ABN vs Sole Trader vs Company for a New Trade Business

Every self employed tradesperson needs an ABN, but how you structure the business behind it, as a sole trader or as a company, changes your tax position, your personal liability, and what finance you can realistically access later. We’re Southern Cross Business Finance, a commercial finance brokerage based in Forest Hill, Melbourne, and this is the decision we see trades make earliest, often before thinking through its longer-term consequences.

What an ABN actually is, separate from your business structure

An ABN is a single registration number identifying your business to the ATO and other businesses; it isn’t itself a business structure. A sole trader has an ABN. A company has an ABN. The ABN sits on top of whichever structure you choose, which is why the real decision facing a new trade business isn’t whether to get an ABN, it’s which structure to register it under.

Sole trader: the default most tradies start with

Most trades start as a sole trader, since it’s the simplest and cheapest structure to set up, often achievable in a single sitting through the ATO’s own registration process. As a sole trader, there’s no legal separation between you and the business: business income is your personal income for tax purposes, and business debts are your personal debts.

This simplicity has a real cost: unlimited personal liability. If the business is sued, or can’t pay a debt, your personal assets, including your home in serious cases, are potentially at risk. For a trade just starting out with minimal assets and straightforward work, this risk is often genuinely low. As the business grows, takes on bigger contracts, or accumulates assets worth protecting, the calculation changes.

Company structure: what actually changes

A company is a separate legal entity, which means the company itself, not you personally, owns the business’s assets and owes its debts, at least in principle. This is the main attraction for trades once the business has grown enough to have something worth protecting. It comes with more administrative overhead: separate tax returns, ASIC annual review fees, and generally the need for an accountant to manage the compliance load properly.

The liability protection is real but not absolute. Directors can still be personally liable in specific circumstances, including trading while insolvent, and as covered elsewhere, most lenders will still ask for a personal guarantee on finance regardless of the company structure.

The ongoing cost of running a company most new tradies underestimate

Beyond the ASIC annual review fee itself, a company structure generally means higher accounting fees each year, since a company’s financial statements and tax return are more involved to prepare than a sole trader’s. It also means separating business and personal banking properly, which some sole traders have been informal about, and maintaining basic company records such as minutes for major decisions. None of this is onerous once established, but it’s worth budgeting for as an ongoing cost rather than a one-off setup expense, since it recurs every year the company exists, active or not.

How this decision affects tax, in general terms

Sole trader income is taxed at individual marginal rates, which can be higher than the company tax rate once profits reach a certain level, but a sole trader also accesses the tax-free threshold and individual tax offsets a company structure doesn’t. A company pays tax at the company rate on its profits, and further tax considerations apply when profits are distributed to you personally. This is genuinely a question for your accountant specific to your numbers, not something to decide from a general article, since the right answer changes with profit level, other income, and personal circumstances.

Why the right structure can change as profit grows

The tax comparison between sole trader and company isn’t static; it shifts as a business’s profit grows, since individual marginal tax rates increase with income while the company rate stays flat. A structure that made little tax difference in a business’s first year, when profit was modest, can look quite different by year three if profit has grown substantially. This is one of the reasons the structure decision is worth revisiting periodically with your accountant rather than treating it as a one-time choice made at registration and never reconsidered.

When trades typically make the switch

There’s no fixed trigger point, but a few common signals prompt trades to move from sole trader to company: taking on staff and the liability that comes with being an employer, winning larger contracts where the counterparty specifically wants to deal with a company, buying significant assets worth ring-fencing from personal risk, or simply profit growing to a level where the tax difference becomes meaningful. None of these alone makes the decision automatic, but they’re the practical triggers worth watching for.

Taking on your first employee as a specific trigger

Employing someone changes the risk profile of a trade business more than almost any other single event, since you become responsible for their safety, their entitlements and any liability arising from their work. Many trades who were comfortable with unlimited personal liability as a one-person operation reconsider that position the moment a second person’s actions can create a debt or a liability in the business’s name. This is one of the more common single triggers for incorporating, separate from any tax consideration.

