Recently, New Distribution organized an online sharing session titled "Coping Strategies for Community Group Buying in a Compliant Environment." We invited Li Xinhao, a partner at New Distribution Consulting and a practical expert in finance and taxation, to share insights in the community group buying CEO group and broadcast live to other internal groups. In today's changing business environment, especially as the state increasingly emphasizes corporate compliance and tax compliance, bosses who don't understand finance and taxation may really suffer significant losses. This is particularly true for individual bosses in the FMCG industry, who have often neglected financial and tax matters in the past. The editor suggests that the following content is really worth careful study by all bosses. This is the second article, focusing on how regulators view community group buying. Let's first briefly introduce the main roles involved in community group buying. Looking at this diagram, from top to bottom in the industry chain, there are roughly these main roles: brand owners, who provide products; platforms, specifically those engaged in community group buying—I understand most bosses in this group play this role; group leaders, who help platforms develop customers, interact via WeChat groups, and sell goods; and customers, who buy our products and provide us with income. Today we are discussing financial and tax compliance, so we won't expand on business operations, as that's not my area of expertise. Why mention these roles? Regulators look at our industry or a specific company by examining the main forms of these roles and their transactional relationships. In the community group buying field, today we'll focus on the platform and group leader roles. The platform primarily undertakes two responsibilities in the industry chain: one is product trading, i.e., procurement and sales of products; the other is technical services, i.e., developing an internet platform or system to support business operations. Why split these? Some bosses may know that these two businesses have different tax rates: for the same 1 million yuan in profit, one has a 13% VAT rate, the other 6%, a significant difference. So, what organizational forms should platforms and group leaders use? Generally, to do business, we need to register a company. In reality, most business entities in the market exist as companies, except for those needing to go public or for other reasons requiring share reform; they are basically limited liability companies, meaning the registered capital you fill in when registering. Typically, when doing community group buying, whether it's trading or technical services—and often both—we register as limited liability companies. However, there are more options. One is the individual business (sole proprietorship), which you might be familiar with; many small shops are individual businesses. An individual business is an individual engaged in production and business activities, but with a license, they can issue invoices and pay taxes. The advantages of an individual business are flexibility, ease of establishment, relatively loose regulation, and in some places, they can be assessed at a fixed amount or rate, requiring only a small amount of tax. The disadvantage is the small scale; being an individual means it's just the worker and family members—essentially a one-person or family business that can't grow large or hire many employees. Another form, which some bosses may have heard of or used, is the sole proprietorship enterprise. This was rarely used before, but in recent years, many places have opened up approved collection for sole proprietorship enterprises to attract investment and tax revenue, so many people use this method to avoid taxes. For example, the well-known film and television industry incident last year essentially used this method. Additionally, a characteristic of sole proprietorship enterprises is that the investor bears unlimited joint and several liability. If the business faces compensation and the amount is huge, both the enterprise assets and personal assets of the investor must be used to pay. So, while it seems beneficial, its practical use is limited; we generally don't use sole proprietorship enterprises for daily business, only in specific situations where risks are controllable. What's the difference between a sole proprietorship enterprise and an individual business? Actually, the difference is minimal, except that legally, an individual business equals the individual, while a sole proprietorship enterprise is still an enterprise. From a practical standpoint, many businesses cannot reasonably or realistically use individual businesses. Additionally, tax policies for individual businesses and sole proprietorship enterprises vary greatly by region, and this difference is reflected in specific business design and tax planning. Partnership enterprises are similar to sole proprietorship enterprises, except that a sole proprietorship is run by one person, while a partnership has two or more. What's the difference? It's mainly about business needs. Some special businesses typically exist as partnerships, such as law firms and accounting firms. Because partnerships, like sole proprietorships, do not pay corporate income tax, many private equity funds use partnerships as entities, and we often use partnerships for equity incentive platforms. How do sole proprietorship enterprises and partnerships avoid taxes? First, they don't pay corporate income tax; VAT is paid as usual. For individual income tax, a deemed taxable income rate can be set based on the industry—for example, 10% for services and 5% for trading. The normal individual income tax rate is 5%-35%. For a trading partnership, after assessment, the maximum is equivalent to 1.75%. If it's a small-scale taxpayer, total taxes are only about 5%, and they can