Sole trader vs company — which structure actually fits

Every founder asks the same thing when they first sit down to register a business: should I be a sole trader, or should I set up a Pty Ltd company? It feels like a binary choice with a clearly correct answer, and the internet is full of confident takes pushing you toward whichever structure the person writing happens to sell.

The honest answer is that neither structure is universally better. They solve different problems. A sole trader structure is fast, cheap, and almost paperwork-free, which is why it suits roughly two-thirds of small Australian businesses according to data published by the Australian Bureau of Statistics. A Pty Ltd company is slower to set up, more expensive to run, and more disciplined to operate — and in return you get personal liability protection, a flat tax rate that helps once profits get serious, and a structure that scales when you bring on staff, investors, or co-founders.

The right choice depends on six things: how much personal risk you carry doing the work, how much profit you expect, how much paperwork you can stomach, whether you want to bring on co-founders or investors later, how seriously clients and suppliers need to take you on paper, and how comfortable you are with ongoing compliance. We'll work through each of those across the rest of this guide, then put the two structures side by side in a table you can actually use to decide.

Before we compare them on cost and tax, it's worth being clear about what each structure is in legal terms, because this is where most of the practical differences come from.

A sole trader is you, trading. There is no separate legal entity — you and the business are the same person in the eyes of the law. You get an Australian Business Number from the Australian Business Register, you can register a business name with the Australian Securities and Investments Commission if you want to trade under something other than your own legal name, and that's basically the setup. You report all business income on your personal tax return each year, and you pay personal income tax at marginal rates on whatever's left after expenses.

A Pty Ltd company is a separate legal person. It has its own Australian Company Number, issued by ASIC. It can own assets in its own name, sign contracts in its own name, and be sued in its own name. You — as a director and shareholder — are legally distinct from the company. The company pays company tax on its profits. When the company pays you, it does so either as a salary (which goes on your personal tax return as wages) or as a dividend (which goes on your personal tax return with attached franking credits for the company tax already paid).

That separation is the engine behind most of the differences. Liability, tax, paperwork, ability to raise capital, perception with clients — they all trace back to whether you and the business are one legal person or two.

This is the single biggest practical difference between the two structures, and it's where founders most often make the wrong call by assuming sole trader is fine when their work actually carries serious risk.

As a sole trader, you have unlimited personal liability for everything the business does. If a client sues you for negligent advice, if a supplier you owe money to chases the debt, if someone trips on your equipment at a site — they sue you personally. Your house, your savings, your car, your investment portfolio all sit inside the same legal estate as the business. Public liability insurance and professional indemnity insurance help, but they have caps and exclusions, and they don't cover everything.

As a director and shareholder of a Pty Ltd, the company is sued, not you. If the company doesn't have enough assets to pay a judgment, the claimant generally can't reach into your personal assets. That's the corporate veil, and it's the main reason any business carrying real client work, contracts with deliverables, employees, physical premises, or product liability exposure should incorporate.

The veil isn't bulletproof though. Banks and landlords almost always require directors to sign a personal guarantee on loans and commercial leases, which bypasses the structure entirely for that specific debt. Directors are personally liable under the insolvent trading provisions of the Corporations Act if they let the company trade while it can't pay its debts. The Australian Taxation Office can issue Director Penalty Notices that make directors personally liable for unpaid PAYG (Pay As You Go) withholding, superannuation guarantee, and GST (Goods and Services Tax). Fraud and breach of director duties also pierce the veil.

So a Pty Ltd is a strong shield, but not an impenetrable one. The right way to think about it: company structure plus appropriate insurance plus careful review of any document asking for a personal guarantee.

Tax is the place where founders hear the most confident advice and get the most confused. The truth is the tax calculus depends almost entirely on how much profit your business actually makes.

A sole trader pays personal income tax on the full business profit each year. That means the tax-free threshold of $18,200, then 16% up to $45,000, then 30% up to $135,000, then 37% up to $190,000, then 45% above that, plus the Medicare levy of 2%. The rates and thresholds are published by the Australian Taxation Office and updated each financial year. The upside is the tax-free threshold and the lower brackets work in your favour when profits are small. The downside is once profits climb past about $135,000, a big chunk of every extra dollar is going to the ATO at the higher marginal rates.

A Pty Ltd company pays a flat company tax rate. For most small companies — what the ATO calls base rate entities, with aggregated turnover under $50 million and no more than 80% passive income — that rate is 25%. For larger or passive-income-heavy companies it's 30%. There's no tax-free threshold and no graduated brackets at the company level. The flat 25% rate is helpful at higher profit levels because you keep 75 cents of every dollar inside the company to reinvest, instead of paying personal marginal rates on it.

