Sole Trader vs Company: Costs, Tax and Liability (2026)

Sole trader vs company comes down to cost and simplicity against tax flexibility and protection. A sole trader is free to set up, pays tax at individual rates and carries unlimited personal liability. A company costs $636 to register plus $342 a year, pays 25% tax if it's a base rate entity, and keeps most business debts separate from you.

As the worked example below shows, the 25% rate doesn't automatically mean less tax. This is general information, not legal or tax advice.

Sole trader vs company: comparison table

The main differences are who owns the business, how profit is taxed, and how much admin you take on. All fees are ASIC fees from 1 July 2026 and tax rates are ATO figures.

	Sole trader	Company (Pty Ltd)
Legal status	You are the business	Separate legal entity that can own assets, sue and be sued
Setup cost	ABN is free. Business name $47 (1 year) or $108 (3 years), only if you don't trade under your own name	ASIC registration $636 for a proprietary company. The company also needs its own TFN and ABN
Annual review fee	None for the structure (business name renewal only, if you have one)	$342 a year for a proprietary company
Liability	Unlimited. Your personal assets are at risk	Shareholders' liability is limited to any unpaid amount on their shares. Directors can be personally liable for breaching their duties, insolvent trading, and some company tax and super debts
Tax rate	Individual rates from 0% to 45%, plus 2% Medicare levy	25% for a base rate entity (aggregated turnover under $50 million and no more than 80% passive income); otherwise 30%
Tax return	Individual return with a business items section	Separate annual company tax return
Director duties and ID	None	Each director needs a director ID (free) before appointment, and must act in the company's best interests and prevent insolvent trading. At least one director must normally live in Australia
Record keeping	Keep records for at least 5 years	Keep financial records for at least 7 years; update ASIC within 28 days of key changes
Super	Optional for yourself; deductible if you notify your fund	Super guarantee (12%) for eligible workers, including directors
Who owns the profits	You, as soon as they're earned	The company. You receive it as salary, director fees or dividends
Switching later	Can incorporate later, but your ABN can't be transferred to the company	Closing it means deregistering through ASIC

Sources: ASIC fees via business.gov.au, ATO company tax rates, ATO key tax obligations, ASIC officeholders, ASIC record keeping.

How are sole traders and companies taxed differently?

A sole trader's profit is taxed on a sliding scale at individual rates, plus the 2% Medicare levy. A company pays a flat rate on its profit, 25% if it is a base rate entity, and the owner pays personal tax only on what the company passes to them.

For 2025–26, resident individual rates are nil up to $18,200, then 16%, 30% from $45,001, 37% from $135,001 and 45% from $190,001 (ATO). From 1 July 2026 the 16% rate becomes 15%.

The company rate is 25% for a base rate entity: aggregated turnover under $50 million, and no more than 80% of assessable income from passive sources such as interest, rent and dividends. Every other company pays 30%.

Two rules limit how useful the company rate is:

Dividends carry franking credits. When a company pays a franked dividend, you include the dividend plus the franking credit in your income, pay tax at your own marginal rate, and get the credit as an offset. If your rate is higher than the company's, you pay "top-up" tax; if it's lower, the excess credit is refunded.
Personal services income. If more than 50% of the income comes from your own skills or effort, and the PSI rules apply, the company must attribute that income to you, so it's taxed at your individual rates anyway (ATO).

Worked example: tax on $90,000 profit

On $90,000 profit, a sole trader pays $19,588 including the Medicare levy (2025–26 rates), while a company that keeps the profit pays $22,500. At this income level, being a sole trader costs less tax, not more.

This example is illustrative only. It assumes an Australian resident with no other income, no deductions or offsets beyond those shown, the full 2% Medicare levy, and a base rate entity company franking at 25%. It ignores accounting fees, ASIC fees and the PSI rules.

Sole trader, $90,000 taxable profit (2025–26):

Step	Amount
First $18,200	$0
$18,201 to $45,000: $26,800 × 16%	$4,288
$45,001 to $90,000: $45,000 × 30%	$13,500
Income tax	$17,788
Medicare levy: $90,000 × 2%	$1,800
Total tax	$19,588
Left after tax	$70,412

Company retaining $90,000 profit:

Step	Amount
Company tax: $90,000 × 25%	$22,500
Medicare levy	Not payable by a company
Left in the company	$67,500

The company pays $2,912 more, and the $67,500 is still the company's money, not yours.

What if the company pays it all out as a dividend? Paying the $67,500 as a fully franked dividend attaches a $22,500 franking credit. You declare $90,000 (dividend plus credit), your tax and Medicare levy come to the same $19,588, and the $22,500 credit is offset against that, leaving a $2,912 refund. You end up with $67,500 + $2,912 = $70,412, exactly what the sole trader kept. Franking is designed so the money is taxed at your rate once it reaches you.

