Question Tag: Sole Proprietorship

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  • 6 Marks

PT – Mar 2024 – L2 – Q3b – Income Tax Liabilities

State the basis periods for a sole proprietorship, company, trust, and partner in a partnership.

State the Basis Periods for the following persons as provided in the Income Tax Act, 2015 (Act 896):

i) A sole proprietorship
ii) A company
iii) A trust
iv) A partner of a partnership

The Basis Periods for the different persons are as follows:

i) Sole Proprietorship: The basis period for a sole proprietor is the calendar year (January to December).
ii) Company: The basis period for a company is its accounting year, which may vary depending on the company’s financial reporting period.
iii) Trust: The basis period for a trust is the accounting year of the trust.
iv) Partner of a Partnership: The basis period for a partner in a partnership is the calendar year (January to December).

  • 3 Marks

AT – May 2020 – L3 – Q5c – Tax planning

Explain how the income of Lydia Waakye, a 16-year-old sole proprietress with a supermarket shop, will be subject to tax

Lydia Waakye aged 16 years old is a sole proprietress with a big super market shop and makes income of an amount of GH¢40,000 per annum over the last 3 years.

Required: How will the income be subject to tax?

Tax is charged on income from employment, business and investment in the case of a resident person, on world-wide income but for non-resident on income derived from and accrued in Ghana.

Lydia Waakye, being an income earner shall be required to pay taxes on income. However, as an individual aged 16 years and running an enterprise, she is an incapacitated person (not fit and proper) and therefore, the tax affairs must be managed by her trustee.

She cannot pay tax on her income, the trustee will pay tax on her behalf until she is able to pay at an adult age

  • 4 Marks

AT – NOV 2021 – L3 – Q1c – Tax Planning

Outlines tax planning measures that can be used to reduce tax liability for a sole proprietorship business.

Evaluate FOUR (4) tax planning measures that you can adopt in your desire to form a sole proprietorship business. (4 marks)

The following tax planning measures can be adopted to reduce the tax liability of a sole proprietorship business:

  1. Personal Reliefs:
    The sole proprietor can benefit from personal reliefs, such as:

    • Marriage/Responsibility Relief (GH¢1,200)
    • Old Age Dependent Relief (GH¢1,000, limited to two relations)
    • Old Age Relief (GH¢1,500)
    • Child Education Relief (GH¢600 per child, limited to three children)
    • Disability Relief (25% of assessable income from employment or business)
  2. Contributions to Pension Schemes:
    Contributions towards pension schemes, such as Tier 1, Tier 2, and Tier 3, are tax-deductible up to 35% of declared income. This helps to reduce taxable income while investing for retirement.
  3. Changing the Character of Income:
    By investing in treasury bills or other tax-exempt financial instruments, the sole proprietor can earn interest income that is tax-free, rather than expanding business operations and being subject to the highest marginal tax rate (30%).
  4. Mortgage Interest Deduction:
    The interest on a loan taken for the acquisition of a residential property can be used to reduce taxable income. This is applicable for one residential house in a taxpayer’s lifetime, providing a tax benefit.

Conclusion:
These tax planning measures can help reduce the overall tax liability of a sole proprietorship business, thereby maximizing after-tax income.

  • 10 Marks

AT – MAR 2024 – L3 – Q5b – Tax Administration in Ghana

Discusses the restrictions on foreign business activities and the tax benefits of sole proprietorship versus limited liability companies.

You are an external consultant to the Ministry of Trade and Industry. The Minister has received a delegation of both foreigners and Ghanaians to deliberate on investment opportunities available in Ghana.

Required:
i) Business activities that cannot be engaged in by foreigners. (5 marks)
ii) The tax benefits of establishing a sole proprietorship business as against a limited liability company. (5 marks)

i) Business Activities that Cannot Be Engaged in by Foreigners
A person who is not a citizen or an enterprise that is not wholly owned by Ghanaian citizens shall not invest or participate in the following activities:

  • The sale of goods or provision of services in a market, petty trading, hawking, or selling of goods in a stall.
  • The operation of taxi or car hire service in an enterprise that has a fleet of fewer than 25 vehicles.
  • The operation of a beauty salon or barber shop.
  • The printing of recharge scratch cards for telecommunications services.
  • The production of exercise books and other basic stationery.
  • The retail of finished pharmaceutical products.
  • The production, supply, and retail of sachet water.
  • All aspects of pool betting business and lotteries except football pools.

(5 marks)

ii) Tax Benefits of Establishing a Sole Proprietorship Business as Against a Limited Liability Company

  • Personal Reliefs: Sole proprietors enjoy personal reliefs, which help reduce their tax liabilities, whereas limited liability companies do not enjoy such benefits.
  • Pension Contributions: Sole proprietors can contribute to pension schemes (up to 35% of declared income), which helps reduce their tax burden, while limited liability companies do not enjoy this benefit.
  • Interest Income: Interest received by sole proprietors from resident financial institutions is exempt from tax, but companies pay an 8% tax on such interest.
  • Tax on Other Interest Income: Sole proprietors pay 1% tax on interest received from non-resident financial institutions, whereas companies pay an 8% tax.
  • No Stamp Duty: Establishing a sole proprietorship does not require the payment of stamp duty, unlike limited liability companies that need to pay stamp duty during their registration process.

