to Move From Sole Trader to Company

How to decide, step by step

Work backwards from the business reality, not just the label “company”. This sequence keeps the decision practical and low-risk:

1. Confirm your driver: risk, profit retention, contract/licence rules, or investor readiness.
2. Run numbers: compare take‑home pay and retained profits as a sole trader versus a company.
3. Check tax roll‑overs: see if a Small Business Restructure Roll‑over (Subdiv 328‑G) or Div 122 can defer CGT.
4. Estimate admin and cost differences: ASIC fees, bookkeeping depth, payroll and reporting.
5. Plan the cut‑over: bank accounts, contracts, asset transfers, software, insurances and ATO registrations.
6. Book a review to confirm timing before you act.

Signals it’s time to move

• Risk has increased: larger contracts, hiring more staff, or industry exposure where limited liability matters.
• Profits exceed drawings: you want to retain earnings to fund growth at the company tax rate (25% for eligible base rate entities).
• External requirement: tenders, clients, lenders or licences require a Pty Ltd structure.
• Ownership plans: you need the ability to issue shares, admit co‑founders or attract investors.
• Professional separation: clean line between personal and business finances, assets and branding.

Remember: GST registration ($75,000 threshold) and employing staff do not require a company—you can do both as a sole trader.

When staying a sole trader still makes sense

• Low risk and modest, variable income where simplicity and low admin costs are a priority.
• All profits are needed personally with little or no retention in the business.
• No third‑party requirement for a Pty Ltd and no near‑term plan to add owners.
• You’re testing a new idea and want to minimise setup and ongoing ASIC compliance.

Australian rules to keep in view

• Company tax: 25% for eligible base rate entities (aggregated turnover under $50m and meeting passive income tests). Individuals pay progressive rates up to 45% plus Medicare levy; dividends are taxed to shareholders with franking credits.
• PSI and personal services rules: structure alone won’t change PSI outcomes—apply the PSI tests and general anti‑avoidance provisions.
• Payroll obligations: if you employ staff you must use STP, withhold PAYG and pay super (11.5% from 1 July 2024), regardless of structure.
• GST: register when GST turnover is at or above $75,000 (NFP $150,000). Structure doesn’t change the threshold.
• ASIC: companies have setup and annual review fees, director duties and record‑keeping obligations. As at 2024–25, typical fees are around $576 to register and $310 annually—check ASIC for current amounts.

Restructure path and tax implications

Moving existing operations from sole trader to company can trigger tax and legal consequences. Common areas to review before you act:

• CGT on goodwill and assets: assess eligibility for Subdivision 328‑G Small Business Restructure Roll‑over or Division 122 roll‑over to defer gains.
• GST on asset transfers: confirm whether transfers are a GST‑free going concern and ensure correct tax invoices and records.
• State taxes: some asset transfers can attract stamp duty—rules vary by state/territory.
• Division 7A: loans, payments or use of company assets by shareholders/directors must be managed to avoid deemed dividends.
• Contracts and licences: check assignability and whether counterparties must consent to novation.
• Banking and insurances: open a company account, update merchant facilities, and review cover in the company’s name.

Costs and admin: sole trader vs company

Checklist before you incorporate

• Document why you’re moving (risk, growth, external requirement or ownership plan).
• Model tax and drawings for the next 12–24 months under both structures.
• Confirm roll‑over eligibility and any duty or GST impacts.
• Decide shareholding, directorships and remuneration approach (salary, super, dividends).
• Plan a clean cut‑over date and communication to clients, suppliers and your bank.
• Line up software migrations and payroll/STP setup if you employ staff.

Best next steps

Write down the outcome you want first—reduced risk, better cash flow, investor readiness, or admin clarity. Then choose a provider who can explain the process, map the tax and legal impacts, and execute the cut‑over cleanly.

Use these pages to move from a broad question into the right service:

• Small business accountant for structure, tax and ongoing support.
• Tax accountant for modelling, roll‑over advice and returns.
• Bookkeeping services to tighten records before/after the move.
• Payroll services for STP and super setup in the company.