Difference Between a Sole Trader and Company in Australia: Explained

Choosing how to structure your new venture is one of the first big decisions you’ll make as a founder in Australia. Should you keep things simple as a sole trader, or set up a company from day one?

There’s no one-size-fits-all answer. Your choice affects your risk, tax position, brand perception, ongoing compliance, and how easily you can bring on co-founders, staff or investors later.

In this guide, we’ll walk through the practical differences between operating as a sole trader versus a company in Australia, how ABNs and ACNs work, setup steps for each path, ongoing compliance, and the key legal documents you’ll want in place. By the end, you’ll have a clear, confident path forward.

What Is the Difference Between a Sole Trader and a Company?

Sole Trader

• What it is: You operate the business as an individual. In legal terms, you and the business are the same person.
• Control and profits: You make all decisions and pocket all profits (after tax).
• Liability: You are personally responsible for debts and obligations. If something goes wrong, your personal assets can be at risk.
• Setup: Low cost and straightforward. If you’re carrying on an enterprise, you’ll generally apply for an ABN in your own name. If you trade under a name that isn’t your personal name, register a business name.
• Administration: Fewer formalities and simpler record-keeping. Your business income is reported in your individual tax return.

Company

• What it is: A company (usually a proprietary limited or “Pty Ltd” company) is a separate legal entity registered with ASIC (the government regulator for companies).
• Control and ownership: Owned by shareholders and managed by directors. One person can be both, but the roles are legally separate.
• Liability: Limited liability. Shareholders are generally not personally liable for company debts beyond what they’ve invested (note directors still have legal duties and may give personal guarantees in practice).
• Setup: More involved. You’ll register the company with ASIC to get an ACN, then obtain an ABN for the company. You’ll also decide on a Company Constitution or rely on replaceable rules under the Corporations Act.
• Administration: More formalities and costs (annual ASIC review fee, record-keeping, separate bank account, and company registers). There is no requirement for a proprietary company to hold an AGM, but you do need to pass an annual solvency resolution and keep ASIC records up to date.

At a glance, the key distinction is risk and formality: sole traders are simpler but expose you personally, companies add structure and protection but require more compliance.

How Do You Choose the Right Structure?

Think about your risk, growth plans, budget, and how you want to operate in the next 12–24 months. Here’s how the two structures compare on the big questions.

1) Liability and Risk

• Sole trader: You carry all the legal risk personally. Claims, debts, or disputes can reach your personal assets.
• Company: The company is a separate “legal person”. Liability generally sits with the company, which helps shield your personal assets (subject to director duties and any personal guarantees you provide).

2) Tax Treatment

• Sole trader: Business income is taxed at your individual marginal rates.
• Company: Companies pay corporate tax (e.g. 25% for many base rate entities). Profits can be retained in the company, and you can pay yourself a salary or dividends. Get accounting advice for your situation.

3) Cost and Administration

• Sole trader: Low setup costs and lighter admin.
• Company: Higher upfront and ongoing costs (ASIC fees, accounting, registers, governance). You’ll keep company records and notify ASIC of certain changes; you do not lodge an annual “return” with ASIC, but you do complete an annual review and pay the review fee.

4) Brand, Credibility and Investment

• Sole trader: Great for freelancers, consultants and owner-operators. Less common for attracting external investment.
• Company: Often preferred when hiring staff, onboarding co-founders, or raising capital because you can issue shares and separate ownership from management.

5) Flexibility to Scale

• Sole trader: Simple when you’re starting out. If you plan to stay small, this can be enough.
• Company: More flexible for growth, equity incentives and bringing in new owners. If you have more than one founder, a Shareholders Agreement helps set the ground rules and avoid disputes.

Many founders begin as sole traders and convert to a company once revenue, risk, or team size grows. That’s a common path and, with the right planning, a smooth one.

ABN, ACN and Business Names: What Changes With Each Structure?

You’ll see a few acronyms as you set up. Here’s what they mean and how they apply.

ABN (Australian Business Number)

If you’re carrying on an enterprise in Australia, you’ll generally apply for an ABN to invoice, register for GST (if required), and interact with government and suppliers. Very small “hobby” activities may not need one, but most businesses benefit from an ABN for practical and tax reasons. If you’re weighing it up, consider the advantages and disadvantages of having an ABN.

• Sole trader: You apply for an ABN in your individual name.
• Company: The company applies for its own ABN (separate from any personal ABN you might already hold).

ACN (Australian Company Number)

Only companies have an ACN. You receive it on registration with ASIC, and it uniquely identifies the company.

Business Names

If you trade under something other than your own personal name (sole trader) or other than the company’s legal name, you’ll register a business name. You can handle this when you’re setting up, or anytime later via a Business Name registration.

Important: if you switch from sole trader to company later, you don’t “update” an ABN. The company is a new legal entity with its own ABN and ACN. You’ll cancel the old ABN (if needed) and set up the new one for the company.

Step-By-Step: Setting Up as a Sole Trader or a Company

Setting Up as a Sole Trader

1. Decide on a name: Use your personal name or register a business name if you want to trade under a brand.
2. Apply for an ABN: Register an ABN in your own name if you’re carrying on an enterprise.
3. Sort your tax registrations: Register for GST if your turnover reaches or exceeds the threshold. Speak to an accountant about PAYG instalments and other tax settings.
4. Set up banking: Open a separate bank account for clarity (not legally required for sole traders, but highly recommended).
5. Put your contracts and policies in place: Prepare customer terms, an Privacy Policy if you collect personal information, and any supplier agreements you need.

