Running a business as a sole trader is simple and inexpensive — and for many business owners starting out, it makes complete sense. But as revenue grows, the tax and risk profile of a sole trader structure becomes increasingly costly. At some point, incorporating becomes not just a tax planning option but a genuine commercial necessity.

This guide covers the key triggers that tell you it’s time to incorporate, how to make the transition from sole trader to company correctly, and the tax and legal steps you need to take to do it without creating new problems in the process.

Why Sole Traders Outgrow Their Structure

The sole trader structure works well at lower income levels. Your income is taxed at your marginal personal rate, you file a single tax return, and there’s no corporate administration. But three structural limitations become problematic as income grows:

• Unlimited personal liability. As a sole trader, your personal assets — your home, savings, superannuation — are exposed to business creditors. There is no legal separation between you and your business.
• Tax rate inefficiency. Once you earn above $135,000 (from the 2026–27 financial year), the marginal personal tax rate is 45 cents in the dollar plus Medicare levy. A company pays a flat 25% where it is a base rate entity, meaning aggregated turnover under $50 million and no more than 80% passive income, and 30% otherwise.
• Limited flexibility. Sole traders cannot split income with a spouse (legitimately), cannot retain profits in the business at a lower tax rate, and have fewer options for structuring remuneration, super, and ownership.

These three limitations combine to make incorporation attractive for most business owners earning more than $100,000–$150,000 per year in net profit, or for those who face genuine liability exposure in their industry.

When Should You Make the Switch?

There’s no single threshold, but the following signals typically indicate that incorporation is worth examining:

• Net profit consistently above $100,000–$120,000 per year
• You are paying more than $35,000–$40,000 in personal income tax annually
• You operate in an industry with significant liability risk (construction, professional services, healthcare)
• You want to bring in business partners or investors in future
• You want to separate your personal assets from business risk
• You are planning to sell the business in future and want to access the small business CGT concessions

The CGT concessions are particularly important for business owners planning to exit. To access the small business 15-year exemption and retirement exemption, you (or the entity you operate through) typically need to have been carrying on an active business — and a company structure is often cleaner for satisfying the conditions.

The Tax Advantage of a Company Structure

A company that qualifies as a base rate entity (annual turnover under $50 million, with 80% or less of its income as passive income) pays corporate tax at 25%. This creates a significant rate differential when compared to the top personal tax rate of 47% (including Medicare levy).

The key benefit is the ability to retain profits inside the company at 25% and only pay the top-up personal tax when you draw those profits as dividends. This is not tax elimination — it’s deferral. But deferral has real value: retained profits can be reinvested in the business, used to pay down debt, or timed to years when your personal income is lower.

Be aware that companies cannot access the 50% general CGT discount that individuals and trusts can access on assets held for more than 12 months. This is a meaningful consideration if the company will hold appreciating assets. For business owners where capital gains are likely on exit, structuring advice upfront matters significantly.

How to Transfer Your Business Without Triggering CGT

When you incorporate, you transfer your business assets — goodwill, plant, equipment, contracts — from yourself as sole trader to the new company. This transfer is a CGT event. Without careful structuring, it triggers capital gains tax on the market value of your business assets at the time of transfer.

Two rollover provisions can prevent this:

1. The Small Business Restructure Rollover (Subdivision 328-G)

The small business restructure rollover allows you to transfer active business assets to a new company at cost base, deferring the capital gain. The business must have turnover under $10 million, and the restructure must be a genuine commercial restructure — not primarily a tax-driven transaction.

If you pass the three-year safe harbour — continuing to operate in the company structure without selling — the ATO accepts the restructure as genuine without further scrutiny. This is typically the cleanest option for most sole traders incorporating for commercial reasons.

2. The Sole Trader Rollover (Subdivision 122-A)

If you transfer all the assets of a sole trader business to a company wholly owned by you in exchange for shares in that company, you can access the rollover under Subdivision 122-A. This is an older, simpler provision that applies specifically to the incorporation scenario. It has different conditions than the SBRR but achieves a similar outcome: the CGT gain on the transferred assets is deferred until the shares in the new company are eventually sold.

