How They Compare
| Consideration | Sole trader | Company |
|---|---|---|
| Tax rate | Individual marginal rates, up to 45% plus Medicare levy | 25% for base rate entities, otherwise 30% |
| Liability | Personal assets exposed to business debts | Generally limited to the company, although directors have duties and may give personal guarantees |
| Setup and running costs | Low | Higher: ASIC registration, annual review fee, separate return and accounts |
| Taking money out | All profit is yours to draw | Through salary, dividends or properly documented loans |
| Bringing in others | Difficult | Straightforward through issuing shares |
The Tax Rate Is Only Part of the Story
A lower company tax rate is attractive, but profit taken out of the company is taxed again in your hands, with franking credits for company tax already paid. The real saving comes when profit is retained in the business to fund growth, or distributed in a tax-effective way. Personal services income rules can also limit the benefit for some contractors and consultants.
Signs It May Be Time to Incorporate
- Your profit is consistently well above what you need to live on.
- Your work carries meaningful risk to your personal assets.
- You plan to hire staff, take on larger contracts or bring in a partner or investor.
- Customers or tenders expect to deal with a company.
Making the Move
- Model the options with your projected figures.
- Obtain a director ID for each director before the company is registered.
- Register the company with ASIC, then apply for an ABN, TFN and GST registration.
- Plan the transfer of business assets and contracts. Roll-over relief may be available to defer tax.
- Set up bank accounts, SYNE One and a compliance calendar for the new entity.