Setting Up as a Company

1. Choose your company name: Check availability. Consider protecting your brand with trade marks later.
2. Register the company with ASIC: Get your ACN and set the company’s details. Many founders use a Company Set Up service to get this right first time.
3. Apply for the company’s ABN: The ABN is in the company’s name, not yours personally.
4. Decide the governance framework: Adopt a tailored Company Constitution or rely on replaceable rules. If you have co-founders or investors, plan ownership and decision-making early with a Shareholders Agreement.
5. Open a company bank account: Keep finances separate. This helps with compliance and limited liability protections.
6. Register for tax: Register for GST (if required) and set up PAYG withholding if you employ staff. Get accounting advice tailored to your model.
7. Prepare your contracts and policies: Draft your customer terms, website terms, NDAs, and employment or contractor agreements as needed.

Tip: Whether you’re a sole trader or a company, investing in solid contracts early can save time and money later.

Compliance and Ongoing Obligations in Australia

Regardless of structure, you’ll need to comply with laws that apply to your business. Here’s a high-level checklist to keep you on track.

ASIC and Company Governance (Companies Only)

• Maintain company registers and records, keep details up to date with ASIC, and pay the annual review fee.
• There is no AGM requirement for proprietary companies, but you must pass an annual solvency resolution and keep proper financial records.
• Directors have legal duties to act in the company’s best interests and with care and diligence. If in doubt, get advice early.

Consumer Law

If you sell goods or services, you must comply with the Australian Consumer Law. That covers fair marketing, consumer guarantees, refunds, and avoiding misleading claims. Build compliant processes into your customer journey from day one.

Employment and Contractors

If you hire, you’ll comply with the Fair Work system, pay at least award or minimum rates, meet leave and record-keeping obligations, and manage safety. Put a tailored Employment Contract and clear workplace policies in place before your first hire.

Privacy and Data

Many small businesses collect personal information (think contact forms, email lists, online orders). While the Privacy Act has a small business exemption for some organisations under $3 million turnover, there are important exceptions (for example, health service providers, those trading in personal information, or handling tax file numbers). Best practice is to adopt a clear, accessible Privacy Policy and only collect what you need.

Intellectual Property

Your name, logo, content and product designs are valuable assets. Consider trade marks for your brand and take care not to infringe others’ rights. Document IP ownership with contractors and employees to avoid disputes.

Tax and Accounting

Register for GST when required, keep good records, and set aside funds for tax. Companies and sole traders have different tax profiles - work with an accountant to optimise and stay compliant.

What Legal Documents Should You Have In Place?

The right documents give you clarity with customers, co-founders, staff and suppliers - and reduce risk. Your exact bundle will depend on your model, but most startups benefit from the following.

• Customer Terms or Service Agreement: Sets out scope, pricing, payment, warranties, and liability limits for your products or services.
• Website Terms: Rules for using your website or app, protecting your IP and limiting your liability online.
• Privacy Policy: Explains how you handle personal information and supports compliance and customer trust. A straightforward Privacy Policy is a simple win.
• Employment or Contractor Agreements: Clear terms on duties, pay, IP ownership, confidentiality and restraints. Start with a tailored Employment Contract if you’re hiring.
• Shareholders Agreement (companies with more than one owner): Rules for ownership, decision-making, exits and disputes. A well-drafted Shareholders Agreement helps preserve relationships and value.
• Company Constitution (companies): Your governance rulebook. A tailored Company Constitution can address your specific needs beyond the default replaceable rules.
• Non-Disclosure Agreement (NDA): Protects confidential information when you share ideas with partners, suppliers or contractors.
• Supplier or Licensing Agreements: Lock in quality, timelines, pricing and IP ownership with your key suppliers or licensors.

You won’t always need everything on day one, but getting the core documents sorted early lets you grow with confidence.

Can You Change From Sole Trader to Company Later?

Yes. It’s common to test a new idea as a sole trader, then move to a company as revenue, risk or hiring needs increase. Plan the transition carefully:

• Register the company: Incorporate, get the ACN and the company’s ABN.
• Move your operations: Transfer contracts, domain names, assets and bank accounts to the company (with consents as required).
• Update stakeholders: Let customers, suppliers and platforms know they’re now dealing with the company.
• Refresh your documents: Reissue customer terms, update invoices and employment agreements in the company’s name.
• Close out the old entity: Cancel any registrations that no longer apply to the sole trader where appropriate, and keep clean records.

One note worth repeating: you don’t “update” an existing ABN when you incorporate. The company is a new legal entity with its own ABN and ACN.

Key Takeaways

• A sole trader is simple and low-cost but exposes you personally to business risk; a company offers limited liability and structure at the cost of more compliance.
• ABN applies to both structures when you’re carrying on an enterprise; only companies have an ACN and separate legal identity.
• Proprietary companies don’t have to hold AGMs, but they do complete an annual ASIC review, pass a solvency resolution and maintain accurate records.
• Comply with key laws from day one - consumer law, employment, privacy and IP - and use clear contracts to manage risk as you grow.
• Core documents like a Privacy Policy, Employment Contract, Company Constitution and Shareholders Agreement help you operate smoothly and protect value.
• It’s common to start as a sole trader and later incorporate. Treat the company as a new legal entity and refresh your registrations and contracts accordingly.

If you’d like a free, no-obligations chat about choosing between a sole trader and a company in Australia - or to set up your structure and documents properly - contact Sprintlaw on 1800 730 617 or team@sprintlaw.com.au.