What is the difference between a sole trader and a Pty Ltd company?One of the main differences between a sole trader vs a company is how they are taxed. A sole trader’s business income is considered their personal income, so they are taxed at the individual income tax rate. On the other hand, a company is taxed as a separate legal entity and pays tax on its profits at the corporate tax rate. Another key difference is how losses are handled. A sole trader can offset business losses against their personal income to reduce their tax liability. In contrast, a company can use business tax planning strategies to reduce their tax bills, like carrying forward losses to offset future profits or carrying them back to offset previous years’ profits. Another tax benefit for companies is the ability to distribute profits to shareholders in the form of franked dividends, which can reduce the overall tax liability of the company and the individual shareholder.
Sole trader tax ratesAs mentioned, a sole trader’s business income is considered their personal income and is taxed accordingly at individual rates. The personal income tax rates in Australia for the 2023-2024 financial year are as follows:
- 0% on income up to $18,200
- 19% on income between $18,201 and $45,000
- 32.5% on income between $45,001 and $120,000
- 37% on income between $120,001 and $180,000
- 45% on income over $180,000
Asset protectionA common question we get asked when discussing sole trader vs company structures, is asset protection. How protected are your personal assets under each business type?
- Sole trader – if you’re liable for anything, all your assets are up for grabs – personal home, car, cash in the bank, etc.
- Company – the company is liable if anything goes wrong so only company assets are up for grabs (outside of a few select circumstances like insolvent trading)