From Sole Trader to Company: When to Make the Switch?

Starting your business as a sole trader is a common and practical starting point for many Australian business owners. But when is it time to consider switching to a company structure? For many Australian SMEs, this transition isn't just a legal manoeuvre, it can bring important tax benefits, better asset protection, and stronger growth potential.

Sole Trader vs Company: The Pros and Cons

Sole Trader

Operating as a sole trader is the simplest business structure. You apply for an ABN, register a business name if required, and report income through your individual tax return.

• Pros:

  • Low setup cost and minimal paperwork

  • Full control over decisions and operations

  • Direct access to all profits

  • Simple reporting obligations

• Cons:

  • Unlimited personal liability, your assets are exposed

  • Profits taxed at personal marginal tax rates (up to 45% + Medicare levy)

  • Limited ability to raise capital or bring in partners

  • No separation between you and the business, it ends if you stop trading

Company (Pty Ltd)
A company is a separate legal entity registered with ASIC. It has its own ABN, pays tax at a flat rate, and requires formal governance.

• Pros:

  • Flat 25% company tax rate for small businesses (turnover under $50m)

  • Limited liability, i.e personal assets generally protected

  • Easier to scale: issue shares, raise capital, attract investors

  • More professional image, often required for larger contracts

  • Ability to retain profits for reinvestment

• Cons:

  • Higher setup and annual compliance costs

  • More complex reporting and governance obligations

  • Must pay yourself via salary or dividends (not simple drawings)

  • Directors can still be personally liable in some cases (e.g. insolvent trading)

Why Change Your Structure from a Sole Trader to a Company?

The biggest driver of change is often tax. As a sole trader, every dollar of profit is added to your personal income and taxed at individual rates. When your taxable profit consistently exceeds around $135,000, the company tax rate is likely more favourable than your personal rate. For example, at $180,000 in taxable profit, much of that income is taxed at the 37% personal rate. Through a company, the same profit would attract only 25% tax, potentially saving thousands each year, which can be reinvested into your business.

Beyond the numbers, other benefits that often prompt business owners to make the switch include:

1. Asset protection: A company separates your personal assets from business liabilities, reducing your personal exposure to risk.

2. Growth potential: Incorporation makes it easier to raise capital, add shareholders, and pursue larger contracts or tenders.

3. Professional credibility: Operating as a company signals stability and commitment, which can help when dealing with clients, lenders, or investors.

4. Succession planning: Unlike a sole trader structure, a company continues beyond the owner, making it easier to sell or pass on to the next generation.

Final Thoughts

There’s no one-size-fits-all answer. For some, staying a sole trader offers simplicity and flexibility that suits their needs. For others, particularly those crossing the $135,000 profit line or taking on bigger contracts, incorporation is the smart move. The shift from sole trader to company is as much about mindset as it is about money, it’s about seeing your work not just as a job, but as a growing business with a future worth protecting.

If you’re at that crossroads, consider not just your tax bill today, but where your business will be in five years. A company structure may be the key to getting there.