Sole Trader vs Company in 2026–27: The Real Tax Numbers for Small Businesses

"Should I set up a company?" is the question our accountants hear most from tradies, consultants and small business owners across Frankston and Ringwood East. The honest answer is that it depends on how much profit you make, how much of it you need to live on, and how much risk you carry. This guide puts real 2026–27 tax numbers on the comparison, lists what a company actually costs to run, and explains when switching makes sense and when it doesn't.

How a sole trader is taxed in 2026–27

As a sole trader, business profit is simply your income. It is added to any wages or investment income and taxed at your marginal rate. For the 2026–27 year (1 July 2026 to 30 June 2027) the resident rates are:

• •$0 to $18,200: nil
• •$18,201 to $45,000: 15% (down from 16% on 1 July 2026)
• •$45,001 to $135,000: 30%
• •$135,001 to $190,000: 37%
• •Over $190,000: 45%
• •Plus the 2% Medicare levy on most taxable income

The upside is simplicity: one tax return, no separate entity, and any business loss can generally be offset against your other income (subject to the non-commercial loss rules). The downside is that once profit passes about $135,000, every extra dollar is taxed at 39% including Medicare, and above $190,000 at 47%.

How a company is taxed

A proprietary company pays a flat 25% on its profit if it is a base rate entity (aggregated turnover under $50 million and no more than 80% of its income from passive sources such as rent or interest). There is no tax-free threshold and no Medicare levy at the company level.

The part that gets missed: 25% is not the final tax bill. The company's after-tax profit belongs to the company, not to you. To get it into your hands you either pay yourself a wage (deductible to the company, taxed to you at marginal rates) or pay a dividend with franking credits attached. When a fully franked dividend lands in your return, you are taxed on the grossed-up amount at your marginal rate and receive a credit for the 25% the company already paid. If you draw out every dollar of profit each year, the total tax across you and the company ends up close to what a sole trader would have paid.

Simply transferring money out of the company without a wage or dividend triggers Division 7A, which can treat the amount as an unfranked dividend. That is one of the most common and expensive mistakes we see when people set up a company without advice.

The numbers: 2026–27 tax on $80k, $120k and $200k of profit

Sole trader figures include the Medicare levy and assume no other income and no offsets. Company figures are the tax paid by the company on retained profit; they exclude the extra personal tax you pay when profits are eventually paid out.

• •$80,000 profit — sole trader: $16,120 (20.2%). Company: $20,000 (25%). The sole trader pays less. A company makes no sense on tax grounds at this level
• •$120,000 profit — sole trader: $28,920 (24.1%). Company: $30,000 (25%). Roughly even. Other factors decide
• •$150,000 profit — sole trader: $39,570 (26.4%). Company: $37,500 (25%). The company edges ahead only if some profit stays in the company
• •$200,000 profit — sole trader: $59,870 (29.9%). Company: $50,000 (25%). Nearly $10,000 less tax, provided you don't need all of it personally this year

The pattern is clear. A company only saves tax when profit is high enough that your marginal rate exceeds 25% and you can leave a meaningful part of the profit in the company to reinvest, pay down business debt or build a buffer. If you need every dollar to live on, the saving mostly disappears once dividends are paid. Run your own figures with our sole trader vs company calculator.

What a company costs to run

Budget for these before you decide:

• •ASIC registration fee: $636 from 1 July 2026, plus constitution and set-up costs
• •ASIC annual review fee: $342 a year for a standard proprietary company
• •A separate company tax return and financial statements every year, on top of your personal return
• •Payroll obligations if you pay yourself a wage: PAYG withholding, Single Touch Payroll and super under the new Payday Super rules
• •Directors' duties, a director ID, and a registered office

Expect your annual accounting to cost more than it does as a sole trader. Our pricing page shows typical fees for company returns and bookkeeping, and we quote fixed fees before we start.

Beyond tax: the reasons that actually decide it

Asset protection

A company is a separate legal entity. If the business is sued or fails, your home and personal assets are generally not on the line for company debts, provided you haven't given personal guarantees and have met your duties as a director. For anyone with employees, contracts, or a trade with physical risk, this is often the real reason to incorporate.

Personal services income

If most of your income comes from your own personal skill and effort (many IT contractors, consultants and locums), the personal services income rules can attribute the income back to you personally regardless of the company. A company does not create a tax saving in that situation. We test this before recommending any structure.

Capital gains

Individuals and trusts currently receive the 50% CGT discount on assets held more than 12 months; companies do not. Note that the May 2026 Federal Budget announced that the individual discount will be replaced with cost base indexation from 1 July 2027, which narrows this difference. If the plan is to build and sell a business, the small business CGT concessions can still apply through a company, but structure matters and it is far easier to set up correctly at the start than to fix later.

Growing, hiring and bringing in partners

Companies make it simple to bring in a business partner, issue shares, take on investors or sell the business as a going concern. Some larger customers and government contracts also require a Pty Ltd.

When switching from sole trader to company makes sense

In our experience the switch is usually right when several of these are true:

• •Profit is consistently above about $120,000 to $150,000 and rising
• •You don't need all of the profit personally and want to reinvest or build a buffer taxed at 25%
• •You are hiring staff, signing larger contracts, or your work carries liability risk
• •You want to bring in a partner or eventually sell the business
• •A spouse or family member genuinely works in the business and a wage or share structure can be justified

If you are already trading as a sole trader, the small business restructure rollover can allow you to move assets into a company without triggering capital gains tax, as long as it is done correctly. Talk to us before you register anything.

What about a trust

A discretionary (family) trust with a corporate trustee is the third common structure. It offers flexibility to distribute income among family members and retains access to the CGT discount, but it can't retain profits at a low rate the way a company can, and it comes with its own compliance and the same PSI limits. For many family businesses a company plus a trust, or a trust alone, beats a company alone. Our tax planning team compares all three on your actual numbers.

Get a structure review in Frankston or Ringwood East

Bring your last tax return and a rough profit forecast, and we'll model sole trader, company and trust side by side, including the running costs and the Division 7A traps. Our accountants sit in the same office as our financial advisers and mortgage brokers, so the conversation can also cover super for business owners, personal insurance and how a structure change affects your borrowing power. Book at our Frankston office on 03 9769 6431 or Ringwood East office on 03 9870 1477.

Frequently asked questions

Does a company pay less tax than a sole trader

Only when profit is high enough that your marginal rate exceeds 25% and you can leave part of the profit in the company. If every dollar is paid out to you, total tax is similar to being a sole trader.

Can I pay myself a wage from my company

Yes, and you usually should. Wages are deductible to the company and taxed to you at marginal rates, with PAYG withholding and super paid each payday under the Payday Super rules that started on 1 July 2026.

Can I just take money out of the company when I need it

Not without consequences. Money taken without a wage or dividend is a loan from the company and falls under Division 7A. Without a complying loan agreement and repayments, it can be taxed as an unfranked dividend.

How long does it take to set up a company

Registration with ASIC is usually same-day. Getting the shareholding, director arrangements, ABN, GST and PAYG registrations, bank accounts and Division 7A safeguards right takes a little longer and is where advice pays for itself.

This article is general information only and does not take into account your personal circumstances. Tax outcomes depend on your total income, other entities and how profits are used; we model your specific position before recommending a structure.