Starting a business often begins with a single decision — how you’ll structure it.
For many Australian founders, freelancers, and professionals, the sole trader structure is the simplest and fastest way to start trading. It offers control, flexibility, and minimal setup cost — but also personal risk that grows as your business scales.
At 42 Advisory, we help Melbourne startups and small businesses understand these trade-offs early, so they can grow with confidence.
A sole trader is an individual carrying on business in their own name. There’s no legal separation between the person and the business — meaning you control everything, but you also bear full responsibility for debts and liabilities.
📊 Did you know?
According to the Australian Bureau of Statistics (ABS 2024), more than 1.5 million Australians operate as sole traders — representing around 60 per cent of all actively trading businesses nationwide. This structure dominates Australia’s small-business landscape because of its low barriers to entry and straightforward compliance.
To operate as a sole trader in Australia, you must hold an Australian Business Number (ABN) and use your individual Tax File Number (TFN) for tax purposes. You lodge your annual tax return as an individual and report all business income as personal income through your own TFN.
There’s no separate company tax rate — your earnings are taxed at individual marginal rates, up to 47 per cent plus the Medicare levy. This structure keeps compliance simple but means higher profits can quickly push you into top tax brackets.
Despite its simplicity, the sole trader structure provides several benefits for early-stage operators and professionals:
You make every decision — from pricing to technology — without board meetings or shareholder approvals. This autonomy suits founders who value independence and speed.
You only need an ABN to begin trading, and you can register a business name through ASIC if you trade under a name other than your own.
All income and expenses are reported through your individual tax return. You may also access a small business tax offset of up to $1,000 each year.
Sole traders enjoy access to the 50 per cent CGT discount after holding assets for at least 12 months, plus small-business CGT concessions such as the 15-year exemption and retirement exemption (if eligibility conditions are met).
Unlike companies or trusts, there are no corporate filings, director obligations, or ASIC annual fees. Your focus stays on operations, not administration.
💡 Example:
A freelance UX designer in Melbourne started as a sole trader to keep running costs low and retain full control during the early stages of business. Using an ABN, she was able to trade immediately, manage income and expenses simply, and build a client base without the overhead of a company structure.
Once business activity increased and profit became consistent, she worked with her advisor to restructure into a company — gaining access to limited liability protection, clearer separation of personal and business finances, and a lower company tax rate.
This approach allowed her to validate her business model first, then scale confidently when the timing was right — a practical progression that many 42 Advisory clients follow
As your business matures, the limitations of a sole trader arrangement become clearer.
You and the business are one entity. If the business can’t meet its debts, your personal assets — including your home — may be at risk. Professional indemnity or public liability insurance can help, but cannot remove the risk entirely.
All profits are taxed at individual marginal rates, which reach 47 per cent once income exceeds $190,000. There’s no ability to retain earnings at the lower company rate of 25%.
You can’t distribute profits to family members unless they’re genuinely employed in the business. This limits flexibility in tax planning.
Sole traders can’t issue shares or admit investors. Scaling often requires moving to a company or trust structure to attract funding or partners.
While you’re not required to pay yourself superannuation, you must pay the current 12% Super Guarantee for eligible workers or contractors. You’re also responsible for PAYG withholding, payroll tax, and workers’ compensation obligations where applicable.
🧭 Advisory Insight:
For professionals in high-risk industries such as construction, e-commerce or crypto consulting, the unlimited liability of a sole trader structure is a significant exposure. Incorporation provides a protective layer between personal and business assets.
Income is taxed at individual marginal rates, up to 45 per cent plus the Medicare levy.
PAYG instalments are generally required to manage tax through the year.
Drawings (money you take from the business) are not deductible, as they’re not wages.
Sole traders can still access CGT small-business concessions and roll-over relief when restructuring to a company.
Example:
“If you operate as a sole trader for several years and later incorporate, you can use CGT roll-over relief to transfer assets without immediate tax consequences — preserving value as your business grows.”
There’s no universal threshold, but key triggers include:
Annual income above $190 k
Employing staff or contractors
Desire to limit personal liability
Seeking to attract investors or external partners
Need for flexible profit distribution or succession planning
At this stage, transitioning to a company or discretionary trust can improve tax efficiency, protect assets, and position your business for sustainable growth.
Apply for an ABN via the Australian Business Register.
Register for GST if annual turnover exceeds $75,000.
Register a business name via ASIC (if applicable).
Keep clear financial and superannuation records for at least five years.
Review insurance coverage regularly (public liability, professional indemnity, and income protection).
🔗 Explore more:
Startup Accounting in Australia: How to Choose the Right Business Structure and Build a Full-Stack Finance System
One of our Melbourne clients, a specialist in IT consulting and systems integration, began as a sole trader on our recommendation.
At launch, his goal was to test the market, minimise compliance costs, and utilise the flexibility of a sole trader structure. This allowed him to claim eligible small-business offsets and quickly validate demand.
Within one year, his revenue grew from $0 to $140,000 per year. As the business gained traction, we reviewed the structure and identified new challenges — including risk exposure, contractor obligations, and the need to bring in partners.
Together, we executed a strategic restructure to a Pty Ltd company, using small-business CGT roll-over relief to preserve asset values and ensure continuity.
The outcome:
Liability was limited to the company.
The structure allowed for new partners and capital investment.
The business scaled rapidly to $1.7 million in annual revenue within three years.
This transition embodies 42 Advisory’s approach: start lean, stay compliant, and evolve structure as strategy — not as an afterthought.
Operating as a sole trader offers simplicity, autonomy, and tax advantages in the early stages of business.
However, as revenue and risk increase, incorporating or adopting a trust structure can deliver better protection and flexibility.
At 42 Advisory, we help founders make that transition with clarity — ensuring every decision supports growth, compliance, and peace of mind.