issue 3% special VAT invoices, making the tax burden quite low. Limited liability companies are the most common form; when we say "company," we usually mean a limited liability company. The biggest feature is limited liability, meaning liability is limited to the registered capital. Additionally, if you want to attract capital or be acquired, you often need to convert to a joint-stock company based on the limited liability company. Given these forms, how do we choose? Generally, platforms choose companies. On one hand, there's limited liability; on the other, if we aim for the capital market, we can only choose a company. What taxes does a company need to pay? This is relatively simple; bosses may know: corporate income tax, about 25% of profits; VAT, paid when issuing invoices—3% for small-scale taxpayers, 13% for general taxpayers in trading; individual income tax, 20% on dividends. Platforms are straightforward, but the interesting part is: what entity form do group leaders use? The first is platform employees. Those who receive salaries from the company—this is a simple labor relationship. Another is part-time workers. That is, someone who originally works elsewhere and does this as a side gig for extra money, or a convenience store owner at the entrance, or a community committee member. They act as group leaders, and the platform pays them commissions. Another situation is when the group leader is a convenience store owner at the community entrance, already an individual business or company. How are these methods taxed? For employees, it's treated as normal wages, with rates from 5% to 45%, withholding individual income tax and social insurance—easy to understand. The second type, individual part-timers, is also clear: it's treated as labor remuneration, withheld by the company, with rates of 20%, 30%, and 40% for amounts above 800 yuan. The new individual income tax law clearly stipulates this. For example, for 10,000 yuan, about 1,600 yuan in individual income tax is due. Moreover, this tax obligation is on the company, not the individual; if audited, the company must pay back taxes. The third situation is a normal transaction relationship: the individual business owner issues an invoice to the company, and the company pays commissions to the individual business owner. These three are normal situations, but in reality, many are not done this way now. In the past, with micro-businesses and now many group leaders, individuals take money directly, and companies do not withhold or pay individual income tax for them. This is actually non-compliant. It may not be caught now, but as our industry develops and companies grow, these non-compliant issues must be gradually resolved. Otherwise, not to mention going public, many investors will require a certain level of financial compliance before entering. We've discussed what forms platforms and group leaders might use, but simply choosing an entity form doesn't mean the tax relationship is clear. As mentioned, common group leader forms are three: employee, part-timer, and individual business or company. In these three cases, the tax perspective is completely different. First, if the group leader is an employee, the platform directly faces upstream suppliers and downstream customers. This tax relationship is simplest: the platform gets 13% input VAT from upstream and issues 13% output VAT to downstream. Employees receive wages, with individual income tax withheld. Of course, often consumers don't ask for invoices, and sometimes invoices can't be obtained. Both situations are problematic. We'll discuss this later. Second, if the group leader is a part-timer, similar to the labor relationship above, the platform deals with suppliers and customers, and the group leader receives labor remuneration from the platform. In this case, the group leader's personal information is typically used to have the tax bureau issue a labor fee invoice, which the company uses for bookkeeping. In reality, many group leaders just take money without issuing invoices, and the platform absorbs this. However, under the current compliance environment, absorbing this is increasingly difficult and risky. Third, if the group leader has their own company or individual business and can issue invoices, there are two destinations for these invoices: one is to consumers, where the group leader acts as a downstream distributor of the platform. The platform sells products to the group leader, who then sells to consumers, with 13% VAT on all invoices. The other is to the platform, where the group leader provides services to the platform, issuing 6% invoices, and the platform directly issues 13% invoices to consumers. At this point, many bosses will ask: if we follow what's just described, we need to pay a lot of taxes and make many adjustments. Is it necessary? Many companies don't operate compliantly and haven't encountered problems, so why bother? My answer is simple: if we go back a few years, I wouldn't recommend compliance either, because the cost is high; after compliance, half or even most of the profits might be eaten up, and the business might not survive. However, with increasingly strict capital and tax supervision, financial and tax compliance is an inevitable choice. Additionally, if you want to enter the capital market—being acquired or going public—financial and tax compliance is a prerequisite; otherwise, you won't pass due diligence or IPO audits. So, how do we respond to the trend of financial and tax compliance? Do we have to pay all taxes? If profits disappear after compliance, why do business? It's all for nothing. Next episode preview (updated tomorrow): How to deal with three major challenges. Extended Reading: If your tip is adopted, we will pay 400-2000 yuan. China FMCG + Internet Professional New Media Dedicated to FMCG manufacturers' transformation and upgrade and channel digital solutions