Sole Trader vs Pty Ltd Company: Choosing a Business Structure in Australia

A company is not automatically a tax win — here is how the four main Australian structures really compare.

By ECTD Editorial · Published 2026-04-09 · Updated 2026-04-09

Picking a business structure is one of the first real decisions you make in business, and it is the one people most often get wrong by copying a mate or following a half-remembered pub tip. In Australia the four common choices — sole trader, partnership, company and trust — each carry their own tax treatment, paperwork, costs and exposure to risk. There is no universally "best" option; there is only the option that fits your income, your risk, and where you are headed.

This guide walks through how each structure is taxed, what protection it does (and does not) give you, and the traps that catch people who incorporate too early — Division 7A, personal services income, and the lost CGT discount. It finishes with a worked example for a freelancer on $120,000 so you can see why "the company tax rate is lower" is not the whole story.

The four structures at a glance

Before the detail, here is the shape of each option and who it tends to suit.

Sole trader

You and the business are the same legal person. You trade under your own name (or a registered business name) using your individual Tax File Number, and the business profit is simply added to your other income on your personal tax return. It is the cheapest and simplest way to start — an Australian Business Number is free from the Australian Business Register, and there is no separate annual company filing.

Partnership

Two or more people (or entities) carrying on business together and sharing the profit. A partnership lodges its own tax return for information purposes, but it does not pay tax itself — each partner is taxed at their own marginal rate on their share of the net profit. A written partnership agreement is strongly advised, because in a general partnership each partner can be personally liable for debts the others run up.

Company (Pty Ltd)

A proprietary limited company is a separate legal entity that you register with ASIC. It pays its own tax on its profits, can hold assets and sign contracts in its own name, and continues to exist independently of its owners. In exchange for that separation you take on real obligations: director duties, annual reviews, record-keeping, and the rules that govern taking money out of the company.

Trust

A trust is a relationship where a trustee holds and runs the business for the benefit of beneficiaries. A discretionary (family) trust is the most common form for small business. The trust itself generally pays no tax provided its income is distributed each year; the beneficiaries are taxed on what they receive. Trusts offer flexibility in how income is split and can combine well with a company acting as trustee, but they are the most complex and expensive to set up and administer.

One ABN, one structure: Your ABN attaches to a specific structure. If you start as a sole trader and later incorporate, the company is a new entity with its own ABN, its own bank account and its own contracts — it is a genuine change, not a rename.

How each structure is taxed

Tax is where the structures diverge most, so it pays to be precise. The key contrast is between flow-through structures, where profit lands on an individual return and is taxed at personal marginal rates, and the company, which is taxed as its own entity at a flat rate.

Individual marginal rates (sole traders, partners, trust beneficiaries)

Profit from a sole trader business, a partner's share, or a distribution from a trust to an individual is taxed at the 2025-26 resident rates. These are stepped, so only the income within each band is taxed at that band's rate:

0% on income up to $18,200 (the tax-free threshold)
16% on the slice from $18,201 to $45,000
30% on the slice from $45,001 to $135,000
37% on the slice from $135,001 to $190,000
45% on income above $190,000

On top of income tax, most residents also pay the 2% Medicare levy. Because the rates are progressive, a sole trader having a quiet year pays very little tax, while a high-earning sole trader can push a large chunk of profit into the 37% and 45% bands.

The company tax rate

A company does not use the individual brackets. It pays a flat rate on its taxable profit. Most small businesses qualify as a base rate entity, which is taxed at 25%. To be a base rate entity in a given year a company must have aggregated turnover under $50 million and no more than 80% of its assessable income can be passive (interest, rent, dividends, royalties and net capital gains). If a company fails either test it pays the full company rate of 30%.

25% is not a discount you keep: The low company rate applies only while profit stays in the company. The moment you pay it out to yourself as a wage or a dividend, you are taxed again at your personal rate. The company rate is a deferral, not a saving — unless you genuinely retain and reinvest the money.

Franking credits and dividend imputation

Australia avoids double-taxing company profits through dividend imputation. When a company has already paid tax on its profit, it can attach franking credits to the dividends it pays. The shareholder declares the grossed-up dividend, then uses the franking credit to offset their own tax bill.

In practice this means the company rate is only ever an interim step. If you earn the profit through a company taxed at 25%, then pay it to yourself as a fully franked dividend, you ultimately pay tax at your personal marginal rate, with the 25% already paid credited against it. If your marginal rate is below the company rate, you can even receive a refund of excess franking credits. The system is designed so the total tax broadly lands at the individual's rate — which is exactly why a company is rarely a magic tax cut for a one-person business that takes all the profit out each year.

Liability and asset protection

Tax usually gets the attention, but for many people the bigger reason to incorporate is protecting personal assets. Here the structures differ sharply.

Sole trader: no separation. If the business is sued or cannot pay its debts, your personal assets — savings, car, potentially the family home — are exposed.
General partnership: worse in one sense — you can be liable not only for your own conduct but for debts your partners incur in the business.
Company: the company is a separate legal person, so liability is generally limited to the company's assets. Your personal assets sit behind that wall — with important exceptions.
Trust: protection depends on the structure, but a company acting as trustee is a common way to combine flow-through tax flexibility with a limited-liability buffer.

The corporate veil is not bulletproof: Limited liability has real limits. Directors can be personally liable for unpaid employee superannuation and PAYG, for trading while insolvent, and for any debts they personally guarantee — and banks and landlords routinely demand director guarantees from small companies. Incorporating is not a licence to behave carelessly.

