When should you switch from sole trader to company?
Starting out as a sole trader makes sense. It’s quick to set up, cheap to run and easy to understand, which is exactly what you want while you’re testing an idea or getting your first customers. But the structure that suits a new business can quietly become expensive, or risky, once the business grows.
You are the business, or you own the business
As a sole trader, you and the business are the same person in the eyes of the law. Business profit goes on your personal tax return and is taxed at your marginal rate. For 2026–27 those rates are:
| Taxable income | Rate |
|---|---|
| $0 – $18,200 | Nil |
| $18,201 – $45,000 | 15% |
| $45,001 – $135,000 | 30% |
| $135,001 – $190,000 | 37% |
| Over $190,000 | 45% |
Plus the 2% Medicare levy.
A company is a separate legal entity with its own tax file number and its own tax return. A small company (a base rate entity, broadly one with turnover under $50 million that earns mostly active business income) pays 25% on its profit.
When the tax argument starts to stack up
The saving comes from profit you leave in the company. That profit is taxed at 25% instead of 37% or 45%, and you only pay personal tax on it when you take it out as salary or dividends. If you’re reinvesting in equipment, stock or staff, you’re doing it with money that’s only been taxed at 25%.
If you need every dollar to live on, a company saves much less, because the money still ends up taxed at your personal rate when you draw it.
As a rough guide, the numbers start to work once profit is consistently above about $100,000 to $120,000 a year and you can leave some of it in the business. Below that, the extra costs usually win.
Asset protection can matter more than tax
As a sole trader, your liability is unlimited. If the business can’t pay a debt or loses a legal claim, your house, savings and car are exposed. A company separates the business’s debts from yours, provided you meet your director duties.
Two catches worth knowing:
- Director penalties. Directors can be personally liable for the company’s unpaid super, PAYG withholding and GST, particularly if they’re not reported to the ATO on time.
- Personal guarantees. Banks, landlords and suppliers will often ask a director to guarantee the company’s debts. A guarantee puts your personal assets back in play for that debt.
For tradies, health practitioners, anyone taking on bigger contracts, and anyone who owns a home, protection alone can justify the move.
Signs it’s time
- Profit is consistently above $100,000 to $120,000 and you don’t need to draw all of it.
- You own a home or other assets worth protecting.
- You’re hiring staff, taking on larger contracts, or bringing in a partner.
- You want to reinvest profits rather than draw them.
- Lenders, head contractors or bigger clients want to deal with a company.
What a company costs to run
On top of setup, a company has an ASIC annual review fee (currently $343), its own tax return and financial statements, and director obligations including a director ID. Our Compliance package for a company is $330 + GST a month, against $80 + GST a month for a sole trader, so the tax saving needs to clear that gap comfortably.
How the switch works
Moving to a company isn’t a name change. You register the company, get a new ABN (and GST registration if needed), move contracts, bank accounts, insurance and payroll across, and tell your customers and suppliers.
Transferring business assets such as equipment, vehicles and goodwill can trigger capital gains tax and stamp duty. The small business restructure rollover and the small business CGT concessions can often defer or remove the tax, but only if the conditions are met, so get advice before anything moves. Switching at 30 June keeps the year’s records clean.
Don’t forget the personal services income rules either. If most of your income comes from your own labour for one client, a company may save no tax at all.
The usual mistake is leaving it too long
There’s no profit level at which everyone should incorporate. The right answer depends on your profit, your risk, your assets and your plans. What we see most often is people who stayed a sole trader for years longer than they should have, paying more tax and carrying more risk than they needed to.
If you’re growing and not sure your structure still fits, we model it with your real numbers in the tax planning meeting that comes with every business package. Our guide to choosing the right business structure covers partnerships and trusts too.