Most articles about this compare tax rates and liability. This one is about the books, because that is where the difference shows up every week rather than once a year.
The one difference everything follows from
A sole trader is not separate from their business. There is one legal person, one tax file number, one income tax return. The ABN is attached to you.
A company is a separate legal person. It has its own ACN, its own ABN, its own tax file number, and it lodges its own tax return. Its money is not your money, even if you own all of it.
Every bookkeeping difference below is a consequence of that.
Paying yourself
| Sole trader | Company | |
|---|---|---|
| What it is called | Drawings | Wages, directors' fees, dividends, or a loan |
| Is it a business expense? | No. Drawings are not a deduction — they are you taking your own profit. | Wages and directors' fees are deductible to the company. Dividends are not. |
| Does it go through payroll? | No. You cannot employ yourself. | Wages and directors' fees do — including PAYG withholding, STP reporting and super. |
| Where it lands in the books | An equity account, not an expense account. | Payroll expense, or a dividend against retained earnings, or a loan account. |
If you run a company and take money out irregularly rather than on a payroll cycle, you need to be deliberate about what each withdrawal is. A director's loan account that is never formalised is the most common problem in small-company books.
Separation of accounts
A sole trader is *strongly advised* to keep a separate business bank account. A company must — the company's money is legally not the director's, and mixing them undermines the separation that is the whole point of the structure.
- Sole trader: one business account, personal spending kept out of it, and any personal use of a business asset apportioned.
- Company: the company's account is the company's. A personal purchase on the company card is either a loan to you, a fringe benefit, or an error — and it has to be recorded as one of those.
How tax lands
A sole trader's business profit is included in their individual income tax return and taxed at individual marginal rates, with the tax-free threshold and the Medicare levy applying as normal.
A company pays tax on its own taxable income. For the 2025–26 income year the rate is 25% if the company is a *base rate entity*, and 30% if it is not. A company is a base rate entity when both of these are true:
- Its aggregated turnover is less than $50 million; and
- No more than 80% of its assessable income is base rate entity passive income — interest, dividends, royalties, rent and net capital gains.
The second test catches people out. A company under $50 million that earns most of its income passively — a company holding an investment property, for example — is not a base rate entity and pays 30%, regardless of its size.
What each structure has to keep
| Record | Sole trader | Company |
|---|---|---|
| Income and expense records, 5 years | Yes | Yes |
| Bank reconciliations | Yes | Yes |
| Tax invoices for GST claims | Yes, if registered | Yes, if registered |
| Asset register and depreciation | Yes | Yes |
| Payroll and STP records | Only if you employ others | Yes, including for director wages |
| ASIC annual review and solvency resolution | Not applicable | Yes, every year |
| Register of members and share structure | Not applicable | Yes |
| Minutes of resolutions, e.g. declaring a dividend | Not applicable | Yes |
| Director loan account tracking | Not applicable | Yes, if money moves either way |
The extra company rows are the real ongoing cost of the structure, and they are why a company should not be set up casually. None of them are hard; all of them are compulsory.
What your chart of accounts should look like
Sole trader
- An equity section with Owner's contributions and Owner's drawings — and nothing that invites you to book drawings as an expense.
- A clear split between business and apportioned expenses (home office, vehicle) so the apportionment is visible rather than buried.
Company
- Payroll expense accounts that include director wages and director super.
- A director loan account per director, so the balance is always visible rather than reconstructed at year end.
- Dividends paid against retained earnings, plus a franking account.
- Retained earnings treated as the company's, not a personal pot.
If you are changing structure mid-year
Moving from sole trader to company is not a rename. It is one business ceasing and another starting: a new ABN, a new GST registration, a new set of books with a clean start date, and a transfer of assets that has its own tax consequences. Do not carry the old ledger over.
In practice that means a final sole trader return covering trading up to the changeover, and a company ledger that starts at the changeover with opening balances agreed with your accountant.
Common questions
Sources
Every rate, threshold and due date in this guide was checked against the pages below on the dates shown. Tax rules change — verify against the ATO before you rely on anything here, and get advice for your own situation.
- Changes to company tax rates — checked 2026-09-27
- Tips to get your base rate entity status correct — checked 2026-09-27