Do business names pay taxes in Nigeria?

A business name is a business that is registered in Nigeria without a legal entity. In Nigeria, businesses can be formed in varying ways, one of which is the limited liability company and the other is the business name. Under the laws in Nigeria, the taxation of limited liability companies is clear following the provision of statutes like the Companies Income Tax Act and others.

Nonetheless, there exists an issue with the taxation of business names in Nigeria, with some corporate experts claiming that business names do not pay taxes in Nigeria. This article seeks to clear the air on whether or not business names are expected to pay taxes on their profits.

What are business names?

A business name is a corporate entity that is established to run without a legal personality. This invariably means the business is not a separate entity known to law and therefore can not hold properties in its name, and cannot sue and be sued in its name. As the name entails, only the name of the business is known to the law, this lets the business name take a distinct form from other non-registered businesses and also protects the business name from use by other entities whether or not having a separate legal entity.

What is business taxation?

Business taxation is highly necessary for a government to thrive and provide amenities for the success of businesses. Business taxation is the tax payable by businesses, businesses are often taxed from their profits at the end of a financial year. Under Nigerian law, all businesses are obligated to pay taxes, whether they fall under a partnership, sole proprietorship or limited liability.

Do business names pay taxes in Nigeria?

Under Nigerian law, business name taxes are payable from their profits derived for the financial year. All business names must file the aggregate of their earnings and pay a certain percentage to the government as taxes for that financial year. This invariably means that business names must account for and pay taxes from their various profits made, such taxes must be made alongside other taxes payable by business names according to law.

All business names must keep a financial statement or some sort of account that can be readily inspected by the tax authorities. For partnerships, such accounts must be signed by at least two of the partners while for the sole proprietorship, such accounts must be signed by the sole proprietor.

Incomes levied on aggregate taxes

It has been agreed that business names ought to pay taxes to the government on the aggregate incomes made in the year. The confusion arises from the meaning of “aggregate income” and the inability of some state laws to legislate on the meaning, thereby, giving room to interpretations. Aggregate income means the profits of the business, the salaries earned by the workers including the partners in the business as well as any other form of income according to law. From the above definition of aggregate income, the business names’ profits, salary income and other forms of income must be taxed and paid collectively by the business.

The confusion as to what classifies as aggregate income is what has led most businesses to believe that business names remit taxes for salary earners only and do not remit taxes on the profit of the business. This assumption is not in line with the law. For instance, if the JGK partnership makes a total income of $2 million and pays salaries for workers at $100,000 annually. If the tax payable in a state is 10% of the earnings, the tax to be remitted by JGK partnership is 10% of $2 million, which is $200,000 and 10% of $100,000, which is $10,000 making a total tax of $210,000 payable for the year.

Taxing body for business names in Nigeria

The federal government and the state government collect taxes from business names in Nigeria. While the federal government collects taxes like the Value Added Tax (VAT) levied on services offered by all businesses including business names in Nigeria, the state governments collect the Personal income tax, the tax on the earnings of the business names, and other forms of taxes like energy tax, developmental tax, environmental tax and others.

The VAT is payable to the Federal Inland Revenue Service (FIRS) while the other forms of taxes are payable to the State Internal Revenue Board (SIRB).

Tax responsibilities for business names

Different tax responsibilities apply to business names in Nigeria than they do to registered businesses. The following are the main taxes that companies are often expected to pay:

Individual Income Tax: The revenue earned by the business is regarded as the owner’s income because a business name lacks a distinct legal personality. As a result, the proprietors must pay personal income tax on the earnings generated by the firm. The applicable tax rates are determined by the owner’s income level, as established by the relevant tax legislation.
Value Added Tax (VAT): Companies that offer goods or services must register for and charge Value Added Tax (VAT) on taxable supplies. VAT is a consumption tax that is levied on the value added at each level of the supply chain and is eventually borne by the end user. The collected VAT must be sent to the Federal Inland Revenue Service (FIRS) monthly by the company owner.
Withholding Tax (WHT): Companies that conduct business with other businesses, such as contract work or services delivered, may be obliged to withhold and remit taxes on payments made to suppliers or service providers. Withholding tax is an advance payment of income tax deducted by the company making the payment and submitted to the tax authorities on the recipient’s behalf.
Pay-As-You-Earn (PAYE): If a company hires employees, it is subject to PAYE tax deductions. The employer is responsible for withholding income tax from employees’ paychecks and remitting it to the appropriate tax authorities on their behalf.

Benefits of paying taxes as a business name

Following through on tax duties as a business name in Nigeria provides various advantages, including:

Keeping Penalties and Legal Problems at Bay: Failing to pay tax responsibilities might result in penalties, fines, or legal ramifications. Business owners may avoid costly tax disputes by paying their taxes on time and appropriately.
Establishing trust and goodwill: Tax compliance improves a business’ reputation and instils confidence among stakeholders. This may lead to higher consumer trust, stronger commercial connections, and better market placement.
Access to Government Assistance and Incentives: Compliant business names may be eligible for government assistance programmes, incentives, and grants targeted at supporting economic growth and development.

Conclusion

In Nigeria, business names have certain tax duties that owners must meet. Personal income tax, VAT, WHT, and PAYE compliance are all essential for tax compliance. By following these requirements, business owners can avoid penalties, preserve a good reputation, and perhaps get access to government assistance programmes. To guarantee correct tax compliance and benefit from experienced help in navigating the Nigerian tax landscape, business owners should speak with tax specialists or hire the services of respected accounting businesses.