The short answer
Learn the key profit and risk triggers that indicate when it may be time to move from sole trader to a company structure.
Many sole traders look at moving to a company once profit reaches around $135,000, because personal income above that is taxed at 37% or more, while most small companies pay 25%. Profit isn’t the only trigger, though. Asset protection, hiring staff, buying expensive equipment or bringing in a partner can all mean it’s time to restructure earlier.
Why does $135,000 matter?
As a sole trader, all your business profit is taxed as personal income. Income from about $135,000 is taxed at 37%, rising to 45% above $190,000. A company that qualifies as a base rate entity pays 25% on its profit. Once your profit is well above the 37% threshold, and you don’t need all of it to live on, a company can let you keep more of it working in the business.
Remember, money you take out of the company is taxed again in your hands, with franking credits for the company tax already paid. The saving comes from what you leave in the business.
What are the other triggers?
Asset protection: a sole trader’s personal assets, including the family home, are exposed to business debts. A company adds a layer of separation.
Hiring employees: more staff means more risk and more complexity.
Buying high-value equipment or vehicles: larger financial commitments and loans.
Bringing in a partner or investor: shares make ownership clear.
Contracts that require it: some clients only deal with companies.
What does it cost to switch?
A company costs more to run: ASIC registration and annual fees, a separate tax return, more formal bookkeeping and director duties. Moving existing assets, goodwill or contracts into the company can also have tax consequences, so plan the transfer with your accountant.
A typical Melbourne scenario
Jake is an electrician in Frankston earning $160,000 profit as a sole trader. He needs about $110,000 a year to live on. By moving to a company, he pays himself $110,000 in wages and leaves the rest in the company, taxed at 25% instead of 37%. The money stays available for a new van and tools. He is about to hire his first apprentice, so the added asset protection is a bonus.
When should you stay a sole trader?
If your profit is modest, your risk is low and you need all your income to live on, staying a sole trader is simpler and cheaper. Many businesses switch later, once profit and risk justify it.
Key takeaways
Around $135,000 profit is a common point to consider a company.
Asset protection, staff, equipment and partners can be earlier triggers.
A company costs more to run and money taken out is taxed again.
Plan the transition so transfers don’t create unexpected tax.
General information only. Talk to your accountant about your circumstances.
Read the difference between a trust and a company, explore our company setup and business structure review services, or talk to our business accountants.
Oz calls accounting "the great art", and his clients would agree. A CPA member and Xero specialist, he joined Elephant to provide a more holistic service that covers every base of building wealth. He believes long-term relationships are the only way to get clients real results. When he's not at his desk, he's at the gym, on his bike, or fishing - ideally all three.
