ABN vs Pty Ltd: Which Structure is Right for Australian Freelancers?

Should you stay as a sole trader with an ABN, or set up a Pty Ltd company?

It depends on what you earn, how much admin you can stomach, whether asset protection matters to you, and what you see the business becoming. There's no universal answer. This guide walks through the real differences, with numbers, so you can make the right call.

Quick comparison: ABN sole trader vs Pty Ltd

What each structure means

Sole trader with an ABN

A sole trader is the simplest way to freelance in Australia. You register for an Australian Business Number, start invoicing, and report your business income on your personal tax return. There's no legal separation between you and the business. Your income is your income. Your debts are your debts.

This is how the vast majority of Australian freelancers operate. The Australian Business Register lets you set up an ABN in minutes, for free. You can register for GST at the same time if your turnover exceeds (or is expected to exceed) $75,000 per year.

As a sole trader, all your business profit is taxed at individual marginal rates. You get the $18,200 tax-free threshold, and you can claim business deductions before calculating your taxable income.

Pty Ltd company

A proprietary limited company (Pty Ltd) is a separate legal entity. It has its own ABN, its own tax file number, and its own legal obligations. You are a director and shareholder, but you and the company are legally distinct.

The company earns the income, pays 25% company tax (for base rate entities with aggregated turnover under $50 million), and then you draw money out. Either as a salary (taxed at your marginal rate), dividends (with franking credits), or a combination of both.

Setting up a Pty Ltd requires registration with ASIC, which costs $538 as of 2024-25. You'll also need a company constitution, director ID, and likely some professional advice to get the structure right.

Tax comparison at different income levels

A 25% company tax rate sounds lower than a 45% top marginal rate. But you still need to get money out of the company and into your personal bank account, and that triggers additional tax.

The comparison below uses three income levels, assuming no other income, basic deductions, and the 2024-25 tax year rates. All figures include the 2% Medicare levy.

At $80,000 taxable income

Sole trader:

• Tax on $80,000 = $16,467 (including Medicare levy of $1,600)
• Effective rate: ~20.6%

Pty Ltd (paying yourself a $60,000 salary + remainder as franked dividend):

• Company tax on $80,000 profit: $20,000 (25%)
• Salary of $60,000 to you: ~$11,067 personal tax
• Remaining $20,000 paid as fully franked dividend
• Franking credit of ~$6,667 offsets your personal tax on the dividend
• Net combined tax: roughly similar to sole trader, potentially slightly more after accounting fees

Verdict at $80,000: The Pty Ltd offers no meaningful tax advantage. After you factor in $2,000-4,000 in additional accounting and compliance costs, you're worse off.

At $120,000 taxable income

Sole trader:

• Tax on $120,000 = $31,267 (including Medicare levy of $2,400)
• Effective rate: ~26.1%

Pty Ltd (optimised salary/dividend split):

• Company tax on $120,000: $30,000 (25%)
• Strategic salary of ~$80,000 + franked dividends for the rest
• Combined personal + company tax: roughly $28,000-30,000 before franking credit adjustments
• Net position: marginal tax saving of $1,000-3,000

Verdict at $120,000: A small tax advantage starts appearing, but once you subtract $2,000-4,000 in additional compliance costs, the benefit is thin. The asset protection benefit might start to matter more than the tax saving.

At $180,000 taxable income

Sole trader:

• Tax on $180,000 = $54,067 (including Medicare levy of $3,600)
• Effective rate: ~30.0%

Pty Ltd (optimised salary/dividend split):

• Company tax on $180,000: $45,000 (25%)
• Strategic salary + dividends structured to minimise marginal rates
• Combined tax: roughly $44,000-48,000 depending on the split
• Net saving: $6,000-10,000 before compliance costs

Verdict at $180,000: Real tax savings emerge. Even after accounting fees, you're likely $3,000-7,000 ahead. At this level, the compliance overhead starts to justify itself.

The real costs of running a Pty Ltd

Tax savings get all the attention, but the ongoing costs of a Pty Ltd catch people off guard.

Setup costs (one-off)

Annual ongoing costs

Compare that to a sole trader, where you might pay $500-1,500 for a tax return and do your own bookkeeping.

Compliance overhead

Running a Pty Ltd also means more paperwork and more deadlines:

• Company tax return due annually (in addition to your personal return)
• PAYG withholding if you pay yourself a salary, with quarterly or monthly BAS obligations
• Superannuation guarantee payments if you're an employee of your own company (currently 11.5%, rising to 12% from 1 July 2025)
• ASIC annual review. Miss this and you cop late fees
• Director obligations under the Corporations Act, including personal liability for certain debts (e.g., employee super, PAYG withholding)
• Solvency declarations. Directors must ensure the company can pay its debts as they fall due

None of this is unmanageable, but it takes time.

Freelancers who just want to do their work and get paid often underestimate how much admin a company adds to their week. If you already dread doing your BAS, a Pty Ltd will not improve your mood.

