Sole Trader vs Company: Which Structure Is Right for Your Trade Business?

Sole Trader: The Default Starting Point

As a sole trader, you and the business are the same legal entity. Your ABN is yours personally. Business income is your personal income. Business debts are your personal debts.

Advantages:

• ✓Simple to set up. Register an ABN, get the right licences, and you're operating. No company registration, no ASIC fees, no corporate compliance requirements.
• ✓Low cost. No annual ASIC review fee (~$59/year for a company). Less compliance work, lower accounting fees.
• ✓Simple tax. Business profit is included in your personal tax return. One return, not two.
• ✓Access to 50% CGT discount. If you sell business assets, sole traders can access the 50% capital gains tax discount for assets held over 12 months.

Disadvantages:

• ✓Unlimited personal liability. If the business is sued or can't pay its debts, your personal assets — house, savings, car — are on the line.
• ✓Tax rate scales with income. Once your taxable income exceeds $135,000 (2024–25), you're in the 37% marginal tax bracket. The company tax rate is 25% for small companies.
• ✓Harder to bring in partners or investors. A sole trader structure doesn't easily accommodate co-owners.
• ✓Perceived differently by some commercial clients. Some larger clients prefer contracting with a company.

Proprietary Limited Company (Pty Ltd)

A company is a separate legal entity from you. It has its own ABN, its own tax obligations, and its own liability. You are a director and shareholder of the company, not the business itself.

Advantages:

• ✓Limited liability. In most circumstances, your personal assets are protected from business debts and legal claims. (Note: directors can still be personally liable in some situations — negligence, insolvent trading, personal guarantees.)
• ✓Lower tax rate. Small companies pay 25% tax on profits. If you're earning over ~$100,000 in business profit, this is likely less than your marginal personal tax rate.
• ✓Income splitting potential. With the right structure, you may be able to pay dividends to a spouse or other shareholders, spreading income and reducing the overall tax burden (get advice on this — the rules are specific).
• ✓Credibility and growth. Easier to bring in business partners, take on employees, and contract with larger clients.

Disadvantages:

• ✓More expensive and complex. ASIC registration (~$560 to register), annual review fee (~$59/year), more complex accounting, and higher accountant fees.
• ✓Two tax returns. The company lodges its own, and so do you as an individual.
• ✓No 50% CGT discount. Companies don't access the individual 50% CGT discount on asset sales.
• ✓Getting money out requires planning. You need to pay yourself via salary or dividends — you can't just transfer business funds to your personal account.

The Breakeven Point: When Does a Company Make Sense?

The most common trigger for switching is tax. At a rough guide:

• ✓Under $80,000 net profit: Sole trader is usually simpler and the tax difference isn't significant
• ✓$80,000–$120,000 net profit: Worth getting an accountant to model both structures
• ✓Over $120,000 net profit: The 25% company tax rate vs your marginal rate (37–45%) starts to create real savings

These are rough figures — your specific situation (super contributions, family circumstances, debt levels) matters a lot.

What About a Trust?

Some trade businesses operate through a discretionary (family) trust structure, which sits above the trading entity. Trusts offer flexibility in distributing income to beneficiaries and can provide asset protection. They're more complex and more expensive to run than either sole trader or company structures. If you're at the point where a trust is relevant, you need an accountant — not a blog post.

Practical Considerations When Switching

If you're moving from sole trader to company:

• ✓New ABN and business name. The company gets its own ABN. You'll need to update clients, suppliers, and any licences.
• ✓Licences may need to be reapplied. Trade licences in some states are issued to individuals, not companies. Check with your licensing authority.
• ✓Contracts and bank accounts. Business contracts and accounts need to reflect the company entity.
• ✓Timing matters. Switching at the start of a financial year is cleaner than mid-year.

Most Tradies Should Start as Sole Traders

Unless you have a specific liability concern or you're starting out with significant revenue already, starting as a sole trader is the right call. It's simpler, cheaper, and easier to manage while you're establishing the business.

Review the structure when: - Net profit is consistently above $80,000–$100,000 - You're taking on employees and personal liability is a real concern - You're looking at bringing in a business partner

Key Takeaways

• ✓Sole trader is simple, cheap, and right for most tradies starting out
• ✓A company offers limited liability and a lower tax rate — advantages that grow as the business does
• ✓The tax crossover point is roughly $80,000–$120,000 in net profit, depending on your situation
• ✓Switching structures has practical implications for licences, contracts, and accounts — plan it properly
• ✓Get an accountant to model your specific situation before deciding