Sole Proprietorship in Japan: Your Quickstart Guide

Ever wondered how sole proprietorship in Japan works?

In this article, we look at the pros and cons of sole proprietorship and discuss the tax obligations and visa possibilities for foreigners interested in starting a sole proprietorship in Japan.

What is sole proprietorship in Japan?

Sole proprietorship in Japan is referred to as kojin jigyo (個人事業). Essentially, sole proprietors in Japan are those doing business without the status of an incorporated entity.

They become independent sole proprietors by submitting a Declaration of Commencement of Business (開業届 = kaigyo todoke) to the tax office.

Data from the 2021 Economic Census for Business Activity in Japan reveals there are approximately 1.61 million unincorporated companies(個人企業 = kojin kigyo), accounting for over 40% of all businesses in Japan.

Pros and cons of sole proprietorship in Japan

A sole proprietorship offers several advantages over corporations.

However, it sometimes falls short when it comes to social credibility, which can result in drawbacks when dealing with getting financing and talent acquisition.

Pros of sole proprietorship in Japan

• Easy and low-cost startup procedures—Starting a sole proprietorship involves straightforward procedures. Simply submitting the required paperwork to the tax office, local authorities, and prefectural tax office is sufficient to commence operations without any substantial expenses. In contrast, establishing a corporation demands registration fees and may take up to a month to complete.

• Simplified tax reporting—Annual tax reporting, known as "kakutei shinkoku," is common for sole proprietors. Even those opting for the more detailed "seiri-ao" blue tax return often use user-friendly accounting software to streamline the process. On the other hand, corporations must file corporate tax returns, requiring considerable knowledge and, as a result, many corporations prefer to hire accountants for tax filing.

• Lower tax burden on lower profits—Sole proprietors pay income tax, while corporations are subject to corporate tax. When profits (income) are relatively low, sole proprietors face lower tax obligations than corporations. Many choose to operate as sole proprietors until their business gains momentum and then incorporate themselves as profits increase. However, the optimal profit threshold favoring sole proprietorship varies depending on individual circumstances, and professional advice from a tax consultant is recommended.

• Reduced administrative workload—Most sole proprietors typically join the national pension and health insurance systems, which requires minimal administrative effort. In contrast, as a corporate director, one would receive salary payments from the company, leading to payroll calculations, income tax withholdings, health insurance (Kyokai Kenpo), and employees' pension (Kosei Nenkin) contributions—all adding to the administrative burden.

Cons of sole proprietorship in Japan

• Lower social credibility—Sole proprietorships do not go through the formal registration process of corporations. Consequently, they may have less social credibility than corporations, making some businesses prefer dealing with registered companies over sole proprietors.

• Difficulty obtaining loans—Sole proprietors may face challenges in obtaining loans from financial institutions. The blurred line between business and personal finances in sole proprietorships can make lenders wary when assessing working capital loans, leading to stricter approval criteria. To improve the chances of loan approval, separating personal and business accounts and maintaining organized financial records are recommended.

• Disadvantaged talent acquisition—In recruitment efforts, sole proprietors may find it more challenging to attract talent compared to corporations. Since corporations are obligated to provide employees with welfare benefits, such as employees' pension and health insurance, they might appear more appealing to job seekers than small-scale sole proprietorships.

• Higher tax burden on higher profits—As profits increase, so does the tax liability for sole proprietors. Income tax follows a progressive tax rate, meaning the tax rate increases as income levels rise. Additionally, individual enterprise tax (kojin jigyozei) may also apply as profits grow, further increasing the tax burden for successful sole proprietors.

What are the tax obligations of sole proprietors in Japan?

Sole proprietors must file their tax returns between February 16th and March 15th each year. This tax return process primarily involves calculating and declaring income tax.

Besides income tax, sole proprietors also have obligations to pay resident tax, consumption tax, and individual business tax.

While income tax and resident tax are mandatory for all sole proprietors, the applicability of consumption tax and individual business tax varies depending on the business type and revenue.

Tax rates for sole proprietors in Japan

The following are the income tax rates and deductions for the different income ranges in Japan, which also apply to sole proprietors:

Income range: 1,000 yen to 1,949,000 yen

• Tax rate: 5%

• Deduction: 0 yen

Income range: 1,950,000 yen to 3,299,000 yen

• Tax rate: 10%

• Deduction: 97,500 yen

Income range: 3,300,000 yen to 6,949,000 yen

• Tax rate: 20%

• Deduction: 427,500 yen

Income range: 6,950,000 yen to 8,999,000 yen

• Tax rate: 23%

• Deduction: 636,000 yen

Income range: 9,000,000 yen to 17,999,000 yen

• Tax rate: 33%

• Deduction: 1,536,000 yen

Income range: 18,000,000 yen to 39,999,000 yen

• Tax rate: 40%

• Deduction: 2,796,000 yen

Income of 40,000,000 yen and above

• Tax rate: 45%

• Deduction: 4,796,000 yen

These rates and deductions are used to calculate the income tax owed by individuals in Japan based on their annual income.

