Table of Contents
Introduction
Taxes are a necessary part of society and have been around for centuries. Recently after the introduction of the Nigerian Tax Act, 2025, there has been a lot of information on the media space regarding the benefits of converting a Business Name to a Limited Liability Company to avoid paying excess tax. In fact, a lot of business owners are rushing to the Corporate Affairs Commission (CAC) to register as limited liability companies. But here’s the real question: does it actually save you money — or is it just hype?
What is the Difference between a Business Name and a Limited Liability Company?
Business Name
A business name either in form of a sole proprietorship or partnership; does not have the word “LTD/LIMITED” after its name, the business and its owner are one before the law, hence, there is an unlimited liability.
However, the owner is the sole decision maker. It is simple and easy to register and you enjoy all your profits alone and you pay income taxes on the profits you make. The owner pays Personal Income Tax to the relevant State Inland Revenue Service where the business is geographically located.
Limited Liability Company (LLC)
A limited liability company (LLC), on the other hand, is a separate “legal person.” It can own property, ratify contracts, and pay its own taxes — different from the owner(s). Hence, the liability is limited to the assets of the Company. The Company pays Company Income Tax to the nearest Federal Inland Revenue Service to the geographical location of the Company.
So, yes — registering as an LLC gives you legal credibility and some protection. But what about taxes?
What then is the Tax Implication of a Business Name and a Limited Liability Company?
According to the Section 56 of the Nigeria Tax Act, 2025, LLCs are taxed based on their turnover. (Turnover is the sum of the total revenue made by the Company).
- Small Companies (defined as companies with annual gross turnovers of ₦50million (previously ₦25million) and below and total fixed assets not exceeding ₦250 million shall pay 0% company income tax (CIT).
- any other company, at the rate of 30% from the commencement of this Act.
Sounds interesting, right? Zero tax if you’re small! But here’s the catch — these exemptions only apply if your business is officially a company and if you meet all the filing and compliance requirements. That includes but not limited to; annual returns, proper accounting books, audited reports, and registration with the Federal Inland Revenue Service (FIRS).
Conversely, when you operate under a business name, you pay Personal Income Tax (PIT) on the profits you earn. According to Section 58 (1) and the 4th Schedule of the Act, the rates are as follows;
(a) First N800,000 at 0%;
(b) Next N2,200,000 at 15%;
(c) Next N9,000,000 at 18%;
(d) Next N13,000,000 at 21%;
(e) Next N25,000,000 at 23%; and
(f) Above N50,000,000 at 25%.
Therefore, there is a relief of ₦800,000 from the tax you are expected to pay. Also, The Act introduces a rent relief under Section 30 (vi), which is 20% of annual rent paid, subject to a maximum of ₦500,000, whichever is lower.
However, unlike companies, you don’t need to hire auditors or file corporate returns. You just declare your income and pay your personal income tax. It’s simpler and usually less expensive to manage — especially if you’re still small or growing.
Which One Pays Less Tax?
Let’s use a quick example.
Diane runs a small chops business, ₦10 million in yearly turnover and declared profit of ₦7milllion.
- As a business name, from the tax rates provided, Diane will pay the sum of ₦1,446,000 as Personal Income Tax.
- As an LLC, Diane will pay 0 tax. However, Diane will still need to pay auditors and still need to file nil returns. Also as an individual working for the Company, Diane is obligated to pay Personal Income Tax at the specified tax rates.
When is it Necessary to Convert to a Limited Liability Company?
It is wise to convert to an LLC when;
- The Business is growing and there is a forecast that your turnover may exceed ₦50million or there is a plan to upscale.
- There is a plan to attract investors – investors most times feel safer to deal with LLCs.
- There is a desire for limited liability.
- There is a plan to bid for contracts with government agencies or high-paying clients.
In these cases, the benefits go beyond taxes. It’s about credibility, protection, and growth.
Converting to an LLC doesn’t automatically mean you’ll pay less tax as this cost you are trying to avoid might be faced in regulatory compliances and extra Personal Income Tax as an Employee of the Company.
It will only be beneficial if your turnover fits the small-company bracket and you’re ready for the responsibilities that come with being a registered company.
Conclusion
Finally, consider the following circumstance before following the trend to convert to an LLC:
• What’s my annual turnover?
• How much do I currently pay in personal tax?
• Can I afford the extra cost of company compliance?
If you’re unsure, consult a trusted tax adviser or accountant — not just social media. The right structure for your business depends on where you are now and where you’re headed.
