Sole traders and companies are the two most common business structures for small Australian businesses. Many clients start as sole traders and transition to companies as they grow. When that transition happens — or when a bookkeeper takes on a client mid-structure — the differences in bookkeeping treatment can cause significant errors if not clearly understood.
This guide focuses on the practical bookkeeping differences, not the business or tax advice differences (which should always come from the client's tax agent or lawyer).
How the owner is paid: the most fundamental difference
Sole trader: The sole trader and the business are legally the same entity. There is no salary. The owner draws money from the business as "drawings" — these reduce the owner's equity but are not a business expense. They do not appear in the profit and loss statement. They do not attract PAYG withholding.
Company: The company is a separate legal entity from its directors and shareholders. An owner who works in the company should be paid a wage (as a director/employee) or receive dividends as a shareholder. Both have different tax treatments:
- Wages/director fees: deductible to the company, assessable to the director as income, subject to PAYG withholding and STP
- Dividends: paid from after-tax profits, franked to the extent the company has paid tax, not deductible to the company
The most common error: Coding a company owner's drawings as wages, or coding a company director's wages as drawings. This produces an incorrect profit figure, wrong PAYG withholding, and incorrect BAS W1 figures.
The owner's drawings account (sole trader)
For sole trader clients, the bookkeeper should maintain a drawings account — a contra-equity account that tracks money the owner has taken from the business for personal use.
Drawings are NOT:
- A salary expense
- A deductible business expense
- Subject to PAYG withholding
- Reported on the activity statement
Drawings ARE:
- A reduction in the owner's equity
- Coded to the drawings account (often set up as a sub-account under Owner's Equity in the Chart of Accounts)
- Reflected in the balance sheet, not the P&L
Common transactions coded to drawings:
- Bank transfers from business account to the owner's personal account
- Business account payments for personal expenses (groceries, fuel for private vehicle, clothing)
- Cash withdrawals from the business ATM card
When a sole trader's bank statement shows frequent round-number transfers out (e.g., $3,000 every fortnight), these are almost certainly drawings. Do not code them as wages or expenses.
Director loans and inter-entity transactions (company)
For company clients, the equivalent of drawings is often a director's loan account (also called a shareholder loan or Division 7A loan account). This is a balance sheet account that tracks amounts owed by the company to the director/shareholder (a liability) or owed by the director to the company (an asset).
If a director takes money from the company for personal use without it being declared as wages or dividends, it's treated as a loan from the company to the director. Under Division 7A of the Income Tax Assessment Act 1936, these loans can become deemed dividends if they are not repaid or put on a complying loan agreement by the lodgement date of the company's tax return.
Bookkeeping for director loans:
- Director withdraws $5,000 for personal use: Debit Loan to Director (asset), Credit Bank
- Director repays $2,000: Debit Bank, Credit Loan to Director
- Company pays director's personal credit card: Debit Loan to Director, Credit Bank
Division 7A implications are the tax agent's responsibility to manage. The bookkeeper's role is to ensure the loan account is accurately maintained so the tax agent can see the balance and take action before year-end.
Tax payments: how they differ
Sole trader: The sole trader pays income tax personally on the net profit of the business (income minus deductible expenses). Tax is paid through:
- PAYG instalments: Quarterly or annual ATO-issued instalment notices based on prior year income. Code to a PAYG Instalment Payable account (liability) when the instalment is paid, and true up against the tax return at year-end.
- There is no company tax — the sole trader's personal income tax return incorporates business income.
Company: The company pays company income tax on its taxable profit (currently 25% for base rate entities — companies with turnover under $50M deriving primarily passive income excluded). Tax payments are made via:
- PAYG instalments: As for sole traders, but the company pays its own instalments. Code to Company Tax Payable (liability).
- The company lodges its own income tax return separate from the directors' returns.
Do not code a company's income tax instalments as a business expense. Income tax is not a deductible expense of the company — it's a reduction of retained earnings. Code to Company Tax Payable (balance sheet liability), not to a P&L expense account.
GST registration and BAS: same framework, different numbers
Both sole traders and companies use the same GST framework and lodge the same BAS form. The practical differences:
Threshold: Both must register for GST if annual GST turnover reaches $75,000. Sole traders are assessed on their individual trading; companies are assessed on the company's trading.
Registering the right entity: A common error when a business transitions from sole trader to company is accidentally continuing to lodge BAS under the old sole trader ABN. The company has its own ABN and must be registered separately for GST.
Wages on the BAS (W1/W2): A sole trader who has no employees and takes only drawings has nothing to report in W1/W2 — drawings are not wages. A company director being paid a salary does report those wages in W1/W2 and withholds PAYG accordingly.
Superannuation guarantee: a critical difference
Sole trader: A sole trader is not an employee and does not receive employer SG contributions. They may choose to make personal super contributions (concessional or non-concessional) but there is no mandatory SG obligation.
Company director as employee: A director of a company who receives remuneration (wages or fees for services) is entitled to SG at the full rate (12% from 2025–26) on those payments. Many small company directors miss this — they pay themselves a salary but forget their own SG.
Consequence of missing SG for director: The company faces SGC (Superannuation Guarantee Charge), which is not deductible. The ATO treats missed director SG the same as missed employee SG.
Bookkeepers managing a company client where the director is the primary worker should confirm at onboarding whether the director is receiving SG contributions. If not, flag to the client and tax agent.
Closing a financial year: different requirements
Sole trader: The financial year ends 30 June. The tax return is the individual's personal tax return including business schedules. No separate entity return. The bookkeeper closes the year by reconciling all accounts to 30 June.
Company: The company lodges its own tax return (company tax return), separate from any director returns. The bookkeeper prepares the trial balance and profit and loss for the tax agent. Specific year-end requirements include:
- Confirming the director loan balance for Division 7A assessment
- Preparing the franking account balance (for dividend declarations)
- Confirming any inter-entity loans or trust distributions received
This article is general guidance for bookkeeping practice. Business structure decisions should be made with a registered tax agent or legal advisor. This is not specific tax or legal advice.