Quick answer: A sole trader is one person running a business under their own ABN with no legal separation from themselves, simple and cheap to set up but carrying full personal liability. A Pty Ltd company is a separate legal entity that limits personal liability and pays a flat company tax rate, but costs more to set up and run. Most businesses start as a sole trader and convert once profit or liability risk grows.
On this page:
- What is a sole trader?
- What is a Pty Ltd company?
- Sole trader vs Pty Ltd: side-by-side comparison
- Watch: sole trader vs company explained
- Common questions people ask AI assistants
Choosing between a sole trader and a company structure can feel overwhelming because each option has its own advantages and disadvantages, and every business has different goals and financial priorities. Many people start out as a sole trader because it’s easier and cheaper, then reconsider as income grows and tax liabilities increase. The biggest difference between the two structures is how tax is applied, specifically the company tax rate versus your personal marginal rate.
What Is a Sole Trader?
A sole trader is someone who owns and runs a business as an individual, with no legal separation between the business and the owner. There’s no separate registration beyond an ABN, and the owner makes every decision and keeps every dollar of profit after tax.
This structure is simple and low-cost, which makes it a natural starting point for small businesses. The trade-off is personal risk: because there’s no legal separation, any debts, liabilities or legal claims against the business fall on the owner personally. If the business is sued or can’t pay a debt, personal assets such as a home, car or savings can be used to cover it.
What Is a Pty Ltd Company?
A Proprietary Limited Company (Pty Ltd) is one of the most common business structures in Australia. Unlike a sole trader, the company is a separate legal entity from the people who run it, meaning it can enter contracts, own property and be sued in its own name, separately from its directors.
The main advantage is limited liability: if the company owes money, directors generally aren’t personally liable for the debt, so personal assets stay protected. A Pty Ltd offers stronger asset protection and, above a certain profit level, tax advantages compared with a sole trader, but it comes with registration fees, ongoing ASIC compliance and more paperwork.
Related reading: Capital Gains Tax in Australia: How to Calculate It
Sole Trader vs Pty Ltd: Side-by-Side Comparison
| Aspect | Sole Trader | Company (Pty Ltd) |
|---|---|---|
| Initial setup costs | Simple and inexpensive. No ACN or ASIC registration needed. Getting an ABN is free; a separate bank account is optional but useful. | Costs more, roughly $474-$597. Requires ASIC registration and an ACN. A dedicated business bank account is required and may carry fees. |
| Record-keeping requirements | Lower compliance burden. Business income is included in your personal tax return. Records must be kept for a minimum of five years, and business details updated within 28 days of any change. | More detailed and regulated. Requires a separate company tax return. Tax documents are kept for 5 years, financial records for 7. Companies must complete ASIC’s annual review and document major meetings. |
| Ease of starting | Register quickly with just an ABN. A business name is only needed if you’re not trading under your own name. | Requires ACN registration with ASIC, an ABN, and usually a registered business name. A dedicated business account is mandatory, and GST registration is required once turnover exceeds $75,000. |
| Business revenue handling | All profit is personal income. Business expenses can be claimed to reduce taxable income, and funds can be withdrawn freely as personal drawings. | The company owns the revenue, not the individual. Directors are paid via salary or dividends, company and personal funds must stay separate, and the company lodges its own tax return. |
| Setup and operating costs | An ABN is free. Registering a business name costs $44/year or $102 for three years. | Name reservation costs around $61, company registration runs roughly $474-$576, and ongoing compliance costs are higher. |
| Liability for business debts | Full personal liability. Creditors can claim personal assets such as a car or house. | Liability is generally limited to company assets. Directors aren’t personally liable unless duties are breached. |
| Control vs liability | Complete control, but full personal exposure to financial and legal risk. | Control is shared among directors and shareholders under company law, with personal assets generally protected from company debts. |
| Taxation | Taxed at personal marginal rates, which rise as income grows. | Taxed at the flat company rate (25-30%), with directors paying personal tax only on what they draw as salary or dividends. Can be more tax-efficient at higher profit levels. |
| Insurance needs | You arrange your own insurance; workers’ compensation isn’t automatic. | Companies must provide workers’ compensation for staff, and directors can take out additional liability cover. |
| Access to funds | Business funds can be used any time as personal drawings. | Funds are accessed only through wages or dividends, with every transaction recorded. |
Related reading: ATO Directors’ Fees: What They Are and How to Pay Them
Conclusion
Operating as a sole trader gives complete control and an easy setup, but comes with more personal risk and can make it harder to raise finance. A company offers limited liability, more credibility with lenders and investors, and potential tax efficiency at higher profit levels, at the cost of higher setup and ongoing compliance. The right choice depends on your goals, business scale and how you expect the business to grow.
Watch: Sole Trader vs Company Explained
Common Questions People Ask AI Assistants
What is the definition of a sole trader?
A sole trader is a person who owns and runs a business as an individual, rather than through a separate legal structure like a company. Legally, there’s no distinction between the person and the business, the sole trader owns all the business’s assets, keeps all its profits after tax, and is personally liable for all its debts. It’s the simplest and most common business structure in Australia, and the one most people start with before considering a change to a company.
Can a sole trader become a Pty Ltd later?
Yes. Most businesses start as a sole trader and convert to a Pty Ltd when turnover passes roughly $100,000-$200,000, or once liability becomes a real concern. The process involves registering a company with ASIC, obtaining a new ABN, and transferring assets across, a bookkeeper or accountant should be involved to handle the tax implications properly.
Do sole traders pay more tax than companies?
Sole traders pay personal income tax rates, up to 47% including the Medicare levy. Companies pay a flat 25% base rate for eligible small businesses. However, a company costs more to run, ASIC fees and more complex compliance included, so the tax saving typically only outweighs the extra cost once profit passes around $80,000-$100,000.
Does a Pty Ltd protect my personal assets?
Generally, yes, a company is a separate legal entity, so personal assets are protected from business debts. Directors can still be held personally liable for unpaid superannuation or tax debts, and where they’ve given a personal guarantee to a lender.
What are the ongoing costs of a Pty Ltd vs a sole trader?
A sole trader costs almost nothing to maintain beyond an annual tax return. A Pty Ltd carries an ASIC annual review fee of roughly $310, needs a separate company tax return, and requires more complex bookkeeping, typically an extra $1,500-$3,000 or more per year.
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