Business Strategy

Sole Trader vs Company: When Is It Worth It?

Someone at a barbecue told you to get a company at a certain turnover. There is no such number, and here is what the decision actually turns on.

Travis Krantz CPA & Registered Tax Agent 4 September 2026 7 min read

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Key Takeaways

There is no turnover figure at which a sole trader should incorporate. Anyone who gives you one is guessing.
A company only saves tax on profit you leave in it. Draw it all out to live on and you are back at your own marginal rate, holding an extra annual bill.
Test personal services income first. If the PSI rules apply, the company's income can be attributed back to you and the structure achieves very little.

This is the question I am asked more than any other, and the number people quote at you is made up. There is no turnover at which a sole trader should incorporate. I have seen sensible companies on modest income and pointless ones on large income, and the difference was never revenue.

Four things actually decide it.

1. How much profit do you leave in the business?

This is the one that does most of the work, and it is the one most often skipped.

A company pays a flat rate on its taxable income: 25% if it is a base rate entity, 30% if it is not. A sole trader pays their own marginal rate on the business profit, on top of whatever else they earn.

So a company looks like a saving. It only is one on money that stays inside the company. The moment you take it out to live on, it is taxed to you as a wage or a dividend at your own rate, and the company's rate turns out to have been a deferral rather than a discount. If you draw everything you make, you land in roughly the same place either way and you have bought yourself a second tax return, financial statements and an ASIC fee every year for the privilege.

The question is not "how much do I earn". It is "how much do I earn and not spend". If the answer is close to nothing, the company is solving a problem you do not have.

The lower rate has a test attached

The 25% rate is not automatic. A company is a base rate entity for 2025-26 if it has both an aggregated turnover for the year of less than $50 million and no more than 80% of its income as passive income: dividends, interest, royalties, rent, net capital gains and the like.

Most trading businesses clear that comfortably. The one that does not is the company set up to hold investments, because passive income is exactly what it earns. If the plan is an investment vehicle rather than a trading business, check which rate you would actually be paying before you assume 25%.

2. What liability does the work carry?

As a sole trader you and the business are the same legal person, so your personal assets sit behind every job you do. A company is a separate legal person, and that separation is real.

It is also not absolute. Directors give personal guarantees, directors have duties, and unpaid PAYG and super can follow a director personally. So a company is a meaningful layer rather than a shield, and this is a legal question at least as much as a tax one. If the work carries genuine risk, that alone can justify a company whatever the tax says, and it is worth talking to a solicitor rather than assuming the structure does more than it does.

3. Would the personal services income rules follow you in?

This is where I see the most expensive mistakes, usually made on the advice of a friend who incorporated and found it worked for them.

If your income is essentially a reward for your own personal skill and effort rather than for a product, an asset or a team, it may be personal services income. Where the PSI rules apply, the company's income can be attributed straight back to you and taxed in your hands, and deductions the company claimed can be denied. The structure then achieves close to nothing, at the cost of running it.

Whether the rules apply is a set of tests applied to your actual working year: who your clients are, how the income is split between them, what you supply, whether you have staff, whether you have premises. It is not a question you can answer from turnover or from a job title, and it can change from one year to the next as your client mix changes. So it gets tested, properly, before the decision, not after.

4. What is coming next?

A structure has to suit the business you are about to have, not just the one you have now. Four things change the answer:

A partner or an investor. Shares are a clean way to bring someone in. A sole trader has nothing to give them.
Staff. Employees do not require a company, but they usually arrive alongside the other reasons to have one.
A sale. Selling a business you run in your own name and selling shares in a company are different transactions with different tax outcomes, and the difference is worth knowing before you build the value, not after.
An asset you intend to sell later. See below. This one catches people out.

The CGT point almost nobody mentions

If you expect to buy something, hold it and sell it at a gain, the structure matters more than the tax rate suggests.

The ATO's discount method is available to an individual, a trust or a complying super entity. A company is not on that list, so a company cannot use the CGT discount at all: it pays its full rate on the whole gain. For an individual or a trust that has held an asset for at least 12 months, the discount percentage is generally 50%.

That does not make a company wrong. Plenty of companies exist to trade, not to hold assets, and the gain never arises. But if the plan involves an asset with a long hold and an eventual sale, running it through a company is a decision that costs real money at the end, and it should be made deliberately.

Timing matters more than usual here: the way capital gains are taxed changes for CGT events from 1 July 2027, so which side of that date a sale falls on can change the answer. If you are weighing up a structure for something you expect to sell, that is a conversation to have now rather than in the week you list it.

What it costs to run a company

Any comparison that leaves this out is not a comparison. A company brings:

A company tax return and a set of financial statements, every year, on top of your own personal return.
ASIC's annual review fee, which is a government charge your company pays directly to ASIC and has nothing to do with your accountant's fee.
A director's loan account that has to be kept current, because money you take out of the company is not your money until it is properly a wage, a dividend or a loan on written terms. That is Division 7A, and it is the single most common expensive surprise I see in a company that has been left to look after itself.
A separate bank account and a genuine discipline about not treating the company account as your wallet.

None of that is difficult. All of it is ongoing, and it has a price, and the price has to sit on the company side of the ledger when you are working out whether the structure pays for itself.

So how do you actually decide?

By running the numbers rather than the rules of thumb. I model both structures against your actual figures, including the full ongoing cost of the company, so you can see the difference in dollars instead of in principle.

Sometimes the answer is a company. Often it is "not yet, and here is the number to watch, and we will look again when you hit it". Occasionally, for someone who already has a company that earns one person's income and holds nothing, the answer is that it should be wound up. Either way you get a decision instead of a hunch.

If you are running it in your own name today, the sole trader page covers where you stand now. If you are leaning towards incorporating, the company page sets out what running one actually involves, and the trust page covers the third option people usually only hear about once it is too late to be simple.

Sources

Travis Krantz, CPA

Registered Tax Agent and founder of Summit Tax. Over a decade of experience helping small business owners take control of their finances.

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