- 20 Marks
AX – Nov 2016 – L2 – Q3 – Taxation of Partnerships and Sole Proprietorships
Discuss the tax implications of converting a partnership into a limited liability company and the treatment of incorporation costs.
Question
Johnson, Seyi, and Bernard, based in Kaduna State, have run the firm Johnson, Seyi & Bernard (Estate Managers) for several years. The partnership agreement provides the following:
(i) Salary paid to partners:
- Johnson: N288,000
- Seyi: N576,000
- Bernard: N1,152,000
(ii) Profit-sharing ratio:
- Johnson: 2
- Seyi: 3
- Bernard: 5
In April 2015, there was a decision to review the partnership agreement. Messrs Johnson, Seyi, and Bernard were unable to find worthy successors to take over as partners. Rather than review the partnership agreement, they agreed to convert the partnership into a limited liability company.
A firm of legal practitioners was contacted to incorporate a new company, JSB Consultants Limited. The Authorised Share Capital was agreed at N50,000,000, made up of 50,000,000 Ordinary Shares of N1.00 each. The shareholding structure is as follows:
- Johnson: 20%
- Seyi: 30%
- Bernard: 50%
The Certificate of Incorporation was dated July 15, 2015, and the company commenced business on September 1, 2015. The cost of incorporation includes:
- Payment for Stamp Duty: N400,000
- Professional fee for incorporation: N250,000
- Corporate Affairs Commission (CAC) registration fee: N500,000
- Miscellaneous costs: N200,000
Total: N1,350,000
The financial results for the year ended December 31, 2015, are as follows:
- Revenue: N20,000,000
- Expenses:
- Cost of incorporation: N1,350,000
- Transport and travelling: N675,000
- Medical: N600,000
- Hotel and accommodation: N625,000
- Audit and accountancy: N550,000
- Postages and telephone: N750,000
- Salaries:
- Johnson: N1,440,000
- Seyi: N2,880,000
- Bernard: N5,760,000
Total expenses: N14,630,000
- Net Profit: N5,370,000
Required:
As the Tax Consultant, you are required to write a report to Messrs Johnson, Seyi, and Bernard highlighting:
a. Tax implications of the decision to convert to a limited liability company, limiting yourself to the details provided. (11 Marks)
b. Your comment on the breakdown of the cost of incorporation of N1,350,000 and the tax implication of each item. (9 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: CIT, Incorporation, Partnership Conversion, Partnership Taxation, Tax implications
- Level: Level 2