Where a company does help: profit you leave in the company. Above $45,000, each extra dollar a sole trader earns costs 32c in tax and Medicare levy (39c above $135,000), against 25c inside a company. On these 2025–26 figures, our arithmetic puts the break-even point for retained profit at about $131,600, where both total $32,900 (about $135,200 using 2026–27 rates). Below that, the company only defers tax; it doesn't cut it.

For 2026–27, the sole trader figure on $90,000 falls to $19,320 ($4,020 + $13,500 + $1,800). Try your own profit in the sole trader tax calculator.

How much protection does a company really give?

A company protects shareholders from the company's debts, but it doesn't make directors untouchable. Directors can be personally liable if they breach their duties, let the company trade while insolvent, or under the director penalty rules for certain unpaid tax and super.

ASIC expects directors to act in good faith, put the company's interests ahead of their own, keep proper records and know when the company is in financial difficulty. In a one-person company, you're both the shareholder and the director, so both sets of rules apply to you.

What extra admin does a company involve?

A company adds a separate tax return, an ASIC annual review, director obligations and stricter rules on taking money out. Budget for an accountant if you would rather not do it yourself.

Director ID: apply free through ABRS before you're appointed, and keep it for life (ABRS).
Annual review: ASIC issues an annual statement, you check the details and pay the $342 fee, and directors pass a solvency resolution each year.
Separate finances: the company has its own TFN, ABN and bank account. Money you take out other than as salary, director fees or a proper dividend can be treated as an unfranked dividend under Division 7A.
Invoices and BAS: invoices go out under the company's name and ABN, and the GST registration threshold is the same $75,000. See what is a tax invoice and our BAS due dates guide.

Can you switch from sole trader to company later?

Yes. You can start as a sole trader and incorporate once profit or risk grows. You register the company, move assets and licences across, then cancel your sole trader ABN, because it can't be transferred to the company (business.gov.au).

Cancelling the ABN also cancels its GST registration, so check whether the company needs to register. Transferring assets to the company is a CGT event, but the small business restructure roll-over can defer the tax if your aggregated turnover is under $10 million, the restructure is genuine, and ultimate ownership of the assets doesn't change. Update your invoicing software with the company's details on day one, so no invoice goes out under the old ABN.

Which one suits you?

A sole trader structure is the simpler default, and nothing forces you to change as you grow. A company starts to make sense once you're regularly leaving profit in the business, or your work carries liability you can't insure away.

A sole trader is likely to suit you if:

your profit is under about $130,000, or you spend most of what you earn
most of your income comes from your own labour or skills
you want minimal admin and no annual ASIC fees
your liability risks are covered by insurance.

A company is worth costing if:

you consistently earn more than you need to live on and want to reinvest the rest
you plan to hire staff, take on investors, or bring in a partner as a shareholder
your work carries risk that insurance doesn't fully cover
you expect some lean years and want losses kept within the company to offset future profits.

Whichever you pick, your invoices need the right legal name and ABN. The free invoice generator works for both, and InvoiceSonic Pro (A$19 a month, 7-day trial) handles quotes and invoices if you send them every week.

New to running your own business? Start with what a sole trader is and how to set one up.

Frequently asked questions

Is a company better than a sole trader for tax?
Not always. On $90,000 of profit, a sole trader pays $19,588 including Medicare levy at 2025–26 rates, while a base rate entity company pays $22,500. A company mainly helps on retained profit above roughly $131,600, and even then the tax is deferred until the money reaches you.

How much does it cost to set up a company in Australia?
From 1 July 2026, ASIC charges $636 to register a proprietary company and $342 a year for the annual review. A director ID is free. Accounting fees for the company tax return and annual paperwork come on top.

Does a company protect my house and personal assets?
It protects shareholders from the company's debts, but not completely. Directors can be personally liable for breaching director duties, insolvent trading, and some unpaid company tax and super under the director penalty rules. A sole trader has no protection at all, so personal assets are exposed to every business debt.

Can I take money out of my company whenever I like?
Not freely. The company's money belongs to the company. You can pay yourself a salary, director fees or dividends; other payments, loans or benefits to you can be treated as unfranked dividends under Division 7A unless they're repaid or put on a complying loan agreement in time.

Do I need a director ID to run a company?
Yes. Every director must verify their identity and get a director ID from ABRS before being appointed. It's free, you apply once and keep it for life, and there are penalties for not having one.

Can I change from a sole trader to a company later?
Yes. You register the company, transfer assets and licences, and cancel your sole trader ABN, which can't move across. The small business restructure roll-over may defer tax on the asset transfer if aggregated turnover is under $10 million and the restructure is genuine.