Insurance and business structure: a connection worth understanding

Public liability and professional indemnity insurance exist partly to cover the risk a business structure alone can’t fully manage, and it’s worth understanding that adequate insurance and the right structure work together rather than one substituting for the other. A sole trader with strong insurance cover has meaningfully reduced their practical risk exposure even without incorporating, while a company with inadequate insurance hasn’t achieved as much protection as the structure alone might suggest. This is worth discussing with an insurance broker alongside your accountant, not instead of them.

What changing structure does to your finance position

This is where the decision intersects directly with what we do. Switching from sole trader to company can affect how much combined trading history a lender will consider, since some lenders view a new company as starting fresh regardless of what came before, while others will look at the continued underlying activity. If a finance application is likely in the near future, whether for a vehicle, equipment or working capital, it’s worth timing a structural change around that rather than switching mid-application or right before you need to apply.

A practical sequencing tip if you’re planning both a switch and finance soon

Where both a structural change and a finance need are on the horizon at roughly the same time, it’s generally worth completing whichever finance is achievable under your current structure first, then switching structure afterward, rather than switching first and applying for finance as a brand new company with no history of its own. This sequencing preserves the trading history that already exists in your favour, and it’s a conversation worth having with us before either step is taken, since the order genuinely affects the outcome.

Partnerships and trusts: worth knowing they exist, even if less common for trades

A smaller number of trade businesses operate as a partnership, typically where two tradespeople are genuinely running the business jointly, or through a trust structure, often for tax or asset protection reasons set up with an accountant’s guidance. Both are less common as a starting structure for a new trade business than sole trader or company, but worth knowing exist if your circumstances involve a business partner or a more complex asset protection need from day one.

A worked comparison: two tradies, two structures

Consider two electricians starting out in the same month. The first registers as a sole trader, works alone, and takes on residential jobs under fifteen thousand dollars. The second incorporates immediately, anticipating growth, and takes on a mix of residential and small commercial work from day one. Eighteen months in, the sole trader has built a clean, simple trading history entirely in their own name, which a lender reads easily and directly. The second has a company with eighteen months of its own trading history, but the director still needed to provide a personal guarantee for their first equipment purchase, meaning the incorporation delivered less immediate finance benefit than expected, even though it was likely still the right long-term structural decision given their growth plans.

This comparison illustrates a point worth internalising: incorporating early doesn’t automatically produce an easier finance position in the short term, even where it’s the right decision for other reasons.

The decision isn’t purely financial

It’s worth resisting the urge to treat this purely as a tax or finance optimisation question. How much administrative complexity you’re willing to manage, whether you’re comfortable engaging an accountant regularly rather than managing your own tax return, and how the business might grow or be sold in future are all part of a decision that a good accountant, not a finance broker, is best placed to guide you through properly.

ABN and business structure FAQs

Do I need a company to get an ABN?

No. A sole trader registers for and uses an ABN just as a company does. The ABN is separate from the structure sitting behind it.

Is it cheaper to stay a sole trader?

Generally yes, in terms of setup and ongoing compliance costs, since a company carries ASIC fees and typically higher accounting costs. Whether it’s cheaper overall depends on your tax position, which an accountant can model properly.

Can I switch from sole trader to company later?

Yes, this is common and generally straightforward from a registration standpoint, though it’s worth planning the timing around any finance you’re likely to need soon after.

Does a company protect me completely from business debts?

Not completely. Directors can still be personally liable in specific circumstances, and most lenders will still require a personal guarantee for company finance.

Should I decide my structure based on what makes finance easier?

This shouldn’t be the primary driver. Tax treatment, liability protection and how the business might grow matter more broadly, with finance considerations sitting alongside rather than ahead of them.

Do I need an accountant to help decide?

Strongly recommended. This decision genuinely depends on your specific numbers, growth plans and risk tolerance, which a general article can’t account for.

Talk to us once you’ve settled on a structure

Whichever structure you choose, we can talk through what it means for your finance options, both now and as the business grows. We work across Forest Hill, Melbourne CBD and Mornington. Contact Southern Cross Business Finance