Sole Trader vs Company: Which Structure Is Better for Tax?

One of the most important decisions for any business owner is choosing the right legal structure. The two most common options in Australia are operating as a sole trader or registering a company. Each has different tax implications.

Sole Trader: Simple but Exposed

As a sole trader, you and your business are the same legal entity. Your business income is included in your personal tax return and taxed at individual marginal rates (up to 47% including the Medicare levy).

Advantages:

• Simple and inexpensive to set up
• Minimal reporting obligations
• Access to the small business income tax offset (up to $1,000)
• 50% CGT discount on assets held over 12 months

Disadvantages:

• No asset protection — personal assets are at risk
• Higher tax rates at higher income levels
• Limited income splitting opportunities

Company: Lower Rate, More Complexity

A company is a separate legal entity. It pays a flat company tax rate — currently 25% for base rate entities (turnover under $50 million) or 30% for larger companies.

Advantages:

• Lower flat tax rate (25% vs up to 47% for individuals)
• Asset protection — personal assets are generally separate
• Ability to retain profits in the company at the lower rate
• More credible structure for larger businesses

Disadvantages:

• Higher set-up and ongoing compliance costs
• More complex reporting requirements (company tax return, ASIC obligations)
• No access to the 50% CGT discount at the company level
• Profits distributed as dividends are taxed again in the hands of shareholders

Which Is Right for You?

There's no one-size-fits-all answer. The right structure depends on your income level, growth plans, asset protection needs, and long-term goals. Our registered tax agents can help you model the tax outcomes of each structure for your specific situation.

Contact Illawarra Accounting and Tax to arrange a consultation.