Are you interested in the exchange? Choosing between a sole trader and a company structure can be overwhelming because each option has its own advantages and disadvantages. Every business has unique goals and financial priorities that influence the best choice.
Many entrepreneurs start out as a sole trader because it is easier and cheaper. However, as their income grows and their tax liabilities increase, they often begin to reconsider whether switching to a company structure will provide better financial and legal benefits.
The most important difference between the two structures is how taxes are applied, specifically the company tax rate.
In this article, we will explore the key differences between operating as a sole trader and forming a company. Understanding these issues will help you decide which structure is best for your business’s current situation and long-term plans.
What Is a Sole Trader?
A sole trader is someone who independently owns and operates their business. They manage everything from day-to-day operations to strategic decision-making – giving them complete control and flexibility over how the business runs.
This structure is straightforward and cost-effective, making it ideal for individuals starting out with a small business. However, it also carries more personal risk because there is no legal separation between the business and the owner.
As a result, any debts, financial liabilities or legal issues that the business incurs are the personal responsibility of the owner. If the business suffers losses or is sued, the owner’s personal assets – such as their home, car or savings – can be used to pay off those debts.
What Is a Pty Ltd Company?
A Proprietorship Limited Company (Pty Ltd) is one of the most common business structures in Australia. It offers key advantages compared to running a business as a sole trader. In a Pty Ltd setup, the company is treated as a separate legal entity from the individuals who manage it. This means that it can enter into contracts, own property and even face legal action in its own name. The biggest advantage is that if the business owes money, the owners are not personally liable for those debts. Their personal belongings, such as their car, home or savings, remain safe.
A Pty Ltd company offers stronger personal protection and tax savings opportunities than operating as a sole trader, although it involves higher costs and stricter regulations. Setting up this type of business requires registration fees, regular paperwork and compliance with legal obligations. Despite the additional costs, many business owners choose this model because it attracts investors and allows for long-term financial planning.
Sole Proprietorship vs Company in Australia: Key Differences
When starting a business, choosing the right structure is one of your first and most important steps. In Australia, the two most common options are operating as a sole proprietorship or registering as a company.
| Aspect | Sole Trader | Company (Pty Ltd) |
| 1. Initial Setup Costs | Setting up as a sole trader is simple and inexpensive. You don’t need an ACN or ASIC registration. Getting an ABN is free, and a separate bank account is optional though useful. | Starting a company costs more — around $474–$597. You must register with ASIC and obtain an ACN. Opening a dedicated business bank account is required and may include maintenance fees. |
| 2. Record-Keeping Requirements | Managing records is easier with less compliance. You include business income in your personal tax return. Keep financial records for a minimum of five years. Update your business details within 28 days when changes occur. | Record-keeping is more detailed and regulated. You must file a separate company tax return. Maintain tax documents for 5 years and financial records for 7 years. Companies must complete ASIC’s annual review and document major meetings. |
| 3. Ease of Starting | You can register quickly with just an ABN. A business name is needed only if you don’t use your personal name. Having a separate bank account is recommended for financial tracking. | A company requires ACN registration with ASIC. You’ll also need an ABN and possibly a registered business name. A dedicated business account is mandatory. You must register for GST if turnover exceeds $75,000. |
| 4. Business Revenue Handling | All profits go directly to you as personal income. You can claim business expenses to reduce taxable income. Withdraw funds freely as personal drawings. | The company owns the revenue, not individuals. Directors receive payments through salaries or dividends. The company files its own tax return. Company and personal funds must remain separate. |
| 5. Setup & Operating Costs | An ABN is free to obtain. Registering a business name costs $44 yearly or $102 for three years. You can use your personal bank account, though separate accounts are ideal. | Name reservation costs around $61. Company registration ranges between $474–$576. A separate bank account is mandatory. Expect higher setup and ongoing compliance costs. |
| 6. Liability for Business Debts | You carry full personal liability for all business debts. Creditors may claim your personal assets like your car or house. | Liability is limited to the company’s assets. Directors aren’t personally liable unless duties are breached. The company may liquidate assets to cover debts. |
| 7. Control vs Liability | You make every decision and have complete control. You also take on all financial and legal risks. | Directors and shareholders share control. Company laws and governance rules must be followed. Personal assets are generally protected from company debts. |
| 8. Taxation | Business profits are taxed at your personal tax rate. The rate increases as your income grows. You report business income on your personal tax return. | The company pays corporate tax at a fixed rate (25–30%). Directors and shareholders pay personal tax on income they receive. Can be more tax-efficient if profits are high. |
| 9. Insurance Needs | You must arrange your own insurance. Workers’ compensation isn’t automatic. Consider public liability and income protection coverage. | Companies must provide workers’ compensation for staff. Directors can take additional coverage for liability protection. The company handles employee claims through its insurance. |
| 10. Access to Bank Funds | You can use business funds anytime as personal drawings. A separate account helps you track finances better. | The company must maintain a dedicated bank account. Payments to directors occur through wages or dividends only. All transactions must be accurately recorded. |
You may also like: Capital Gains Tax in Australia: How To Calculate Capital Gains Tax
Conclusion
Operating as a sole proprietorship gives you complete control and an easy setup, but it also exposes you to more personal risk and can make it more difficult to obtain funding. In contrast, forming a corporation offers limited liability protection, increases business credibility, and makes it easier to raise capital. However, running a corporation involves higher startup costs and stricter legal and reporting obligations. Ultimately, the best choice depends on your goals, business scale, and how you envision your long-term growth.
