Sole trader vs company: how business structure changes your tax
Whether you run as a sole trader or through a company changes how your profit is taxed. Here is the difference and when a company starts to make sense.
The way you structure your business changes how its profit is taxed — sometimes dramatically. The two most common structures for small operators are the sole trader and the company, and they are taxed on completely different bases.
Sole trader
As a sole trader, your business profit is your personal income. It is taxed at your marginal rates — the same brackets as wages, up to 47% including Medicare at the top. It is cheap and simple to run, but there is no rate cap: a big year is taxed at big-year rates.
Company
A company is a separate legal entity and pays a flat company tax rate on its profit — 25% for a base rate entity (broadly, aggregated turnover under $50 million and no more than 80% passive income) or 30% otherwise. That flat rate is the appeal once your marginal rate climbs above it.
The catch: getting money out
A company does not automatically save tax — it changes when tax is paid. Profit left in the company is taxed at 25–30%. But when you take it out as a dividend, it is taxed again in your hands at your marginal rate, with a franking credit for the company tax already paid. So the real benefit is deferral and retention, not avoidance.
Worked example
Emma's business makes $180,000 profit. As a sole trader, the whole $180,000 is taxed at her marginal rates, pushing well into the 37% bracket. Through a company, that profit is taxed at 25% while it stays in the company — leaving more to reinvest — though she will pay top-up tax on any amount she draws out personally.
Compare a business car purchase
Our business vehicle calculator handles both sole-trader marginal rates and company rates for 2026-27.
Business structure affects tax, asset protection, admin cost and more — your accountant can advise what suits you. See also the instant asset write-off in 2026-27.
Frequently asked questions
Does a company always pay less tax than a sole trader?
No. A company pays a flat 25–30% on retained profit, but money you draw out is taxed at your marginal rate. The benefit only shows up if you retain profit in the company.
What is a base rate entity?
Broadly, a company with aggregated turnover under $50 million and no more than 80% passive income. It pays the 25% company rate; other companies pay 30%.
Can I switch from sole trader to company later?
Yes, many businesses do as they grow, though it adds admin and cost and there can be tax consequences on transferring assets. It is worth planning with an accountant.
What about asset protection?
A company is a separate legal entity, which can offer more separation between business and personal assets than operating as a sole trader — one of the non-tax reasons people incorporate.