When Should You Switch From Sole Trader to a Company?

Many Australian small businesses start out as sole traders—it’s simple, affordable, and fast to set up. But as your business grows, the sole trader structure may no longer give you the tax advantages, asset protection, or scalability you need.

So when is the right time to switch from a sole trader to a company? While the answer will vary depending on your goals and circumstances, there are several clear signs that indicate it may be time to make the move.

In this article, we break down the key factors to consider so you can make the decision with confidence.

1. You’re Earning Enough Profit to Benefit From Company Tax Rates

One of the biggest reasons businesses move to a company structure is taxation.

As a sole trader, you’re taxed at individual marginal tax rates—which can climb as high as 45% plus Medicare Levy.

Companies, on the other hand, are taxed at a flat rate of 25% or 30%, depending on eligibility.

If your taxable income is rising and you’re moving into higher tax brackets, incorporating can significantly reduce your tax liability, especially if you don’t need to draw out all of your profit as personal income.

2. You Want Stronger Asset Protection

As a sole trader, you and your business are legally the same entity. That means:

• You are personally liable for business debts

• Your personal assets could be at risk

• Legal claims can flow directly to you

Switching to a company separates you from the business. The company becomes its own legal entity, which can limit your personal liability and offer a greater layer of protection—particularly important for businesses with employees, contractual obligations, or higher operational risk.

3. You’re Planning to Hire Employees

Hiring staff can expose a business to additional financial and legal responsibilities.

Many business owners transition to a company before hiring because it:

• Creates a more professional commercial structure

• Helps manage payroll and superannuation obligations

• Offers clearer legal protections

• Makes it easier to take on apprentices or contractors

If growth is on the horizon, incorporating early can make the expansion smoother.

4. You Want to Build Business Credibility

Whether you’re bidding for contracts, attracting investors, or working with larger clients, many organisations prefer dealing with companies rather than sole traders.

A company structure signals:

• Stability

• Scalability

• Professionalism

• Long-term commitment

If your industry values formal structures—such as construction, consulting, technology, and professional services—incorporating can help position you more competitively.

5. You Want Flexibility in How You Pay Yourself

Sole traders have only one option: drawing income directly from business profits.

Companies offer more flexibility, such as:

• Wages

• Dividends

• Director fees

• Profit retention for reinvestment

This flexibility allows for more strategic tax planning and smoother cash flow management.

6. You’re Looking to Bring in Partners or Investors

If you plan to expand your ownership structure—perhaps taking on a business partner, investor, or family member—forming a company is essential.

Companies allow for:

• Shareholding

• Transfer of ownership

• Capital raising

• Clear legal agreements

These are simply not possible under a sole trader structure.

7. Your Business Risk Is Increasing

If you’re taking on larger jobs, signing leases, purchasing equipment, or entering contracts, your risk level is growing.

A company structure can help shield your personal finances from business liabilities. As your exposure increases, so does the importance of separating you from the business entity.

8. You Plan to Sell the Business in the Future

A company structure makes the business more attractive and easier to sell.

Potential buyers often prefer businesses that:

• Have formal governance

• Hold assets under a company

• Show structured financial records

• Allow transfer of shares

If an exit strategy is part of your long-term plan, incorporating early can position you well.

Final Thoughts: Is It Time to Switch?

You may not need to incorporate immediately—but if you’re growing, taking on more responsibility, or planning for the future, it’s worth considering.

Switching from a sole trader to a company is a strategic decision that can offer:

• Tax advantages

• Better asset protection

• Increased credibility

• Improved financial flexibility

• Stronger business structure

If you’re unsure whether now is the right time, a conversation with your accountant can help clarify your next steps based on your financials, industry, and long-term goals.