Sole Trader vs Pty Ltd Company — Australia (2025-26)
Side-by-side comparison of the two most common Australian business structures. Covers tax, liability, compliance costs, and when each structure makes sense.
Quick Answer
Stay sole traderif your profit is under ~$120,000/yr, you don't need limited liability, and the compliance simplicity matters more than tax savings.
Switch to Pty Ltd when profit consistently exceeds ~$130,000–$180,000/yr AND you can retain some earnings in the company, want asset protection, or plan to bring in investors or sell the business later.
Feature-by-Feature Comparison
| Feature | Sole Trader | Pty Ltd |
|---|---|---|
| Tax rate | Personal marginal rates (16–45%) | 25% BRE (turnover <$50M, <80% passive) or 30% |
| Tax-free threshold | $18,200 (resident individuals) | None — every dollar taxed at 25%/30% |
| Limited liability | No — personal assets at risk | Yes — shareholders protected (except guarantees) |
| Setup cost | Free (just register ABN) | $500–$1,500 (ASIC + accountant) |
| Annual compliance | $0–$300 (tax return) | $2,000–$4,000 (ASIC review fee, company tax return, financial statements) |
| Profit retention | All taxed personally each year — no deferral | Can retain at 25%/30% rate, defer personal tax |
| Dividend imputation | N/A | Franking credits prevent double tax |
| Bring in investors | Difficult — only via partnership | Easy — issue shares |
| CGT on sale | May qualify for small business CGT concessions | Same concessions available, with shares sale or asset sale options |
| Workers compensation insurance | Optional (you're not an employee) | Mandatory if you pay yourself a salary |
| Division 7A loan rules | N/A | Strict — informal loans from company treated as unfranked dividends |
| PSI (Personal Services Income) rules | Applies — limits deductions if 80%+ income from one client | Applies — same test, but easier to pass if you have multiple income sources |
Worked Example: $150,000 Profit
Scenario:
Sarah runs an IT consulting business making $150,000 annual profit. No other income. She compares staying sole trader vs forming a Pty Ltd company paying herself $90,000 salary + retaining the rest in the company.
Sole Trader
- Taxable income: $150,000
- Income tax: $36,838
- Medicare levy (2%): $3,000
- Total tax: $39,838
- Take-home: $110,162
Pty Ltd (BRE 25%)
- Salary $90k tax: $17,788 + $1,800 Medicare
- Company profit $60k × 25%: $15,000
- Dividend top-up tax: $5,250
- Total tax: $39,838
- Take-home: $110,162 (same!)
Verdict at $150k profit: Dividend imputation neutralises the tax difference. Pty Ltd offers no tax advantage if Sarah pays out all profit. BUT: if Sarah retains $30k+ in the company (deferring personal tax), Pty Ltd becomes meaningfully better. Pty Ltd also offers limited liability (~$200/yr more in insurance, but legal protection worth far more for IT consultants).
When Pty Ltd Clearly Wins
- Profit consistently $180k+ — even with full payout, the ability to time dividends across financial years (or pay to spouse on lower rate) starts saving thousands.
- You can retain earnings — every $10k retained at 25% (BRE) vs 37%/45% personal rate saves $1,200–$2,000/yr in deferred tax.
- Asset protection matters — high-litigation industries (consulting, construction, healthcare, financial services).
- Bringing in investors/cofounders — issuing shares is impossible as sole trader.
- Planning to sell the business — share sale vs asset sale flexibility; CGT concessions for active assets.
When Sole Trader Stays Best
- Profit under $120k consistently — compliance cost of company ($2-4k/yr) outweighs tax savings.
- You need all profit personally each year — no benefit from company retention if everything gets distributed.
- One main client, PSI rules apply — company structure doesn't bypass PSI; just adds admin.
- Side hustle — simplicity, no minimum compliance cost.
- Limited liability not critical — service businesses with low litigation risk.
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Disclaimer: This article is general information only and not personal tax advice. Business structure choice depends on your specific circumstances. Consult a registered tax agent or accountant before making a structural change.