What it costs to run a company

A sole trader has almost no structural overhead. A company is different: you pay ASIC to register it, then pay an annual review fee every year to keep it on the register, plus the ongoing cost of company tax returns and bookkeeping that are typically more involved than an individual's. Fees change periodically and depend on company type, so check the current schedule at asic.gov.au rather than relying on a figure you read somewhere. The point is to budget for a recurring, non-negotiable annual cost that a sole trader simply does not have.

GST is separate from your structure: You must register for GST once your turnover reaches the $75,000 threshold (or immediately if you drive a taxi or rideshare), regardless of whether you are a sole trader, partnership, company or trust. GST is charged at 10%. Registering for GST does not change which structure you are.

Three traps that catch new company owners

A company introduces rules that simply do not exist for a sole trader. Three of them quietly undo the tax case for incorporating if you are not careful.

Division 7A — you cannot just borrow the money

Because the company is a separate entity, its money is not your money. If you take cash out of the company as a loan, or let it pay your personal expenses, Division 7A can treat that amount as an unfranked deemed dividend taxed in your hands — unless it is put on a complying loan agreement with minimum yearly repayments and a benchmark interest rate. Many new owners are surprised to learn they cannot simply dip into the company account; doing so without the right paperwork can trigger a tax bill on money they thought was a loan.

Personal services income (PSI)

If your income is mainly a reward for your personal skills and effort — a contractor IT developer, a consultant, a freelance designer billing for their own time — it may be personal services income. The PSI rules can attribute that income back to you personally and deny certain deductions, even if you route it through a company or trust. In other words, you generally cannot incorporate purely to convert your own labour income into company-rate income. There are tests (the results test, the 80% rule, the unrelated clients, employment and business premises tests) that decide whether you are running a genuine personal services business or simply you-with-a-company-attached.

PSI is the freelancer's biggest gotcha: If most of your income comes from one client for your personal effort, assume the PSI rules may apply and get advice before incorporating. Setting up a company in the belief it will halve your tax can backfire when the income is attributed straight back to you.

No 50% CGT discount for companies

When an individual or a trust sells an asset they have held for more than 12 months, only half the capital gain is taxable — the 50% CGT discount. Companies do not get this discount. So if your business is likely to build and one day sell a capital asset — goodwill, property, a website, a portfolio — holding it in a company can mean the full gain is taxed rather than half of it. For asset-holding and investment purposes, this is a meaningful mark against the company structure and a point in favour of individuals and trusts.

Worked example: a freelancer earning $120,000

Meet Priya, a freelance designer. Her business nets $120,000 profit for the year before tax, and she needs to live on essentially all of it. Should she stay a sole trader or incorporate? (Figures below are income tax only and ignore the 2% Medicare levy, super and offsets, to keep the comparison clean.)

As a sole trader

The whole $120,000 is taxed at her personal marginal rates. The first $18,200 is tax-free. The slice from $18,201 to $45,000 ($26,800) is taxed at 16%, giving $4,288. The slice from $45,001 to $120,000 ($75,000) is taxed at 30%, giving $22,500. Her income tax is therefore $26,788. There is no annual ASIC fee, no separate company return, and if she sells business goodwill down the track she can access the 50% CGT discount.

Through a company

Suppose the company is a base rate entity taxed at 25%. If it earned $120,000 and retained it, the company would pay $30,000 in tax. But Priya needs the money to live on, so the company pays it out — say as a wage of $80,000 plus a fully franked dividend for the rest. The wage is taxed in her hands: the $18,201-$45,000 slice at 16% is $4,288, and the $45,001-$80,000 slice ($35,000) at 30% is $10,500, for income tax of $14,788 on the wage. The dividend then carries franking credits for the company tax already paid, and is grossed up and taxed at her marginal rate too. Once everything washes through imputation, her total tax on $120,000 of income she fully extracts lands close to the sole-trader figure — but now she is also paying ASIC fees, a company tax return, payroll and extra bookkeeping.

The lesson from Priya: When you take all the profit out each year, the company rate is neutralised by imputation and you are left paying for complexity you did not need. The company starts to win only when you can retain profit at 25% to reinvest, when liability protection genuinely matters, or when you are splitting income across people in a higher-turnover business.

When is it actually worth incorporating?

Strip away the myths and a company tends to make sense when one or more of these is true:

You can retain profit in the business to reinvest rather than drawing it all out — the 25% rate becomes a genuine deferral that funds growth.
You face real liability risk — you carry stock, employ staff, sign large contracts, or operate where a claim could wipe out personal assets.
You want a clean, sellable entity with its own history, contracts and ABN that an investor or buyer can step into.
Your turnover and income are high and stable enough that the structural cost is small relative to the planning flexibility you gain.
You are building a genuine business with multiple clients and staff, not just selling your own labour (which the PSI rules would catch anyway).

Conversely, if you are a solo freelancer billing mostly your own time to one or two clients, taking all the profit out to live on, a sole trader structure is usually cheaper, simpler and gives you the CGT discount. You can always incorporate later when the numbers and the risk profile change — and many successful businesses do exactly that.

Run your own numbers first. Plug your expected profit into the 2025-26 brackets with our income tax calculator to see your personal tax position, then weigh that against the recurring cost and admin of a company before you commit to a structure.

General advice warning: This article is general information only and does not take into account your personal circumstances, objectives or financial situation. It is not personal tax, financial or legal advice. Tax laws are complex and change, and the right structure depends on your specific situation. Before choosing or changing a business structure, consult a registered tax agent or qualified accountant.

General information only — not personal financial, tax, legal or medical advice. Consider your own situation and consult a licensed professional before acting. Figures are current as at the date shown above.