This article provides a detailed explanation of whether a business name pays company tax in Nigeria and outlines the tax obligations applicable to business name owners.
Understanding Business Name and Company Structure in Nigeria
Before diving into taxation, it is essential to distinguish between a business name and a company:
Business Name: A business name is a sole proprietorship or a partnership registered under the CAC. It is not a separate legal entity from its owner(s), meaning that the owner(s) bear personal liability for the business’s debts and obligations.
Company: A company (such as a Private Limited Company or Public Limited Company) is a separate legal entity distinct from its shareholders or directors. It can sue or be sued and is subject to corporate tax laws in Nigeria.
Tax Obligations of a Business Name
- Does a Business Name Pay Company Tax?
No, a business name does not pay company income tax (CIT) because it is not a separate legal entity. Instead, its tax obligations fall on the owner(s), who pay personal income tax (PIT) based on the business’s earnings.
- Taxation of Business Name Owners
Since a business name is not taxed as a company, the owner(s) are required to pay taxes under the Personal Income Tax Act (PITA). The Federal Inland Revenue Service (FIRS) and State Internal Revenue Services (SIRS) enforce this tax.
The key taxes applicable to a business name owner include:
Personal Income Tax (PIT):
Sole proprietors and partners in a business name pay tax on their profits under the Pay-As-You-Earn (PAYE) system or self-assessment.
The tax rate ranges from 7% to 24%, depending on the income bracket.
Value Added Tax (VAT):
If a business name’s taxable turnover exceeds N25 million per year, it must register for VAT (7.5%) and remit it to FIRS.
Withholding Tax (WHT):
If the business engages in transactions requiring withholding tax deductions, it must comply by remitting WHT to the tax authorities.
Pay-As-You-Earn (PAYE) Tax:
If a business name has employees, it must deduct PAYE tax from employees’ salaries and remit it to the State Internal Revenue Service.
Business Premises Levy:
Many states impose a business premises levy on businesses operating within their jurisdiction.
Tax Obligations of a Registered Company
For comparison, a registered company (e.g., Limited Liability Company) is subject to:
Company Income Tax (CIT) at 20%-30%, depending on turnover.
Education Tax at 2.5%.
Minimum Tax if the company records no profit.
Withholding Tax
Value Added Tax
This distinction makes business names attractive to small-scale entrepreneurs who want to avoid high corporate tax rates.
Benefits of a Business Name Over a Company in Taxation
- Lower Tax Liability: Since business name owners pay personal income tax instead of company tax, they generally enjoy lower tax rates.
- Simplified Tax Compliance: Business names deal mainly with personal income tax and are not subject to company audits.
- No Double Taxation: Unlike companies, where both corporate tax and dividend tax may apply, business name owners only pay personal income tax on profits.
Conclusion
A business name does not pay company tax in Nigeria because it is not a separate legal entity. Instead, the owner(s) pay personal income tax on the business’s earnings. However, business name owners must still comply with tax obligations such as VAT, PAYE, and business premises levy, depending on the nature of their business.
For entrepreneurs deciding whether to register a business name or incorporate a company, taxation is a key factor to consider. If a business is small and owner-driven, a business name may be preferable due to lower tax obligations. However, for larger businesses requiring investment and legal protection, a company structure may be the better option.
If you need assistance with business registration, tax compliance, or CAC-related services, feel free to contact us for professional guidance.
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