Pty Ltd vs Sole Trader in Australia: Which Should You Choose?

The structure question is the first thing every Australian founder asks — and one of the most important decisions you'll make. The wrong choice doesn't just cost tax; it affects liability, ability to raise funding, super flexibility, and how your business looks to clients.

This guide compares the two main options for founders, with worked examples at different income levels.

Quick comparison

How each structure is taxed

Sole trader

You and the business are the same legal entity. Profit flows directly to your personal tax return. You pay:

• Personal income tax at marginal rates (FY26):
  • 0% to A$18,200
  • 16% to A$45,000
  • 30% to A$135,000
  • 37% to A$190,000
  • 45% above
• Medicare Levy 2% on most income
• Medicare Levy Surcharge 1–1.5% if no private health and high income
• PAYG instalments quarterly (after first year)
• GST if turnover ≥ A$75,000

Pty Ltd

The company is a separate legal person. The company pays:

• Company tax at 25% (base rate entity) or 30%
• GST quarterly via BAS
• PAYG instalments quarterly
• Super Guarantee on any wages (including director's salary)
• FBT on any benefits provided

When the company pays profit to you, you pay personal tax on:

• Salary at marginal rates (with PAYG withholding by company)
• Dividends at marginal rates, with franking credits for company tax already paid

Worked example: A$80,000 profit

Single founder, A$80,000 net profit:

As a sole trader

As a Pty Ltd (full salary strategy)

Same result for personal cash, but A$9,200 locked in super until age 60 (with significant tax advantages on the way out). Plus the company costs A$321 ASIC + ~A$1,500 accountant fees.

Verdict at A$80k: sole trader wins on simplicity. Pty Ltd makes sense only if you value liability protection or the super lock-up.

Worked example: A$200,000 profit

As a sole trader

As a Pty Ltd (salary + retain + dividend mix)

A common strategy: pay yourself a salary up to the next tax bracket boundary, retain some profit, and pay a small dividend.

The Pty Ltd structure saves A$17,438 in year-one tax and parks A$49,650 in retained profit at the lower 25% company rate. When eventually distributed via dividend, franking credits avoid double taxation.

Verdict at A$200k: Pty Ltd typically wins on tax + flexibility, despite the extra compliance cost (~A$2,000/year).

When each structure makes sense

Stay sole trader if:

• Annual profit under ~A$80,000
• Single owner with no employees
• Low liability risk (consulting, freelance writing, knowledge work)
• No plans to raise external investment
• Income roughly matches personal lifestyle needs (no retained profits desired)

Go Pty Ltd if:

• Annual profit over ~A$80,000–A$100,000
• Multiple founders / shareholders
• Liability risk (clients suing, physical product, employees)
• Plans to raise investment (VCs and angels need shares to invest in)
• You want to retain profit at 25% rather than push it through personal tax
• Asset protection is important (e.g. you have personal investment property)

The "discretionary trust" alternative

Some Australian advisors recommend a discretionary (family) trust as an alternative to a Pty Ltd. Key features:

• Income splitting between family members on lower marginal rates
• CGT discount flow-through (50% on assets held > 12 months)
• Asset protection similar to a company

But:

• No CGT discount for income (only capital)
• Trust beneficiaries can be challenged in tax disputes
• Setup costs higher (~A$1,500 with accountant)
• Annual compliance higher (separate trust tax return + corporate trustee)

For most owner-managed businesses, a Pty Ltd is simpler. Trust structures are best for asset-rich founders, family businesses, and certain investment-heavy structures.

Switching from sole trader to Pty Ltd later

You can transition. The ATO's Small Business Restructure Rollover (s328-G) lets you transfer business assets from sole trader to Pty Ltd without triggering immediate CGT, provided:

• You're a small business (turnover < A$10m)
• Same ultimate economic ownership before and after
• Genuine restructure, not for tax avoidance

The transition typically costs A$1,500–A$3,000 in accountant fees and a few weeks of administrative time. Plan it for the start of a financial year for cleanest reporting.

Other considerations

Working with overseas clients

Both structures can invoice overseas clients in any currency. Pty Ltd often looks more "real" to international clients used to corporate structures.

Hiring employees

Both structures can employ. A sole trader hiring requires the same payroll setup as a Pty Ltd — STP, super, workers comp.

Selling the business

Selling a sole trader business is a sale of assets, generally CGT-eligible. Selling a Pty Ltd is often a sale of shares, which can attract CGT discount and potentially qualify for the 15-year exemption or 50% active asset reduction under the small business CGT concessions. Pty Ltd is generally more tax-efficient on exit.

How AccountsOS handles both

AccountsOS is live in Australia and supports both sole traders and Pty Ltds:

• Sole trader: simple bookkeeping, BAS lodgement, PAYG instalment tracking, year-end income tax return prep
• Pty Ltd: full company workflow including STP, SG, BAS, PAYG instalments, ASIC annual review, company tax return prep
• One login switches between entities — useful for founders running both a personal sole trader practice and a Pty Ltd for a separate venture

Try AccountsOS free or read about AccountsOS in Australia.

Related reading

• Company tax in Australia: 25% vs 30% explained
• Quarterly BAS and GST guide
• Superannuation Guarantee 2025: 11.5% to 12% transition
• Single Touch Payroll Phase 2 for small business