Sole Trader vs Company: Which Structure Pays You More

Every second conversation we have with a tradie, allied health provider or NDIS support worker in Geelong starts the same way: "Should I switch to a company to save tax?" It's a fair question, but the honest answer is that the tax rate is only one piece of a much bigger picture. Get it wrong and you can end up with more admin, a Division 7A headache, and no extra cash in your pocket at all.

Why structure affects your take-home pay

Your business structure determines three things that flow straight through to your bank account: how much tax you pay, how the ATO treats money you draw out of the business, and what you're personally liable for if things go wrong. As a sole trader, you and the business are legally the same person — there is no separation. As a company director and shareholder, you're running a separate legal entity that happens to be owned and controlled by you.

That distinction is exactly why the two structures are taxed so differently, and why one isn't automatically "better" than the other.

How sole traders are taxed

As a sole trader, all business profit is added to your other income and taxed at your individual marginal rate under the Income Tax Assessment Act 1997 (ITAA 1997). For the 2025–26 income year, that means:

• The first $18,200 is tax-free (the tax-free threshold)
• Income above that is taxed progressively, rising through the 16%, 30% and 37% brackets
• Income over $190,000 is taxed at 45%, plus the 2% Medicare levy — an effective top rate of 47%

There's no separate "business tax return" — your business profit is simply reported on your individual tax return via the business schedule. You can't pay yourself a wage, and drawings you take out during the year aren't a business expense; they're just you accessing profit that's already been taxed as your income.

How companies are taxed

A company pays tax on its own profit at a flat corporate rate, separate from your personal tax return. Most small Geelong businesses qualify as a "base rate entity" (aggregated turnover under $50 million with no more than 80% passive income), which means:

• 25% company tax rate for base rate entities
• 30% for companies that don't meet the base rate entity test

The company can then pay you a wage (taxed as normal employment income through PAYG withholding), or pay dividends, which come with franking credits attached to reflect the tax the company has already paid. If you leave profit inside the company rather than drawing it all out, that profit is only ever taxed once at the company rate — which is where the real advantage can appear.

The tax rate gap — and when it actually matters

Here's the trap a lot of business owners fall into: comparing the 25% company rate to the 45% top individual rate and assuming a company automatically saves 20 cents in every dollar. It doesn't work that way for two reasons.

• You still pay personal tax on what you draw out. If you take every dollar of company profit as a wage or fully franked dividend, you generally end up paying close to the same total tax as a sole trader — sometimes more once accounting and compliance costs are added.
• The gap only matters at higher profit levels. If your business profit sits under roughly $45,000–$90,000, you're likely paying 16–30% as a sole trader anyway — not far off the company rate, and without the extra reporting obligations.

The company structure earns its keep when you're consistently profitable well above the top marginal threshold and can genuinely afford to leave some profit sitting inside the company (rather than needing every dollar to live on) to be reinvested or taxed later at a lower rate.

Super and personal liability differences

Two practical differences trip people up more than tax rates do:

• Superannuation: Sole traders aren't required to pay Superannuation Guarantee (SG) contributions to themselves under the Superannuation Guarantee (Administration) Act 1992, though voluntary contributions are tax-deductible. Company directors paid a wage are generally treated as employees of their own company and must receive SG contributions — currently 11.5%, rising to 12% from 1 July 2025 — on top of their wage.
• Personal liability: As a sole trader, your personal assets — your house, your car, your savings — are exposed if the business is sued or can't pay its debts. A company is a separate legal entity, which generally shields your personal assets, though banks and suppliers often still ask directors for a personal guarantee, which reduces that protection in practice.

Asset protection and admin costs

A company isn't just a tax decision — it comes with ongoing obligations:

• Annual ASIC review fees and company statements
• A separate set of financial statements and a company tax return
• Formal record-keeping for director loans, dividends and Division 7A compliance under the ITAA 1936
• Single Touch Payroll reporting if you pay yourself or staff a wage
• Typically higher bookkeeping and accounting fees than a sole trader setup

We run all of this through Xero for our company clients — payroll, BAS lodgement and director drawings are tracked cleanly so nothing gets missed at tax time. As a Registered BAS Agent operating under the Tax Agent Services Act 2009 (TASA 2009), we also make sure any BAS lodged on your behalf meets the ATO's requirements regardless of which structure you're running.

Which structure actually pays you more

There's no single answer that suits every Geelong business, but here's the practical test we use with clients:

• If your annual profit is under roughly $90,000 and you draw most of it out to live on, staying a sole trader usually keeps more cash in your pocket once you factor in extra company compliance costs.
• If your profit is well above that, is growing consistently, and you can leave some of it in the business rather than drawing it all out, a company structure often reduces your overall tax bill and gives you asset protection into the bargain.
• If you're planning to bring on business partners, sell the business one day, or need external investment, a company structure is almost always the better foundation.

The number that actually matters isn't the headline tax rate — it's your projected profit for the next 12 months, run through both structures side by side.

What to do next: pull your last 12 months of profit from Xero (or ask us to), and run it against both the sole trader marginal rates and the 25% company rate before spending money on a restructure. A ten-minute conversation with a bookkeeper or accountant who knows your actual numbers will save you far more than guessing based on someone else's tax bracket.