Company or sole trader? The pros and cons

Sole trader

• Good: cheap and simple. An ABN is free, and there's just one tax return: yours.
• Good: the business profit is your money. Take it whenever you like.
• Good: business losses can usually reduce tax on your other income (some conditions apply).
• Good: the 50% capital gains tax discount applies if you sell the business or its assets after 12 months.
• Catch: profit is taxed at your personal rates, up to 45% plus the Medicare levy.
• Catch: you're personally liable for the business's debts. Your house and savings are exposed.
• Catch: it's hard to share income with family or bring in investors.

Company

• Good: a small business company pays 25% tax, often less than you'd pay personally on the same profit.
• Good: profit you leave in the company is taxed at that rate. You choose when to pay it out as dividends, so you can time it for lower-income years.
• Good: generally limits your personal liability, and it's easier to bring in partners or sell the business.
• Catch: costs more. ASIC fees every year, a separate tax return and financial statements, and every director needs a Director ID.
• Catch: the money belongs to the company. Taking it out means a wage or a dividend, and both are taxed.
• Catch: borrowing from your own company, or using its money for private things, can be treated as a dividend under Division 7A. This is the most common and costly trap we see.
• Catch: no 50% capital gains discount inside a company.
• Catch: losses stay trapped in the company. They can't reduce your personal tax.

What no one tells you

• Limited liability isn't total. Directors can be personally liable for unpaid PAYG withholding, super and GST, and banks and landlords usually want a personal guarantee anyway.
• If your income comes mainly from your own work (e.g. a contractor billing hours), the personal services income rules can tax it as yours anyway, so a company may save nothing.
• The tax saving is often only a timing difference. When profits are paid out to you, you pay the difference between the company rate and your own rate, less franking credits.
• Switching later isn't free. Moving an existing business into a company can trigger capital gains tax and stamp duty, so it's worth getting it right early.
• A family trust, sometimes with a company as beneficiary, is another option that can suit some families better.

When a company usually makes sense

• Profits are high enough that you're paying more than 25% on them, and you don't need all of it to live on.
• The business carries real risk, such as employees, contracts, or the chance of being sued.
• You plan to grow, bring in partners or sell one day.

If your profit is modest and you spend most of it, a sole trader is often simpler and costs less overall.