Question

In December 2018, Ms Chen wanted to open a fruit shop as her new business. She made an budget for her new business in 2019 as following:

RMB RMB

Sales (exempt from value added tax) 460,000

Cost of sales (all tax deductible) 110,000

Rent expense 220,000

Entertainment expenses 1,500

Other costs and expenses (all tax deductible) 52,500

Total costs and expenses (384,000 )

Estimate Net profit (Before any tax adjustments ) 76,000

She was considering setting up her business in two forms. Either Sole Proprietorship or Limit Company, which will distribute all the profit (after paid enterprise income tax) as dividend to her. Also, Ms Chen' fruit shop is qualify as a small-profit enterprise.

Required:

Please give the advice to Ms Chen, which form of business should she chose to setting her new business, in order to get greater net-of-tax income.

Answer 1

The forecasted profit for 2019 is 76,000 RMB

If Registered as sole proprietor

1. The Income of 75,000 RMB will be taxed at slab rates applicables and this income will fall in the slab of 30,000 to 90,000 RMB is 10% whereas for income below 30,000 is 5%

So the Tax is (76,000-30,000) x 10% + 30,000 x 5% = 6,100 RMB

Net of tax = 76,000 -6100 = 69,900 RMB

If Registered as limited company

As the company is qualified as Low profit enterprise, the taxation rates are much lower

EIY of 5% untill the income is 1 million RMB

So the tax is 5% of 76,000 = 3,800

Also,we will pay dividend tax = 20% for company not listed in China

So Profits net of taxes = 76,000 -3800-(72,200x20%)= 57,760 RMB

So, it would be better to get registered as a sole proprietorship