“Should I set up a company?” often arrives just after a business wins a bigger contract. Revenue is rising, the work feels more serious, and someone has mentioned a lower tax rate.
It is a sensible question. It just needs a broader answer than a comparison between two percentages. The right structure should suit how you earn money, how much you need to take home, who owns the business and what could go wrong.
One business, two very different arrangements
As a sole trader, you operate the business personally. Business income and allowable expenses feed into your individual tax position. A company is a separate legal entity with its own obligations and tax return. The money in its bank account belongs to the company.
That separation can help organise ownership and business arrangements, but it also brings administration. The government’s sole trader and company comparison outlines the differences in setup, reporting and record keeping. Think about the ongoing cost and discipline, not just the registration fee.
Neither choice excuses loose records. A sole trader still needs to understand business performance, retain evidence and meet applicable tax and employment obligations. A company adds formal requirements; it does not replace everyday financial management.
Follow the money all the way home
A company tax calculation is not necessarily the final tax cost for its owner. If profits are paid out as dividends, the shareholder’s circumstances and any franking credits matter. If the owner is paid wages, payroll and superannuation obligations need attention. Taking money informally can create separate problems.
Eligibility for the lower company tax rate has conditions. The ATO’s company tax rate guidance explains the base rate entity rules. Do not assume that every small company qualifies, or that keeping profits in a company permanently settles the owner’s personal tax position.
A useful comparison models several years and includes the cash you actually need for living costs. There is little value in celebrating a tax outcome that leaves your household short of money or relies on withdrawals that have not been properly planned.
Illustrative example: Two businesses each make $180,000 before paying their owners. One owner needs nearly all the available cash for household commitments. The other can leave a substantial amount in the business to fund equipment and recruitment. Even before considering industry risk, their structure discussions should look different. Their similar profit figures do not create an automatic recommendation.
Risk is more than the name on an invoice
Consider contracts, employees, debt, professional exposure and the assets the business uses. A company can provide separation, but it is not a promise that personal assets can never be exposed. Personal guarantees and directors’ obligations require their own assessment.
ASIC’s guidance for company officeholders makes clear that directors must understand the company’s financial position and meet their duties. Incorporating a struggling business does not remove the need to pay debts or make sound decisions.
Ask a lawyer about contractual exposure and guarantees where appropriate. Ask your insurer whether cover matches the activities and structure. The accountant’s tax model should sit beside those answers, rather than be expected to solve every risk on its own.
Who might own this business in three years?
If a future partner may buy into the business, discuss how ownership will be recorded, how decisions will be made and what happens if someone wants to leave. If you intend to sell, consider what a buyer would acquire and which assets or contracts would need to move.
These are practical questions even when the business is small. A short conversation early can reveal that an apparently simple arrangement will become awkward once there are two owners, external funding or valuable intellectual property.
Contractors also need to consider whether income is personal services income. Operating through a company does not automatically switch off those rules. The ATO’s PSI guidance is a useful starting point before modelling company profits.
Changing later is possible, but it is a project
Do not treat incorporation as a stationery update. Assets, contracts, registrations, bank accounts, insurance and invoicing arrangements may need attention. Transferring assets can have tax consequences, and any available relief needs to be checked against your circumstances.
Bring your accountant a profit forecast, household cash requirements, current contracts and a rough ownership plan. Ask for a comparison that includes setup costs, annual administration and the treatment of money coming out of the business. Then ask what would make the recommendation change. A structure is useful when it supports the business you intend to run, with obligations you are prepared to maintain.
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