(5 marks)

  • 8 Marks

AT – Dec 2023 – L3 – Q2b – Tax planning

Discussing tax planning opportunities available to sole proprietorships that are not available to limited liability companies.

Tax planning opportunities are available to all persons. All business units may not have the same tax planning opportunities, hence the need to carefully select a business unit that may provide the intended benefits to the owner or owners.

Required:
Discuss FOUR (4) tax planning opportunities available to sole proprietorships which may not be available to limited liability companies.

Tax Planning Opportunities for Sole Proprietorships:

  1. Personal Reliefs:
    Sole proprietors, unlike limited liability companies, can claim personal reliefs to reduce their taxable income. These reliefs are available for various personal circumstances and include:

    • Marriage/Responsibility Relief: GH¢1,200 per year.
    • Children’s Education Relief: GH¢600 per child, up to a maximum of 3 children.
    • Old Age Relief: GH¢1,500 for individuals aged 60 years or older.
    • Disability Relief: 25% of the individual’s assessable income if they have a certified disability.
    • Training and Professional Development Relief: GH¢2,000 for training and upgrading skills.
      Limited liability companies do not benefit from these personal reliefs, which are designed to support individuals.
  2. Exemption from Tax on Mortgage Interest:
    Sole proprietors can claim a deduction for mortgage interest paid on their residential property, provided it is their first property. This tax benefit is not available to limited liability companies, which cannot claim personal mortgage interest as a deduction.
  3. Tax-free Withdrawals from Tier 3 Pension Scheme:
    Sole proprietors can make tax-free withdrawals from Tier 3 (voluntary) pension contributions after five years, or earlier under certain conditions (such as hardship due to COVID-19). Companies, on the other hand, are subject to corporate pension rules and cannot access such personal tax benefits.
  4. Tier 3 Pension Contributions:
    Sole proprietors are eligible to contribute up to 35% of their declared income to a Tier 3 pension scheme, and the contributions are deductible for tax purposes. This provides an opportunity to reduce taxable income while saving for retirement. Limited liability companies do not benefit directly from these personal pension contributions and deductions.
  5. Change in the Character of Income:
    Sole proprietors can change the character of their income through personal investments. For example, by investing in Treasury bills, a sole proprietor can enjoy tax-free interest income. This flexibility is not available to limited liability companies, as they are subject to corporate income tax rules.

Conclusion:
Sole proprietorships offer unique tax planning opportunities that are unavailable to limited liability companies. These opportunities, such as personal reliefs, mortgage interest deductions, pension contributions, and tax-free withdrawals, help sole proprietors reduce their tax liabilities. Limited liability companies, by contrast, are subject to corporate tax laws and cannot access these individual tax reliefs.

  • 4 Marks

BCL – Nov 2019 – L1 – Q2c – Alternative forms and constitutions of business organisations

List of particulars required for sole proprietorship registration with the Registrar-General.

List FOUR (4) particulars for registration with the Registrar-General by a sole proprietor. (4 marks)

Under Section 2 of the Registration of Business Names Act, 1962 (ACT 151), the particulars required to be registered are:

  • The business name.
  • The general nature of the business.
  • The principal place of business.
  • Any other places at which the business is carried on.

The particulars of the proprietor should include:

  • The present first name and surname.
  • The nationality.
  • The nationality of origin of the proprietor.
  • The usual residence and other business occupation of the proprietor.
  • The date of the commencement of the business.

(1 mark each for a point = 4 marks)

  • 4 Marks

BCL – Nov 2019 – L1 – Q2b – Alternative forms and constitutions of business organisations

Advantages and disadvantages of forming a sole proprietorship.

It appears that many Ghanaians prefer to own their businesses without going through the cumbersome details of forming an incorporated company limited by shares.

Required:
State TWO (2) advantages and TWO (2) disadvantages of forming sole proprietorship. (4 marks)

Advantages of forming a sole proprietorship:

  • Simplicity: It is simple, inexpensive, and allows the business to legally commence operations before the business name is registered.
  • Flexible working time: The proprietor has the flexibility of working time.
  • Profit retention: The proprietor enjoys all the profits generated by the business.
  • Business transfer: The proprietor can purchase or sell a business, including its assets such as inventory, plant machinery, and landed property.

(2 points @ 1 mark each = 2 marks)

Disadvantages:

  • Limited access to credit: Obtaining loans and credit to run the business is more difficult for a sole proprietorship.
  • Personal liability: The owner’s personal liabilities are not distinct from the business liabilities.
  • Business continuity: Sole proprietorships hardly survive the death of the proprietor.
  • Health and life dependency: The health and life of a sole proprietorship business are inevitably linked to that of the proprietor.

