• 5 Marks

TF – May 2018 – L3 – Q4b – Tax Planning

Advise on the relevance of the number of shareholders for tax planning purposes in a limited liability company.

A proprietor of an enterprise intends converting his business into a limited liability company. He also intends to have shareholders made up of 5 members as against 6 members proposed by his wife in a discussion. He has approached you as a final level ICAG Tax student to advise him on the relevance of the number of shareholders in a limited liability company setting.

Required:
Advise for tax planning purposes, the relevance of numbers of shareholders.
(5 marks)

The relevance of the number of shareholders for tax planning purposes in a limited liability company is as follows:

A company with not more than 5 shareholders is considered a close company under the Income Tax Act.
A close company is subject to specific rules regarding the distribution of dividends, especially when it fails to declare dividends after a reasonable period.
The Commissioner-General has the authority to deem part of the retained income as dividends and levy tax on it at a rate of 8%.
If the company has more than 5 shareholders, these provisions do not apply, which provides flexibility in retaining profits without immediate tax implications.
Therefore, for tax planning purposes, having 6 shareholders might provide more flexibility in managing retained earnings and reduce the risk of forced dividend taxation.
(5 marks)

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