The sole trader vs company decision is one of the most common questions practitioners face when a client is starting out or growing past the point where the simplest structure is no longer optimal. There is no universally correct answer, but there is a clear framework for working through it.
Tax rates: the headline difference
Sole trader: Personal marginal tax rates apply to net business income. In 2026-27, marginal rates range from 0% (under $18,200) to 45% (over $190,000), plus the 2% Medicare levy. A sole trader earning $150,000 in business profit pays tax at an effective rate of around 37-38%.
Company: The base rate for a base rate entity (passively invested or active business with turnover under $50M) is 25%. For larger companies it is 30%. A company earning $150,000 in profit pays $37,500 in corporate tax, with retained earnings available for investment or future distribution.
The tax rate advantage of a company only materialises if profits are retained inside the company. If the owner needs to draw all profits as salary or dividends to live, the overall tax position often does not differ greatly once personal tax on distributions is considered.
| Factor | Sole trader | Company |
|---|---|---|
| Tax rate | Marginal up to 45% plus 2% Medicare levy | 25% base rate entity (30% if larger) |
| Income tax return | One personal return | Separate company return |
| Annual review fee | None | ASIC $310 for a proprietary company |
| Asset protection | Personal assets exposed | Separate legal entity, generally protected |
| Extra compliance cost | Baseline | $1,000 to $3,000 per year more |
Franking credits
When a company pays a dividend, franking credits attach representing the company tax already paid. A shareholder with a marginal rate below the company rate receives a tax refund. A shareholder with a higher marginal rate pays additional tax to bring the total to their marginal rate.
Franking credits make the company structure tax-efficient for profit retention and gradual distribution, but they do not eliminate personal tax on extraction.
Division 7A
If a company owner borrows from the company without a complying loan agreement, or leaves an unpaid present entitlement sitting in the company accounts, Division 7A deems an unfranked dividend. This is the most common tax compliance trap for company structures.
For clients operating through a company, the bookkeeper must track loans to shareholders and associates carefully, and ensure any loans are either repaid or placed on a Division 7A complying loan before lodgement.
Super contributions
Both structures allow concessional superannuation contributions up to the annual cap ($30,000 in 2026-27, indexed). For a sole trader, contributions are made personally and claimed as a deduction. For a company, contributions are paid by the company as an employer SG obligation or as additional concessional contributions for a director.
Asset protection
A company provides a separate legal entity, which means personal assets are generally protected from business creditors (subject to director guarantees). A sole trader has no legal separation: personal assets are exposed to business liabilities.
For clients in trades, professional services, or any business with significant liability exposure, asset protection is often a stronger argument for incorporation than the tax rate difference.
Compliance costs
Sole trader compliance is simple: one personal income tax return, BAS lodgement if GST-registered, and payroll if there are employees.
A company requires:
- Annual company tax return (separate from the director personal return)
- ASIC annual review fee (currently $310 for a proprietary company)
- Director loan tracking for Division 7A
- Shareholder loan accounts
- Potentially more complex payroll (if directors pay themselves salary)
- Potentially more complex bookkeeping to separate company finances from personal
The difference in accounting and tax preparation costs is typically $1,000-$3,000 per year for a small company vs. a sole trader at similar revenue levels.
When to recommend a company structure
The company structure generally makes economic sense when:
- Net business profit is consistently above $100,000 and the owner does not need to draw all of it
- The business has significant liability exposure
- The owner wants to bring in other shareholders or investors
- There is a plan to sell the business (small business CGT concessions apply to both structures, but the mechanics differ)
Bookkeeping differences
Sole trader: The owner draws typically appear as drawings (not a deduction). Business expenses are deductible against business income in the personal return. The books are simpler.
Company: Payments to the director-shareholder must be classified correctly as salary (PAYG), dividends (with or without franking), or loans (Division 7A risk). Each has different tax treatment. The chart of accounts needs separate loan accounts for each related party.
For bookkeepers taking on a new company client, the first task is always to map the existing related-party account structure and confirm whether any outstanding balances create Division 7A exposure.