(2 points @ 1 mark each = 2 marks)

  • 6 Marks

BMIS – May 2017 – L1 – Q1b – Business and organisational structure

Identify characteristics of sole proprietorships, partnerships, and limited companies.

b) Identify TWO characteristics each of the following business set ups.
i) Sole proprietorship.
ii) Partnership.
iii) Limited companies.
(6 marks)

i) Sole Proprietorship:

  1. The organisation is owned and run by an individual who makes all business decisions.
  2. A trading name may be used, but there is no legal distinction between the individual and the business.

ii) Partnership:

  1. The business is owned and run by two or more individuals.
  2. A partnership name may be used, but the partnership is not a legal entity.

iii) Limited Companies:

  1. A limited company has a separate legal personality from its owners (shareholders).
  2. The shareholders cannot normally be sued for the debts of the business unless they have given some personal guarantee.
  • 20 Marks

FA – Nov 2018 – L1 – Q7 – Preparation of financial statements of a sole trader | Preparation of limited liability company financial statements

Explain the advantages of a limited liability company over a sole proprietorship and describe different types of shares and debentures.

a) State FOUR (4) advantages a Limited Liability Company has over a Sole Proprietorship.
(6 marks)

b) Explain the following:
i) Issued Shares
ii) Preference Shares
iii) Ordinary Shares
iv) Debentures
(14 marks)

a) Advantages of a Limited Liability Company over a Sole Proprietorship

  • Distinct Entity: A limited company is a completely separate entity from its owners. Everything from the company bank account, to ownership of assets and involvement in tenders and contracts is purely company business and separate from the interests of the company’s shareholders.
  • Limited Liability: Running your business as a limited company means you have the reassurance of ‘limited liability’. Assuming no fraud has taken place, your ‘limited liability’ means you will not be personally liable for any financial losses made by your business.
  • Funding: Because a limited company is a distinct entity from its owners, it may be a little easier for a company to secure business finance than it is for their sole trader counterparts.
  • Naming: Once you register your company with the registrar generals department, your company name is protected by law. No one else can use the same name as you, or anything deemed to be too similar.
    (6 marks)

b) Explanation of Terms
i) Issued Shares: Represents the actual number of shares that have been issued to shareholders. The number of issued shares cannot exceed the number of authorized shares.
(3 marks)

ii) Preference Shares: Preference shares are shares that confer certain preferential rights on their holder. It can be classified into Redeemable and Irredeemable preference shares. Redeemable preference shares mean the company will redeem (repay) the nominal value of those shares at a later date, while Irredeemable preference shares are treated just like other shares. They form part of the equity and their dividends are treated as an appropriation of profit.
(4 marks)

iii) Ordinary Shares: Ordinary shares are shares that carry no right to a fixed dividend but are entitled to all profits left after payments of any preference dividends. Thus, a holder only receives a dividend after fixed dividends have been paid to preference shareholders. The amount of ordinary dividends normally fluctuates, although it is often expected that it will increase from year to year.
(3 marks)

iv) Debentures: A debenture is a long-term security yielding a fixed rate of interest, issued by a company. A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond to secure capital.
(4 marks)

  • 20 Marks

FA – Nov 2017 – L1 – Q5 – Preparation of limited liability company financial statements | Non-current assets and depreciation

Prepare the Statement of Profit or Loss and Statement of Financial Position for Bob & Sons as of December 31, 2016, including necessary adjustments.

The following trial balance was extracted from the ledger account of Bob & Sons, a sole proprietor, as at 31 December 2016:

Trial Balance as at 31 December 2016

Account Debit (GH¢) Credit (GH¢)
Building, at cost 650,000
Office equipment at cost 135,000
Plant and Machinery 263,500
Accumulated depreciation
– Building 39,000
– Office equipment 27,000
– Plant and Machinery 65,875
Purchases 248,000
Sales 500,000
Inventory 1 January 2016 27,500
Discount allowed 4,800
Returns inwards 3,200
Wages and Salaries 64,885
Rent 5,580
Insurance 6,000
Trade receivables 145,000
Trade payables 132,750
Provision for bad debt 24,840
Bank overdraft 58,956
Cash in hand 5,400
Long-term loan 350,000
Capital 1 January 2016  

1,558,865 

 360,444

1,558,865 

Additional Information:

i) Inventory as at December 2016 was valued at GH¢24,000.
ii) Insurance was paid for 15 months ending 31 March 2018.
iii) 3 months rent is outstanding. The agreed amount per month is GH¢620.
iv) Included in wages and salaries is an amount of GH¢2,500 withdrawn by the owner. Secondly, the cleaner has not been paid his salary for December 2016 as at the end of the year. His monthly salary is GH¢500.
v) Interest on capital per annum is 15% and is yet to be recorded.
vi) Depreciation for the year ended 31 December 2016 has not been charged as follows:

  • Building 3% per annum using the straight-line method.
  • Office equipment 20% using the reducing balance method.
  • Plant and machinery 25% using the reducing balance method.

Required:

a) Prepare Bob & Sons’ Statement of Profit or Loss account for the year ended 31 December 2016. (8 marks)
b) Prepare the Statement of Financial Position as at that date. (12 marks)


 

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