When Should You Make the Switch from Sole Trader vs Company?
Starting out as a sole trader makes a lot of sense. It is fast to set up, low cost to run, and straightforward to manage. For many small business owners across Western Sydney, it is exactly the right structure when you are getting started or testing an idea. But as your business grows, the structure that once served you well can quietly become a liability, both financially and legally.
Knowing when to make the move to a company structure is one of the most important decisions a growing business owner will face. Get the timing right and you can protect your personal assets, improve your tax position, and set your business up for long-term growth. Get it wrong, or leave it too long, and you may find yourself paying more tax than necessary or carrying personal risk that could have been avoided.
If you are still working through the fundamentals, our article How to Choose the Right Business Structure is a good place to start before reading on.
The Core Difference: You Are the Business vs You Own the Business
As a sole trader, you and your business are one and the same in the eyes of the law. Your business income is reported on your personal tax return and taxed at individual marginal rates. For the 2025-26 financial year, those rates range from 16% on income between $18,201 and $45,000, up to 45% on income above $190,000, with a 2% Medicare levy on top of that.
A company is a separate legal entity. It has its own Tax File Number, lodges its own tax return, and pays a flat corporate tax rate. For eligible small businesses with an annual turnover under $50 million, that rate is currently 25%. The difference in tax treatment becomes significant as your income grows.
When the Tax Argument Starts to Stack Up
Tax alone is rarely a sufficient reason to restructure immediately, but it becomes a compelling factor as profits increase. The crossover point where a company structure starts to provide meaningful tax advantages generally sits between $90,000 and $120,000 in annual profit, depending on your personal circumstances and how much income you need to draw. Below that threshold, the additional costs of running a company, including ASIC registration, annual review fees, a separate company tax return, and higher accounting fees, often outweigh the tax savings. Above it, retaining profits inside a company at 25% rather than paying personal tax at 37% or higher begins to make a real difference.
It is worth understanding what tax deferral means in practice. If you leave profit inside the company rather than drawing it as a salary or dividend, that retained profit is taxed at 25%. You only pay personal tax on top of that when you eventually extract it. If you are reinvesting profits into equipment, staff, or business growth, you are doing so with pre-personal-tax money. That is a genuine and often underappreciated advantage.
Asset Protection: Sometimes the Biggest Reason to Switch
Tax efficiency is not always the primary driver. For many business owners, asset protection is reason enough to incorporate, even before the tax benefits become compelling.
As a sole trader, you have unlimited personal liability. If your business incurs debts it cannot repay, or faces a legal claim, creditors can pursue your personal assets, including your family home, savings, and vehicle. A company provides a legal separation between you and the business. If the company faces a claim, your personal assets are generally protected, provided you have met your director duties and have not provided personal guarantees.
This matters particularly for trade businesses, healthcare practitioners, and anyone taking on larger contracts or employing staff. The higher the value of your personal assets and the greater the risk exposure of your work, the stronger the case for a company structure, regardless of where your income sits. If you are in the trades and already sensing you have outgrown your current setup, our article Signs Tradies Have Outgrown Their Setup is worth a read.
Four Signs It Is Time to Make the Move
- Your profits are consistently above $100,000 to $120,000 Once your business is generating reliable profit at this level, the tax savings of a company structure begin to outweigh the additional compliance costs. This is a good time to model the numbers with your accountant.
- You have personal assets worth protecting If you own property or have accumulated savings, the unlimited personal liability of the sole trader structure is a risk worth addressing. A company creates the legal separation that protects those assets.
- You are planning to hire staff, take on larger contracts, or grow the business Growth brings complexity and greater exposure. A company structure handles employment obligations more cleanly, can issue shares to future partners or investors, and presents a more credible entity to lenders and clients.
- You want to retain profits in the business rather than drawing them all personally If your goal is to reinvest earnings into business growth, a company allows you to do that at a 25% tax rate rather than your personal marginal rate.
What Does It Cost to Run a Company?
The costs of operating a company are real and should be factored into your decision. Registration of a standard proprietary company with ASIC currently costs $611, and the annual review fee for proprietary companies is $329 per year. On top of that, you will need a separate company tax return and typically higher ongoing accounting fees than a sole trader arrangement.
These are not trivial costs, but for a business generating $150,000 or more in annual profit, they are generally well justified by the tax savings and the protection a company structure provides.
What the Switch Actually Involves
Transitioning from a sole trader to a company is not a simple name change. It requires registering a new entity with ASIC and obtaining a new ABN. You will need to transfer existing contracts and assets to the company, update your clients and suppliers with the new details, and separate your financial records cleanly between the old and new entity. Ideally, timing the switch to the end of the financial year avoids the complexity of splitting income across two structures mid-year.
Asset transfers can have tax implications, including potential Capital Gains Tax exposure, so it is important to get professional advice on how to structure the transition correctly. The ATO’s small business restructure rollover provisions may provide relief in some circumstances, but eligibility depends on your specific situation.
The Decision Is Rarely Simple
There is no universal rule that says every business earning above a certain amount should be a company. The right answer depends on your profit level, your risk exposure, your personal asset situation, your plans for growth, and how much complexity you are willing to manage.
What we do know is that leaving the decision too long is a common and costly mistake. Many business owners reach a point where the tax they have overpaid, or the personal risk they have carried unnecessarily, could have been avoided with earlier, proactive advice.
At Judge Accountants, we work with business owners across Western Sydney to review their structure at every stage of growth, not just when something goes wrong. If your business is growing and you are not sure whether your current structure is still working for you, this is exactly the kind of conversation worth having now.