One of the most common questions Australian business owners ask is: should I stay as a sole trader or set up a company? The answer is not one-size-fits-all — it depends on your income, how you plan to extract profits, and your risk appetite. This guide gives you real numbers using FY 2025-26 tax rates so you can make an informed decision.
The Core Difference Between Sole Trader and Company
As a sole trader, you and your business are the same legal entity for tax purposes. All business profits are added to your personal income and taxed at marginal rates — the same rates that apply to salary income. You pay tax at the same rate whether the money is "in the business" or in your pocket.
As a Pty Ltd company, the business is a separate legal entity. The company pays tax at the flat corporate rate (25% for base rate entities in FY 2025-26). But there is a catch: you still need to extract money from the company to spend it personally, and that extraction is taxed again — either as salary (PAYG) or as dividends.
Tax Rates: Sole Trader vs Company 2025-26
Sole trader marginal rates FY 2025-26:
- $0–$18,200: 0%
- $18,201–$45,000: 19%
- $45,001–$120,000: 32.5%
- $120,001–$180,000: 37%
- $180,001+: 45%
- Plus 2% Medicare Levy on most income
Company tax rate 2025-26:
- 25% flat rate for base rate entities (turnover under $50M, at least 80% active income)
- 30% for all other companies
The key point: if you are a sole trader earning $150,000, your marginal rate is 37%. If that income goes through a company first, it's taxed at 25%. That's a 12 percentage point difference before extraction.
The Real After-Tax Take-Home (Real Numbers)
Here is the real comparison with actual numbers for FY 2025-26. These examples assume business profit only (no other income), extract all profit as fully franked dividends from the company.
Business profit: $80,000
| Sole Trader | Company | |
|---|---|---|
| Business tax | $16,717 (effective) | $20,000 (25%) |
| Personal tax on extraction | — | ~$0 (franking credits offset) |
| LITO offset | -$325 | — |
| Take-home | ~$63,608 | ~$59,690 |
At $80,000, the sole trader structure wins. The small business tax offset ($1,000 max) and LITO reduce the effective rate significantly.
Business profit: $150,000
| Sole Trader | Company + Dividend | |
|---|---|---|
| Income tax + Medicare | $40,567 | ~$35,250 total |
| Take-home | $109,433 | $114,750 |
| Difference | +$5,317 per year for company |
At $150,000, the company structure starts to win. The gap widens as income grows.
Business profit: $300,000
| Sole Trader | Company + Dividend | |
|---|---|---|
| Total tax | $120,667 | ~$97,500 |
| Take-home | $179,333 | $202,500 |
| Difference | +$23,167 per year for company |
At high income levels, the company advantage is substantial.
Hidden Costs of a Company Structure
Before you rush to register a company, factor in these additional costs:
ASIC annual review fee: ~$310 per year (unavoidable)
Additional accounting fees: Company tax returns, ASIC compliance, director obligations, BAS requirements. Expect to pay $1,500–$3,000 more per year than a sole trader for accounting services.
Division 7A risk: If you take money from the company without proper documentation, it can be treated as an unfranked dividend or a deemed loan with mandatory minimum repayments. Getting this wrong can cost significantly in tax and penalties.
No 50% CGT discount: Companies do not receive the 50% capital gains tax discount available to individuals who hold assets for more than 12 months. This matters if your business holds appreciating assets.
Director obligations: As a company director, you have personal legal obligations under the Corporations Act. You can be personally liable for company debts in certain circumstances (especially unpaid superannuation and GST under Director Penalty Notices).
When Does a Company Start Saving You Money?
Based on FY 2025-26 rates, the break-even point where a company structure typically starts producing tax savings is approximately $100,000–$120,000 in annual business profit, depending on how you extract money. Below this level, the small business tax offset and LITO available to sole traders often makes the sole trader structure more tax-efficient after accounting for company compliance costs.
The calculation also depends on extraction method:
- Salary extraction: If you draw a director salary equal to your profit, you pay the same tax as a sole trader — no benefit
- Dividend extraction: Fully franked dividends create a tax credit for the company tax paid, reducing double-taxation significantly
- Retained profit: If you leave profits in the company and re-invest them, the 25% company rate means more capital to work with
Income Splitting with a Company or Trust
One of the key advantages of a company or trust structure (not available to sole traders) is income splitting. By paying dividends to lower-income family members (who are shareholders), you can spread income across tax brackets. This must be done carefully — the ATO's Taxpayer Alert TA 2022/1 and Section 100A rules impose limits on artificial income splitting arrangements.
Calculate Your Exact Savings
Every situation is different. Use our Sole Trader vs Company Tax Calculator to enter your actual income level and see the exact dollar difference based on your specific circumstances — including HECS debt, private health insurance, and profit extraction method.
Frequently Asked Questions
Is it worth setting up a company in Australia? For most people, a company becomes worth considering when business profit consistently exceeds $100,000–$150,000 per year. Below that, the compliance costs and accounting fees often outweigh the tax savings. Above $150,000, the 25% company rate vs 37–47% marginal rates creates a meaningful saving.
Can I switch from sole trader to company mid-year? Yes, you can switch at any time, but there are CGT implications for transferring business assets to a company structure. The small business restructure rollover concession (Subdivision 328-G of ITAA 1997) may allow you to transfer without triggering immediate CGT. Get advice from a registered tax agent before switching.
Do I still pay superannuation as a sole trader? Sole traders are not required to pay themselves superannuation (no employer super obligations). However, you can make personal deductible super contributions. Company directors who are employees must receive employer super at 11.5% (FY 2025-26).
Final Verdict
For most Australian business owners earning under $100,000 in profit, staying as a sole trader is simpler and often more tax-effective. Once profit consistently exceeds $120,000–$150,000, a company structure typically saves meaningful tax — but only if you're extracting profit as dividends, not salary.
Use our free sole trader vs company tax calculator to see your exact numbers in two minutes. No login required.
Disclaimer: This guide provides estimates for informational purposes only using FY 2025-26 tax rates. Individual circumstances vary significantly. For advice specific to your situation, consult a registered tax agent or financial adviser.