Sole trader vs. company: choosing the right business structure

What’s the best business structure for you?

When starting a business as an individual in Australia, one of the biggest decisions you’ll make is choosing between operating as a sole trader or registering as a company. Each structure has distinct legal, tax, liability and scalability implications, making it crucial to select the right one for the goals of your business.

This guide will break down some of the key differences between sole traders and companies, helping Australian small business owners and entrepreneurs make an informed decision. There may be other types of business structures available to individuals operating a business in Australia. However, this article will be focusing on the most common - sole traders and companies.

What is a sole trader?

A sole trader can be defined as an individual operating a business under their own name or an ABN. This is the simplest and most common business structure in Australia, offering full control and minimal compliance requirements.

Key features of a sole trader structure

• Business income is taxed at personal income tax rates.
• Owners have unlimited personal liability for business debts.
• Lower setup and ongoing costs compared to a company structure.
• Complete decision-making power with no need for directors or shareholders.
• Harder to raise investment compared to a company structure.

What is a company?

A company is a separate legal entity registered under the Australian Securities and Investments Commission (ASIC). Unlike a sole trader, it is the company that enters into contracts, owns the business assets and takes on business liabilities, which can help protect the personal assets of its owners.

Types of companies in Australia

While there are different types of companies in Australia, the most common for small and medium sized businesses is a proprietary limited company (Pty Ltd). They are the main focus of this guide because it’s relevant to small business owners transitioning from a sole trader business structure. Privately owned companies operating under this structure have at least one director and shareholder but aren’t listed on the stock exchange.

Other company types include:

• Public company (Ltd) – this structure is suited to larger businesses that can raise funds from the public by issuing shares and are sometimes listed on the Australian Securities Exchange (ASX).
• Not-for-profit companies – companies with this structure are limited by guarantee and generally used for charities and nonprofit organisations. They have members rather than shareholders and do not pay dividends. 

How a company differs from other business structures

While this article focuses on understanding the sole trader vs. company business structure, it’s important to note that this article will not be discussing other business structures such as:

• Trusts – a structure where a trustee (who can be an individual or a company) holds assets for the benefit of others (known as beneficiaries). They’re often used for tax benefits but do require a higher amount of accounting and legal management.
• Partnerships – this is where a business is owned by two or more people who share the profits, liabilities and business responsibilities. 

Key features of a company structure

• Owners (shareholders) have limited liability for company debts. Usually this is limited to the amount paid by the owners for their shares.
• The company pays corporate tax on profits, with additional tax implications for dividends (this is where profits are paid to shareholders).
• Higher setup and compliance costs than a sole trader.
• Decisions on the day-to-day operations of the company are made by directors with shareholders having a limited input.
• Greater potential for scalability and investment.

What are the differences between a sole trader and a company?

Legal liabilities

Choosing the right business structure impacts how much personal risk you undertake. Sole traders have unlimited personal liability, meaning personal assets could be used to cover business debts. A company, on the other hand, offers limited liability, helping protect owners from being personally responsible for company debts.

Note: where companies obtain loans, it is not unusual for a company’s directors to be required to provide personal guarantees. Where this happens, it means that the directors may be personally liable if the company fails to meet its obligations under the loan.

Taxation

The tax obligations of a business structure can significantly impact profits. Sole traders pay tax at a personal income tax rate, which can be high at higher income levels. Companies pay a flat corporate tax rate, which is often lower, though additional tax may apply when distributing profits to owners as dividends.

Actual tax rates vary and may likely change year-to-year. Visit the Australian Tax Office (ATO), opens in new window website for the latest rates.

Note: The above table is only intended as a summary of the common tax obligations. There may be others. 

Setup and ongoing costs

The cost of setting up and maintaining a business varies depending on the structure. Sole traders benefit from minimal registration costs and lower compliance requirements, though companies face higher setup costs, annual ASIC fees and ongoing financial reporting obligations.

Note: The above table is only intended as a summary of the key setup costs and compliance requirements. There may be others.

Control and decision-making

If maintaining full control is a priority, a sole trader structure allows complete autonomy over business decisions. A company structure involves shared decision-making, requiring governance processes for directors and shareholders.

Scalability and investment

The ability to grow and attract investors is different between structures. Sole traders rely on personal funds and small business loans, which can make large-scale growth difficult. Companies have greater scalability and may be able to raise capital by issuing shares and attracting external investors.

What to consider when choosing a business structure

When deciding between a sole trader and a company business structure, consider:

• Business size and goals – do you plan on remaining small or gradually scaling your business?
• Risk tolerance – are you comfortable with unlimited liability?
• Tax strategy – which structure minimises your tax burden?
• Administrative capacity – do you want simple compliance, or can you manage additional reporting requirements?

Transitioning between business structures

You can switch from being a sole trader to a company as your business grows or changes over time.

1. Register a company with ASIC, opens in new window and obtain an ACN.
2. Apply for a new ABN, opens in new window linked to your company.
3. Update your business details with the ATO, opens in new window and relevant authorities.
4. Open a new business bank account under your company’s name.
5. Transfer any existing contracts and assets to the company.
6. Adjust tax reporting to reflect the new structure.

Keep in mind that while transitioning can help by offering potential tax efficiencies, risk protection and scalability, it may come with higher costs and more stringent compliance requirements. There may also be tax consequences where business assets need to be transferred from the name of the sole trader to the name of the company.

Ready to choose the right business structure?

Deciding between a sole trader or company business structure is a crucial step as part of your business journey. For further guidance:

• Explore the Sole Trader Resource Centre for additional support, tips and guidance.
• Learn about whether you should open a separate business bank account as a sole trader.
• Speak with a NAB business banker to discuss your financing options.
• Check out NAB’s business banking solutions to find the most suitable fit for your business needs.

Whether you’re just starting out or planning to scale, NAB is here to help you each step of the way.