Somewhere between your third invoice and your first serious tax bill, someone will tell you to “set up a company”. It sounds like the grown-up thing to do, and for a lot of growing businesses it eventually is. But setting up a company too early is one of the more expensive pieces of good-intentioned advice we unwind for new business owners across Melbourne and Brisbane. Here is how to actually decide between operating as a sole trader or a company in 2026, without the myths.
Four structures, but really a two-horse race
Australian businesses generally run as one of four structures: sole trader, partnership, company, or trust. Partnerships and trusts have their place, but for most people going out on their own or turning a side income into a real business, the decision comes down to two options: stay a sole trader, or set up a company. Get that call right and most of the other questions answer themselves.
A sole trader is you, trading in your own name and your own tax file number. A company is a separate legal entity you own shares in, registered with ASIC, with its own tax file number and its own return. That difference in legal identity is where every trade-off below comes from.
How each one is taxed (where the myth lives)
As a sole trader, your business profit is added to your other income and taxed at individual marginal rates. That means you get the tax-free threshold, and you pay progressively more as you earn more:
| Taxable income (2025-26) | Tax on this income |
|---|---|
| $0 – $18,200 | Nil |
| $18,201 – $45,000 | 16c for each $1 over $18,200 |
| $45,001 – $135,000 | 30c for each $1 over $45,000 |
| $135,001 – $190,000 | 37c for each $1 over $135,000 |
| $190,001 and over | 45c for each $1 over $190,000 |
On top of that, most people pay the 2% Medicare levy. A company is taxed differently: a flat 25% if it is a base rate entity (broadly, aggregated turnover under $50 million and no more than 80% passive income), otherwise 30%. There is no tax-free threshold for a company. Every dollar of company profit is taxed from the first dollar.
This is where “companies pay less tax” comes from, and why it is only half true. On low profit, a sole trader often pays less, because the first $18,200 is tax-free and the next band is only 16%. The flat 25% company rate only starts to look attractive once your profit is high and, crucially, you are leaving money in the business rather than taking it all home.
The 25% rate is a deferral, not a discount
Here is the part that catches people out. That 25% is what the company pays. It is not what you pay. The moment you move that money into your own pocket, as a wage or a dividend, it gets taxed again in your hands at your marginal rate, with a credit for the company tax already paid so you are not taxed twice on the same dollar.
So if you draw every dollar the business makes to live on, a company saves you almost nothing on tax and costs you more to run. The company rate only becomes a genuine advantage when profits stay in the business to fund stock, equipment or growth, where the 25% acts as a lower holding rate until you eventually take the money out. Draw it carelessly and you can also trip the ATO’s Division 7A rules, which treat loans and informal drawings from your own company as deemed dividends. It is a real trap, and a common one.
Sole trader vs company, side by side
| Sole trader | Company | |
|---|---|---|
| Tax rate | Your marginal rate (0% to 45% + 2%) | Flat 25% or 30% |
| Tax-free threshold | Yes ($18,200) | No |
| Setup | Free ABN, trade under your name or a registered business name | ASIC registration fee (indexed each 1 July), constitution, company records |
| Ongoing admin | One individual tax return | Company tax return, ASIC annual review fee, separate books, director duties |
| Personal liability | Unlimited: business debts are your debts | Limited: the company is a separate legal person (directors still have duties) |
| Getting paid | Take money out freely, it is already your income | Wages, dividends or director loans, with rules attached |
| Best when | Starting out, lower profit, drawing it all to live on | Higher retained profit, real liability risk, partners or investors |
When a company actually earns its keep
A company is often the right move once one or more of these is true:
- You are consistently profitable and not drawing all of it. If profit sits well above what you need to live on and you are reinvesting the rest, the 25% holding rate does real work.
- You carry genuine liability. If a claim, a bad debt or a workplace incident could come back on you personally, the limited-liability wall of a company is worth paying for. Trades, importers and anyone signing sizeable contracts feel this first.
- Your clients require it. Some larger clients and government contracts will only engage a company, and some insurers price it differently.
- You are bringing in partners or investors. Shares make it far cleaner to split ownership, bring someone in, or sell part of the business later.
When staying a sole trader is the smart call
Plenty of profitable businesses run perfectly well as sole traders for years. It is usually the better call when your income is still building, your risk is low, and you draw most of what you earn to live on. You keep the tax-free threshold, your admin is one return instead of two sets of books, and you can always incorporate later once the numbers justify it.
One warning that applies to both structures: if you essentially sell your personal skills and time, such as a contractor working mainly through one client, the ATO’s personal services income rules can push that income back onto you at your marginal rate regardless of the company you put it through. Incorporating does not switch off PSI. If your work looks like this, get advice before you assume a company will save tax, because it may not.
Melbourne or Brisbane, either way
You do not need to sit across a desk from your accountant to set this up properly. We register companies, sort out ABNs and GST, and run the ongoing books for clients in both Melbourne and Brisbane, and the structure conversation is the same in either city. What changes the answer is your numbers and your risk, not your postcode. If you are weighing this up, it is worth reading how accounting fees actually work for a small business, and if your growth started as a side income, which platforms now report your earnings to the ATO before you decide anything.
Getting it wrong is fixable, but not free
You can restructure later. People move from sole trader to company all the time as they grow. The catch is that it is not always a clean swap: moving assets and goodwill into a new entity can trigger capital gains tax and, in some states, stamp duty, though small business rollover concessions can reduce the pain if you qualify. The cheaper path is to choose deliberately at the start, and to revisit the decision each year as your profit and risk change. That yearly check is exactly the kind of thing a registered tax agent should be doing with you, not a one-off form you file and forget.
Frequently asked questions
Is it better to be a sole trader or a company in Australia?
Neither is better in the abstract. A sole trader usually pays less tax and less admin at lower profit, because of the tax-free threshold and progressive rates. A company can save tax and protect you personally once profit is high and you leave some of it in the business, or once you carry real liability. The right answer depends on your numbers and your risk.
Do companies pay less tax than sole traders?
Not necessarily. A company pays a flat 25% or 30% with no tax-free threshold, while a sole trader pays individual rates that start at nil. On lower profit a sole trader often pays less. A company only wins on tax when profit is high and you retain some of it rather than drawing it all, because money you take out is taxed again in your hands.
How much does it cost to set up a company in Australia?
You pay an ASIC registration fee, which is indexed on 1 July each year, plus any cost for a constitution and setup help. Check the current fee at asic.gov.au. On top of registration there are ongoing costs a sole trader does not have, including the ASIC annual review fee and a separate company tax return each year.
Can I change from sole trader to a company later?
Yes, and many businesses do as they grow. Be aware that moving business assets and goodwill into a company can trigger capital gains tax and, in some states, stamp duty. Small business rollover concessions may reduce this if you qualify, so it is worth getting advice before you make the switch rather than after.
Does a company protect my personal assets?
Largely, yes. A company is a separate legal entity, so its debts are generally its own rather than yours. That protection is not absolute: directors still have legal duties, personal guarantees you sign on loans or leases remain your responsibility, and directors can be personally liable for unpaid super and PAYG in some situations.
Sources
- Australian Taxation Office (ATO), Tax rates for Australian residents and Company tax rates (2025-26 income year)
- Australian Taxation Office (ATO), Personal services income and Division 7A guidance
- Australian Securities and Investments Commission (ASIC), Fees for commonly lodged documents (registration and annual review fees, indexed 1 July)
