Sole trader vs company in Australia: which to start with

Sole trader vs company: as a sole trader you run the business yourself under your own ABN and owe its debts personally. A company (Pty Ltd) is a separate legal entity registered with ASIC, and its debts are generally its own.

Most first-time founders in Australia can start as a sole trader and register a company once a product that could hurt someone, a co-founder or a run of profit is close. The steps below assume you sell a physical product online with pre-orders.

This is general information for Australia, not legal or tax advice. Fees and rates were checked on ASIC, ATO and business.gov.au pages on 19 October 2026.

Sole trader vs company: costs, tax and liability compared

In law, a sole trader and their business are the same person. A company is owned by shareholders and run by directors, and one person can be both.

A base rate entity is a company with aggregated turnover under $50 million that earns no more than 80% of its assessable income from passive sources such as interest, rent, royalties and dividends (ATO). A sole trader's profit is taxed at the individual resident rates, with the tax-free threshold if you're entitled to it, plus the 2% Medicare levy.

Worked example: Nadia's fire pit business in Adelaide

Nadia and her figures are made up for this example. The fees and tax rates are real.

She wants to sell a folding steel backyard fire pit for $240 under the brand Ironbark: an ad test, then pre-orders, then 300 units from an overseas factory.

1. Get an ABN and register the business name as a sole trader

You can apply for an ABN once you run a business or have started setting one up. The Australian Business Register counts steps such as advertising, building a website or consulting a tax adviser as a start, so an ad test to check whether people will pay qualifies. Applying is free, a successful online application gets the number on the spot, and the number is public, so it can go on invoices and supplier forms.

An ABN isn't compulsory for every business, though trading without one has costs. If a business customer pays you more than $75 excluding GST and you haven't given them your ABN, the ATO says they generally withhold the top rate of tax from the payment. You need an ABN, or an application for one, to register a business name, and an ABN before you can register for GST.

Trading under anything except your own first name and surname means registering a business name with ASIC, at $47 for one year or $108 for three. How to name your business covers choosing it. Draper's Register Your Business workshop walks you through the ABN application.

Nadia applies for an ABN as a sole trader, registers Ironbark for one year and opens a bank account just for the business. A company at this point would have cost $636 before the ad test showed anyone wanted the fire pit.

2. Track GST turnover while pre-orders come in

If production falls through, every customer who paid for a pre-order is owed a refund under either structure, so hold the money until you place the factory order. When to charge and what the terms should say are in how to take pre-orders.

At this stage, watch GST turnover, which counts sales rather than profit. The ATO works it out two ways: this month plus the previous 11 (current turnover), and this month plus the next 11 (projected turnover). Once either reaches $75,000, you have 21 days to register for GST. A new business that expects to reach $75,000 in its first year registers from the start.

Nadia's 120 pre-orders at $240 are worth $28,800. If all 300 fire pits sell within 12 months, her sales come to $72,000, just under the threshold, so she stays unregistered and works out both totals again each month. A second batch in the same 12 months would take her over.

3. Check which risks a company would cover

Under section 7 of the Australian Consumer Law, a business that imports goods into Australia is treated as their manufacturer if, at the time of import, the actual maker has no place of business in Australia. The same section also counts a business that puts its own name or brand on goods it supplies. A founder who imports a branded product from an overseas factory with no Australian office meets both tests, so a claim over a safety defect can be brought against you.

Product liability insurance pays out when your product causes injury, death or property damage. With a company, the claim is against the company and generally can't reach your house, but the company still has to pay it. You need the policy under either structure, in place before the first delivery.

Two people who run a business together and share its income or losses are a partnership, and in a general partnership each partner has unlimited liability for its debts. If a co-founder is joining, a company lets you both hold shares while the debts stay with the company. Write a shareholders agreement before they start, covering who holds how many shares, who decides what, and how a founder who leaves is bought out.

ASIC's guide for new directors says these duties apply from the start, even to a sole director who holds every share.

Nadia's factory has no office in Australia and every fire pit will carry the Ironbark brand, so the law treats her as the manufacturer. A fire pit gets hot and stands in a stranger's backyard. She decides to register a company and arranges product liability cover from the first shipment.

4. Compare the cost of a company now with switching later

Besides the ASIC fees in the table, a company lodges its own tax return, and each director needs a director ID before being appointed. The ID is free, you have to apply for it yourself, and at least one director must normally live in Australia.

Moving a sole trader business into a company later adds three jobs:

• The company gets its own ABN. A sole trader's ABN can't be transferred to it, and canceling your ABN also cancels the GST registration attached to it, so the company registers for GST separately if it needs to.
• The business name moves through ASIC's transfer process. You start the transfer on ASIC Connect, ASIC sends you a transfer number, and the company registers the name with it for the usual $47 or $108. Time left on your old registration doesn't carry over, and ASIC doesn't refund it.
• Contracts, the bank account, your payment provider and your insurance each have to be set up again in the company's name.

So the cheapest time to switch is before you register for GST and before you sign anything that runs for months, such as a factory order.

The factory quotes Nadia $18,000 for 300 fire pits, with $5,400 as a deposit and $12,600 due before shipping. Registering the company now costs $636: 2.2% of the $28,800 she has taken in pre-orders, and less than the price of three fire pits. Waiting a year would add another name registration and a second round of paperwork with the factory and the bank. She registers the company before paying the deposit.

5. Set up the company and put the business in its name

The Business Registration Service handles the company, its ABN and a business name in one application. The director ID comes first and the sole trader ABN goes last.

Nadia registers Ironbark Fire Pty Ltd and moves the Ironbark name to it for a new one-year term at $47. The company pays the deposit and, later, the balance from its own account, and its first $342 annual review comes a year after registration.

6. Work out the tax on profit you leave in the company

Company money belongs to the company, so you can't take drawings from it the way a sole trader can. It can pay you wages or directors' fees, with PAYG withholding and super, or pay dividends to shareholders. Wages are a cost for the company and income on your return. Dividends come out of profit the company has already paid tax on, and carry franking credits for that tax.

The 25% rate helps with profit you keep in the company. Suppose Nadia's job pays $90,000, so the next dollars she earns are taxed at 30% plus the 2% Medicare levy. As a sole trader, $20,000 of fire pit profit would cost her $6,400 in tax. Kept in the company for the next factory order, it costs $5,000. If it is paid to her later as a dividend, she is taxed at her own rate then, with a credit for the company's tax. Ask an accountant to run your own figures after a year of steady profit.

Who should register a company from the start, and who may not need one

Investors buy shares, and a sole trader has none to sell, so if you plan to raise money, start with a company. The same applies to a co-founder who is in from day one, since otherwise the two of you may be a partnership.

If you sell services or digital downloads, injury claims are unlikely and an ABN may carry you for years.

Related questions

To size the factory order in step 4, read what is MOQ. Founders in the US face a similar choice with different rules: see LLC vs sole proprietor.