Quick answer
Moving from sole trader to a company separates the business from you legally, changes how profit is taxed, and changes how lenders assess you. A company is taxed at 25% if it's a base rate entity, or 30% otherwise, for 2025–26. Lenders will read the company's own records, may still look at your sole trader history, and often ask directors for a personal guarantee.
Key points
- A company is a separate legal entity; a sole trader isn't.
- Base rate entity companies pay 25% company tax in 2025–26; others pay 30%.
- A new company may have little history of its own — keep your sole trader records.
- Directors are often asked to personally guarantee company borrowing.
- Base rate entity tax rate
- 25% (2025–26)
- Full company tax rate
- 30% (2025–26)
- Base rate entity test
- Turnover under $50m, passive income 80% or less
- Credit check to enquire
- None
Most Australian founders start as sole traders. It’s quick, cheap and simple: register an ABN, start trading, and declare the business income in your personal tax return. As a business grows, the question comes up: should this be a company? The answer affects tax, liability and, importantly for this site, how you borrow.
What’s actually different about a company?
business.gov.au sums up the core difference: a company is a legal entity that’s separate from you, while a sole trader isn’t. That single fact flows through everything else.
| Sole trader | Company (Pty Ltd) | |
|---|---|---|
| Legal identity | You are the business | Separate legal entity |
| Liability | Personally responsible for business debts | Generally limited, unless you guarantee |
| Tax on profits | At your personal marginal rates | Company tax rate (25% or 30% in 2025–26) |
| Set-up and running | Simple and low cost | ASIC registration, annual obligations, more records |
| Paying yourself | Draw from profits | Wages, director’s fees or dividends |
| Borrowing | Assessed on you and the business together | Company assessed; directors often guarantee |
For 2025–26, the ATO lists company tax at 25% for base rate entities and 30% for other companies. A base rate entity is broadly one with aggregated turnover under $50 million and base rate entity passive income of 80% or less of assessable income. Most young trading businesses meet that test, but check with your accountant.
How does becoming a company affect borrowing?
This is where founders get caught out. Three things change:
1. The borrower changes. Business funding is now applied for by the company, not you personally. The company needs its own ABN, bank account and records.
2. Trading history can reset. A brand-new company has no statements of its own. If the same business traded for years as a sole trader, lenders may consider that history, but you’ll need to show it. Keep your sole trader bank statements and financials, and explain the transition clearly on your enquiry.
3. Guarantees come into play. Lenders commonly ask directors to personally guarantee company borrowing. That means the limited liability a company offers doesn’t extend to debts you’ve guaranteed.
If you’re mid-transition and need funding, start a 60-second enquiry and tell us about both structures. There’s no credit check to ask.
When does it make sense to switch?
There’s no magic number, and an accountant should model your situation. Common triggers include:
- Profit levels where the difference between personal and company tax rates becomes meaningful.
- Liability — for example, taking on staff, leases or larger contracts.
- Partners or investors joining, which is simpler with shares.
- Incentives that need a company, such as the R&D Tax Incentive. See SaaS startup funding.
- Credibility with larger customers or suppliers who prefer dealing with a company.
How do I make the switch without a funding gap?
A little planning avoids the “new company, no history” problem:
- Time it thoughtfully. If you know you’ll need funding soon, consider whether to apply before or after the change, and discuss it with your accountant.
- Open the company account early and move all business activity across on a clear date.
- Keep continuity visible. Same trading name, same customers, same suppliers. Update them all with the new ABN.
- Keep your sole trader records for at least the period a lender might want to see.
- Register for GST and PAYG withholding in the company’s name if they apply. See the GST milestone page.
Illustrative example: a studio changes structure
Illustrative only. A two-person design studio has traded as a sole trader for three years, with steady growth and one employee. The founder’s accountant recommends moving to a company for liability protection and tax planning. At the same time, the founder wants funding for a second hire and new equipment.
They register the company, open a new account and move clients over from 1 July. When the founder applies for funding in September, the company has two months of statements, but she provides three years of sole trader statements and financials showing the same business, clients and trajectory. The lender reads the full history and asks for a director’s guarantee, which is standard.
What changes in the day-to-day running?
Beyond tax and borrowing, a company brings some ongoing responsibilities:
- Company records. Keep minutes of key decisions, a share register and financial records for the company separately from your own.
- Annual obligations. ASIC requires companies to keep details up to date and pay an annual review fee.
- Separate money. Company funds belong to the company. Taking money out needs to be done properly — as wages, dividends or a documented loan — or it can create tax problems.
- Director duties. As a director, you have legal duties to act in the company’s interests and avoid trading while insolvent.
Most founders handle these easily with a good accountant. The payoff is a structure that can grow, bring in partners and borrow in its own name.
If the change coincides with a big quarter, the BAS and tax bill funding page explains how to stay ahead of the ATO while the structure changes.
Growing into a company? Let’s keep your options open
Changing structure is a sign of a maturing business, and it doesn’t have to interrupt your access to funding. If you need finance during or after the transition, send us an enquiry. There’s no credit check to enquire, your details are handled by one person instead of being fanned out to lenders, and we’ll call to understand your history. Please be clear on the form about when the company started and how long the business has traded overall — accurate details let us match you properly first time.
Frequently asked questions
When should a sole trader become a company?
There's no fixed point. Common triggers include profits reaching a level where company tax rates may help, wanting to limit personal liability, bringing in partners or investors, hiring staff, or needing a company to claim incentives like the R&D Tax Incentive. An accountant can model it for you.
What is a base rate entity?
A company whose aggregated turnover is below $50 million and whose base rate entity passive income is 80% or less of its assessable income, according to the ATO. For 2025–26, base rate entities pay company tax at 25%, compared with 30% for other companies.
Will my new company be able to borrow?
A new company has little trading history of its own, but if the same business has traded as a sole trader, lenders may consider that history. Keep your sole trader statements and explain the change on your enquiry. Directors are often asked for personal guarantees.
Does a company protect me from business debts?
A company is a separate legal entity, which generally limits owners' liability. But if you personally guarantee a loan, you're personally responsible for it if the company can't pay. Directors also have legal duties.
How do I register a company?
Companies are registered with ASIC, often through the Business Registration Service. You'll need a name, addresses, officeholder details, share structure and rules. Many founders use an accountant to set it up correctly.