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Taxation of Business Names Under the Nigerian Tax Act 2025

Introduction

Since the Nigerian Tax Act (the "NTA") was signed into law on June 26, 2025, there has been a growing wave of advice urging business owners to convert their business names into limited liability companies, in response to the provisions of the NTA. The advice is often presented as a smart tax-planning move.

However, it is not an advice that applies to everyone. What many fail to recognise is that the new tax regime distinguishes sharply between small companies and all other business entities. Once a business crosses the small company threshold, its tax obligations change significantly, and incorporation may become more of a financial disadvantage than a relief.

What Is a Small Company?

Section 202 of the NTA defines a small company as one whose annual gross turnover does not exceed ₦50,000,000 and whose total fixed assets do not exceed ₦250,000,000. This definition is crucial because it determines the applicable corporate tax rate. By section 56 of the NTA, small companies are exempted from paying companies income tax. Once a business surpasses this threshold, it ceases to qualify as a small company and is automatically subjected to the standard 30% corporate tax rate.

Why Conversion May Not Be Prudent

The implication is that conversion to a limited liability structure may not be prudent for a business whose annual turnover already exceeds the ₦50,000,000 threshold if the primary motivation is tax planning. This is because the incorporated entity will be subject to companies income tax at a flat rate of 30%.

In such a case, it is more prudent for the business to maintain the status quo. Under Nigerian law, a business name does not possess separate legal personality and, therefore, is not taxed in its own right. In practical terms, this means that the business is indistinguishable from its owner for tax purposes, and the applicable tax will be personal income tax, calculated on a progressive scale up to a maximum of 25%.

This suggests that unless the motivation for conversion extends beyond tax considerations, it may indeed be more prudent for an entrepreneur to retain the business name structure.

When Incorporation Still Makes Sense

Of course, there are circumstances where incorporation is justified despite the higher tax exposure. These include:

1. The need for limited liability protection for owners and investors 2. Access to institutional financing, tenders, or large-scale contracts 3. A desire to professionalize governance or position for strategic partnerships

Outside these considerations, conversion purely for perceived tax advantage is often ill-advised. Entrepreneurs should resist one-size-fits-all advice and instead evaluate their business realities through both fiscal and operational lenses.

Conclusion

Conversion to a limited liability company is not an automatic exemption. It must be an informed strategic choice based on turnover, asset size, and the company's growth trajectory. Entrepreneurs whose businesses exceed the ₦50,000,000 turnover threshold should carefully evaluate their tax exposure under both structures before making that leap.