Your tax adviser will determine which rollover is more appropriate based on your specific facts — some situations call for one, some for the other, and occasionally both can be considered.

Practical Steps in the Transition

Transitioning from sole trader to company is not just a tax exercise — it involves a range of legal, commercial, and operational steps. Here is what the process typically involves:

1. Incorporate the company. Register a new company with ASIC, obtain an ACN, and set up the company constitution and share structure. You will be the sole shareholder and director in most cases.
2. Obtain a new ABN and TFN for the company. The company is a separate legal entity and needs its own tax file number and ABN.
3. Register for GST under the company’s ABN (if applicable) and cancel your sole trader GST registration.
4. Transfer active assets. Document the transfer of all business assets — goodwill, equipment, contracts, IP — from yourself to the company. Apply the appropriate rollover to defer CGT.
5. Transfer contracts and client agreements. Notify clients and counterparties that the business is now operated by the company. Assignment of contracts may require client consent, depending on the contract terms.
6. Update bank accounts, insurance, and licences. Operating accounts should be in the company name. Professional indemnity, public liability, and other insurances must be reissued in the company’s name.
7. Set up payroll. As a company director receiving salary, you are now an employee of the company. Set up payroll, PAYG withholding, and super guarantee obligations from day one.

Personal Services Income After Incorporation

One important caveat: incorporation does not automatically fix your tax position if you earn personal services income. If the income you earn is predominantly a reward for your own skills and effort, and you fail the PSI tests, the ATO will attribute your company’s income back to you personally — and tax it at your marginal rate regardless of what the company does with it.

See our detailed guide to personal services income rules if you are a contractor, consultant, or professional who provides services primarily through your own skills. The PSI rules interact directly with the incorporation question and must be understood before you restructure.

Division 7A — The Risk That Comes With the Company

Once you operate through a company, Division 7A of the Income Tax Assessment Act 1936 becomes relevant. Division 7A applies when a company makes a loan to, or pays an expense for, a shareholder (or their associate) without a complying loan agreement. Such payments are treated as unfranked dividends — fully taxable at your marginal rate, with no franking credits to offset the tax.

This is one of the most common compliance issues for small business company directors. Using the company account for personal expenses, drawing more than your salary without formal loan documentation, or taking out loans without proper terms all create Division 7A exposure. See our guide on Division 7A to understand the rules and how to avoid them. Also review our comparison of company vs trust structures if you are weighing both options.

Frequently Asked Questions

Do I need a lawyer to incorporate?

You don’t legally need a lawyer, but you do need professional advice. The tax and structuring decisions involved in incorporation — particularly around rollovers, company constitution, and share structure — have long-term consequences. Getting it wrong creates problems that are expensive to fix. Engage both an accountant and a commercial lawyer before incorporating.

Can I just stop trading as a sole trader and start fresh as a company?

You can, but this approach typically triggers CGT on the goodwill of the sole trader business (since you’re ceasing one business and the company is starting fresh). It’s almost always more tax-efficient to use a rollover provision to transfer the business, rather than ceasing and restarting. Take advice before choosing this approach.

How long does incorporation take?

The company can be registered with ASIC within a day or two. But the full transition — transferring contracts, updating insurances, notifying clients, setting up payroll — takes weeks. Plan the transition for a quiet period in your business cycle, and allow at least 4–6 weeks to complete all operational steps properly.

Should I incorporate into a company or a trust?

Both structures have advantages. A company offers the flat 25% rate for a base rate entity, 30% otherwise, and clear creditor separation. A discretionary trust offers income-splitting flexibility — the ability to distribute different amounts to different beneficiaries each year — but doesn’t have the same asset protection or flat-rate benefit. See our guide to trust distribution strategies to understand how income splitting works in practice. Many established businesses use a combination — a discretionary trust as the holding entity with the operating business run through a company. The right choice depends on your income level, family situation, asset base, and long-term plans. For a full breakdown of all four main structures, see our guide to business structures in Australia.

Frequently Asked Questions

This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.

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