Sole trader vs company in Australia: which structure is right for you?
Choosing how to structure your business is one of the first and most important decisions you will make as a new business owner. Get it right and you will save money on tax, protect your personal assets, and set yourself up to grow.
This guide breaks down the three most common structures so you can make the right call for where you are right now.
What is a sole trader?
A sole trader is the simplest business structure in Australia. The business and the person are legally the same entity. You declare business income on your personal tax return and pay tax at your individual marginal rate.
Advantages: easy and cheap to set up, simple tax reporting, full control, less admin. Disadvantages: unlimited personal liability, personal assets are at risk if something goes wrong, and you are taxed at personal rates, which can be higher than the company rate as income grows.
What is a Pty Ltd company?
A proprietary limited company (Pty Ltd) is a separate legal entity from its owners. If the company has debts or faces legal action, directors and shareholders are generally not personally liable. Companies pay tax at 25% (small base rate entities) or 30%, which is significantly lower than the top personal marginal rate of 47%.
Advantages: limited liability, lower corporate tax rate, easier to bring on investors, and more credible with clients. Disadvantages: more expensive to set up, more compliance obligations, and directors still have legal duties.
What is a partnership?
A partnership is a business owned by two or more people. It is not a separate legal entity. Income is split between partners, and each declares their share on their own tax return. Partnerships carry the same personal liability risk as a sole trader, and if one partner does something wrong, all partners can be held responsible.
Side-by-side comparison
Feature | Sole trader | Partnership | Pty Ltd company |
Setup cost | Minimal (ABN only) | Low | Moderate (ASIC fee) |
Personal liability | Unlimited | Unlimited (shared) | Limited |
Tax rate | Personal marginal rate | Personal marginal rate | 25-30% corporate rate |
Admin burden | Low | Low-medium | Medium-high |
Suitable for | Freelancers, side hustles | Small partnerships | Growing businesses |
When should you upgrade to a company?
Consider registering a company when your income regularly exceeds $80,000-$100,000, you are taking on significant legal or financial risk, you want to bring on partners or investors, or you want to protect personal assets such as your home and savings.
Which structure is right for you?
Just starting out with low risk? A sole trader is fine. Growing quickly or taking on risk? Consider a company. Multiple family members involved with a focus on tax planning? Look into a discretionary trust. Whatever you decide, it is worth talking to an accountant who can assess your specific situation.
Ready to register your company? eCompanies makes it simple. Register your Pty Ltd online in minutes at ecompanies.com.au
The content provided in this blog is intended solely for general information and awareness around our product offerings. It does not constitute personalised advice for any specific individual or organisation and should not be solely relied upon. All information within this blog post is generalised and does not consider the unique situations, circumstances, or requirements of any individual or organisation. Always seek professional advice and consider the suitability of the information to your specific goals and needs before taking any action based on the information presented.