When to stay as a sole trader

For most Australian freelancers, a sole trader structure is the right choice. Stay as a sole trader if:

• Your taxable income is under $120,000. The tax benefit of a Pty Ltd below this threshold is almost always wiped out by higher compliance costs.
• You're just starting out. Get your freelance business established before adding structural complexity. You can always incorporate later.
• You value simplicity. If you dread admin and paperwork, the extra obligations of a company will drain your energy.
• Your business risk is low. If you're a writer, designer, developer, or consultant with no employees and minimal liability exposure, asset protection is less critical.
• You don't plan to sell the business. Sole trader businesses are harder to sell, but most freelancers aren't building to exit anyway.
• You want to maximise super contributions strategically. Sole traders can make voluntary concessional super contributions and claim them as deductions. This is often simpler than running payroll through a company.

When to incorporate as a Pty Ltd

A Pty Ltd starts making sense when several of these factors apply:

• Your consistent taxable income exceeds $150,000. At this level, the tax structuring opportunities clearly outweigh the costs. The key word is "consistent." One good year doesn't justify incorporating.
• You need asset protection. If you're giving professional advice, handling client funds, or working in areas with litigation risk, the liability shield of a company structure matters.
• You have (or plan to have) employees or subcontractors. Running a team is cleaner through a company structure.
• You want to retain profits in the business. A company lets you leave money in the business at 25% tax rather than paying your full marginal rate. Useful if you're reinvesting in growth.
• You're building something you might sell. A company is a transferable asset. A sole trader business is much harder to value and sell.
• You have a partner or family member you want to distribute income to. (Be very careful here. The ATO watches income splitting closely. Get professional advice.)

The middle ground: trusts

This article focuses on the two most common structures, but many accountants will suggest a trust (family trust or trading trust) as an alternative. Trusts sit between sole trader simplicity and Pty Ltd formality in terms of both cost and flexibility.

A trust can distribute income to beneficiaries (family members, a company) in tax-effective ways, and offers some asset protection. However, they add complexity and cost, and the ATO has been tightening rules around trust distributions in recent years.

If your accountant suggests a trust, make sure you understand the ongoing costs and obligations before committing.

How to switch from sole trader to Pty Ltd

If you decide to incorporate, the process looks like this:

1. Get professional advice first. An accountant can model whether a Pty Ltd benefits your specific situation and help you choose the right structure.
2. Apply for a Director ID via the Australian Business Registry Services (ABRS). This is now mandatory.
3. Register the company with ASIC ($538). You'll need to choose a company name, appoint directors, and issue shares.
4. Get a company TFN and ABN. These are separate from your personal ones.
5. Set up a company bank account. Keep business and personal finances completely separate.
6. Transfer clients and contracts. Your clients will need to update their records to pay the new entity.
7. Update your GST registration if applicable, and set up PAYG withholding if you're paying yourself a salary.

The transition doesn't need to happen overnight, but it should be planned carefully to avoid disruption.

Frequently asked questions

Can I have an ABN and a Pty Ltd at the same time?

Yes. Your Pty Ltd company gets its own ABN, and you can keep a personal ABN as a sole trader for separate activities.

At what income should I switch to a Pty Ltd?

There's no magic number, but most accountants suggest seriously considering it once your consistent freelance income exceeds $130,000-150,000 per year. Below that, the compliance costs typically outweigh the tax benefits. The decision should also factor in your risk profile, growth plans, and personal circumstances.

Is a Pty Ltd just for tax savings?

No, and for many freelancers, asset protection is actually the bigger reason to incorporate. If a client sues your Pty Ltd, your personal assets (home, savings, car) are generally shielded. As a sole trader, everything you own is on the line.

Directors aren't completely off the hook though. You can still be personally liable for certain obligations like unpaid employee super and PAYG withholding. The shield protects against commercial disputes with clients, not against your own compliance failures.

Can I convert back to a sole trader if it doesn't work out?

Yes, but it's not as simple as flipping a switch. You need to wind up the company through ASIC, finalise all tax obligations, and deal with any retained profits. There are costs involved, including potential tax consequences on distributing company assets. It's much easier to go from sole trader to Pty Ltd than the other way around.

Do I need a separate accountant for a Pty Ltd?

Not necessarily a separate one, but you need an accountant experienced with company structures. A basic tax agent who only handles individual returns might not be equipped to manage company tax, BAS, and payroll obligations. Expect to pay more for this expertise.

Does a Pty Ltd affect my super contributions?

Yes, it changes the mechanics. As a sole trader, you make voluntary contributions and claim a personal deduction. As a director-employee of your Pty Ltd, the company pays super as part of your salary package (currently 11.5%, rising to 12% from 1 July 2025). Both get you to the same place, but the paperwork is different.

What about the $1,000 instant asset write-off for sole traders?

Both sole traders and companies can access the instant asset write-off and other small business concessions, provided they meet the eligibility criteria (aggregated turnover under $10 million for most concessions). The business structure doesn't change your access to these benefits.