The catch is that company profits eventually have to come out to you, and when they do, they're taxed at your personal marginal rate — with a credit for the 25% company tax already paid, via the franking system. So the company structure doesn't necessarily save you tax over a lifetime. What it does is let you control the timing — leaving profits inside the company to fund growth while you're earning, then paying them out as dividends when your personal income is lower.

The day-to-day reality of running each structure is very different, and the running cost gap is wider than most founders expect when they're comparing setup quotes.

A sole trader has essentially no compliance overhead beyond a personal tax return each year. If you're registered for GST, you also lodge a Business Activity Statement quarterly or annually. There's no separate company tax return, no annual review, no director duties, no ASIC reporting. Most sole traders run their bookkeeping in a spreadsheet or basic accounting software and either do their own tax return or pay a few hundred dollars to a tax agent to lodge it for them.

A Pty Ltd company has several layers of ongoing obligations. ASIC charges an annual review fee — $329 for a standard proprietary limited company in 2025–26, or $67 if it's a special-purpose company like a corporate trustee. ASIC also charges late fees of $98 for payments 1–28 days late and $411 for payments more than 28 days late. The company has to file its own tax return separately from yours. Most companies pay a tax agent $1,500–$3,000 a year to prepare the company return, BAS, and director financial statements. Director identification numbers are required for every director under the Australian Business Registry Services regime, and directors carry legal duties under the Corporations Act 2001.

Setup costs are also different. Becoming a sole trader is free at the ATO. Structly's Sole Trader Starter is $139 if you want us to register the ABN, GST, PAYG, and a business name in one go without the back-and-forth with the ABR and ASIC. Company registration involves an ASIC fee of $611, which everyone pays regardless of who lodges. Structly's Company Registration is $699 all-in — that's the $611 ASIC fee plus an $88 service fee. The Company Essential bundle — Company Registration plus the ABN Package plus a three-year business name registration — is $887 all-in, and it's what we recommend when you need a real fresh start as a Pty Ltd.

The structure you choose also shapes what the business can become and how seriously other people take it on paper. This part is harder to measure than tax, but it matters more than founders usually expect.

A sole trader structure is intrinsically a single-person business. You can hire employees and contractors as a sole trader, but you can't share equity, you can't bring in a co-founder as a partner without becoming a partnership, and you can't take outside investment. Some larger clients — especially government departments, big consultancies, and listed companies — won't engage a sole trader for material contracts because their procurement rules require a registered company on the other side of the table. Banks lend more readily to companies with a track record than to sole traders.

A Pty Ltd structure is built to scale. You can issue shares to co-founders, employees (through an Employee Share Scheme), or investors. You can have multiple classes of shares with different rights. You can sell the business by selling its shares without disrupting customer contracts. You can change directors without changing the entity. You can apply for grants, certifications, and tenders that require a registered company. The structure handles complexity that a sole trader simply cannot.

The flip side is that all of that flexibility comes with responsibility. Directors have legal duties, shareholders have rights, the constitution governs how the company is run. None of that is hard once you understand it, but it's real, and it's why we tell founders not to incorporate purely because it sounds more legitimate. Incorporate because the structure does work the sole trader structure can't do — protecting personal assets at meaningful risk, splitting equity, planning for sale or investment, or running a business at a profit level where the flat company rate genuinely helps.

Here's the side-by-side, with the actual numbers and obligations rather than the marketing version. Use it as a decision aid, not a verdict — and run your specific numbers past your accountant before you commit.

If you take only one thing from this guide, take this: pick the structure that fits the business you're running today, with a clear-eyed view of where it might be in two years. Don't over-engineer for a future that may not arrive, and don't under-engineer to save $560 when you're carrying real liability or expecting real profit.

Sole trader is the right call when you're freelancing or consulting in a low-risk service area, your profit is unlikely to push past around $90,000 in the next year or two, you don't plan to bring on co-founders or investors, and your clients don't specifically require you to operate through a registered company. The cost discipline is real — saving $1,500–$3,000 a year on tax agent fees and $329 on the ASIC annual review compounds when you're early.

Pty Ltd is the right call when any of these apply: your work carries real liability (advice, physical premises, products, employees), you expect profits comfortably above $135,000, you want to share equity with co-founders, you're planning to take on investment or sell the business, you need to look credible to enterprise or government clients, or you want a clean separation between business and personal finances from the start. The annual compliance cost is the price you pay for protection and flexibility — for most growing businesses, it's worth it.

If you're genuinely unsure, the test that works for most founders is liability first, profit second. If the work could plausibly result in a six-figure claim against you personally, incorporate. If profit is going to comfortably exceed your personal needs and you want to leave money inside the business to grow, incorporate. Otherwise, start as a sole trader, keep it lean, and revisit once one of those triggers fires.

Stanley can walk you through the decision in about a minute if you'd rather answer six short questions than read another guide.