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The numbers, honestly
Take $150,000 of profit where all of it is needed for living costs.
| Sole trader | Company (profit paid out to you) | |
|---|---|---|
| Entity tax | None | $37,500 at 25% |
| Your tax | Around $40,238 including the Medicare levy | Top-up on franked dividends to roughly the same total |
| Compliance cost | One return | Company return, ASIC fee, Division 7A hygiene and bookkeeping rigour: $3,000 to $6,000 or more a year |
| Verdict | Cheaper | The 25% rate is a way-station, not a destination |
Same business, but only $80,000 of the $150,000 is needed personally. The retained $70,000 sits taxed at 25% instead of 39%, roughly $9,800 a year deferred and compounding inside the company for reinvestment. That is the company's real tax case: it is a retention vehicle, not a rate trick. Getting retained profits out later means franked dividends in lower-income years. You can model the personal side with our income tax calculator.
What each structure actually gets you
Sole trader: the full 50% CGT discount on business asset gains, losses that offset your other income within the non-commercial loss rules, the small business income tax offset, and trivially cheap compliance. The costs are unlimited personal liability, everything taxed at marginal rates, and harder optics with some clients and lenders.
Company: limited liability that is real but thinner than advertised, since directors personally guarantee leases and loans and director penalty notices pierce it for unpaid PAYG, super and GST. You also get the 25% retention rate and easier equity and succession. The costs: no CGT discount, which ambushes owners at exit; losses trapped inside the company, never available against your salary; the extraction problem permanently; and PSI rules that can neutralise the whole structure for personal-exertion consultants.
The switch checklist, when profits justify it
Moving from sole trader to company
Confirm the retention case
Sustained profit comfortably above living needs is the trigger. If you spend everything, incorporating mostly buys compliance cost.
Price the restructure itself
The transfer has CGT, GST and duty consequences. Small business restructure rollovers usually solve them, but this is advice territory.
Re-paper every registration
New entity, new ABN, new GST registration, new BAS continuity and new company lodgment deadlines. See ABN vs ACN for what changes.
Set up how you get paid on day one
Decide the salary and dividend mix before the first drawing, so the Division 7A loan account never starts.
And there is a third option this binary hides: a trust, often the better answer for family businesses.
Frequently asked questions
Is a company better than a sole trader for tax?
At what income should I switch to a company?
Does a company protect my assets completely?
Do companies get the CGT discount?
Can my company's losses reduce my personal tax?
General information only - not personal tax, financial or legal advice. Consider your own circumstances or speak to a registered tax agent. Remission of penalties or interest and payment plans are decisions of the ATO and outcomes can't be guaranteed.