Note: If you file for a Blue Tax declaration status, you will be allowed to deduct up to 550,000 yen to 650,000 yen from your taxable income. This special deduction varies depending on the method you use for filing your taxes, with preference given to those who file via e-Tax.

Consider using a Japanese tax calculator, such as this one, to find out your possible upcoming tax bills. (Use Chrome's browser translator to read the instructions in English.)

What is the Business Opening Notice (Kaigyo Todoke form) in Japan?

When starting a business in Japan, you must submit a "Kaigyo Todoke" or Business Opening Notice. You can obtain the "Kaigyo Todoke" at your local tax office or download it from the National Tax Agency's website. (Link to PDF.)

Image. Kaigyo todoke form. Business opening notification form in Japan.

Traditionally, the notice was submitted in person at the tax office, but there are now alternative methods for submission. Business owners have the option to send the completed form through the post office or electronically via an online platform provided by the tax authorities. This offers greater flexibility for entrepreneurs, enabling them to choose the method that best suits their preferences.

The kaigyo todoke form should ideally be submitted within one month from the date of business commencement, but there are no penalties for not doing so. However, there are compelling advantages for those who submit the notice.

For instance, it allows them to take advantage of the highly advantageous "青色申告" (Blue Form Tax Return) for tax savings during the annual tax filing.

Additionally, presenting a copy of the "Kaigyo Todoke" can serve as proof of the business's existence when dealing with office rental agreements or applying for startup loans, making it a handy document to have on hand.

Can sole proprietorships in Japan use a virtual office address on their business opening form?

Most sole proprietorships in Japan can use a virtual office address on their business opening form, including consulting services, e-commerce shops, and a wide range of freelance businesses.

The few exceptions are for those who are in a legal profession, real estate, and a handful of other cases. But pretty much everyone else can use a virtual office address on a business opening form.

The advantages of using a virtual office address instead of renting office space include the following:

Your own upscale virtual address, located in Japan.

• A business address you can use for company registration—at the most competitive price in Japan.

• At your request, physical mail is opened and OCR-scanned.

• Everything is stored in the cloud for easy access and forwarding to the key players in your team.

• With 1-click, request a translated summary of any letter or bills paid on your behalf. 

• Fully bilingual digital mailroom customer support to ease language concerns.

• If you are working from home, you can create a professional impression by having a business address.

• No more hiding from or dreading Japanese-language mail. 

What to know about becoming a sole proprietor and obtaining a work visa in Japan

Unlike the business management visa, which requires starting a company and a capital investment of at least 5 million yen, the technical, humanities, and international services visa does not have such investment requirements. This reduces the financial burden for individuals seeking work visas that will accommodate sole proprietorship.

To meet the requirements for obtaining a work visa as a sole proprietor, certain criteria must be fulfilled, such as demonstrating a stable income source and securing long-term contracts with companies.

For foreign nationals seeking to operate a business without limitations in Japan, specific residency statuses are essential, such as the following:

1. permanent residents,

2. spouses of Japanese nationals,

3. spouses of permanent residents,

4. and specific visas like the business management visa and specialized skills visas.

In some cases, you can apply for a self-sponsored visa with permission to engage in other activities to be a sole proprietor in Japan.

While there have been positive changes in making it easier for foreigners to start a sole proprietorship in Japan, visa-related barriers still exist for some individuals. It is crucial for foreign entrepreneurs to ensure they have the appropriate visa status or seek professional guidance to navigate the complexities of company registration and visa applications.

Frequently asked questions

What is a sole proprietorship in Japan?

Sole proprietorship in Japan is referred to as kojin jigyo (個人事業). Essentially, sole proprietors in Japan are those doing business without the status of an incorporated entity.

How can I start a sole proprietorship in Japan?

To start a sole proprietorship in Japan, you must have legal residency status and then submit a Business Opening Notice to the tax office.

Do I need to be a Japanese citizen to start a sole proprietorship?

One does not need to be a Japanese citizen to start a sole proprietorship. However, one must have a valid visa that allows you to open a sole proprietorship in Japan.

What are the taxes for a sole proprietorship in Japan?

The income tax rates and deductions for different income ranges in Japan, including for sole proprietors, are as follows: For an income range of 1,000 yen to 1,949,000 yen, the tax rate is 5% with no deductions. From 1,950,000 yen to 3,299,000 yen, the tax rate increases to 10%, with a deduction of 97,500 yen. For those earning between 3,300,000 yen and 6,949,000 yen, the tax rate is 20%, with a deduction of 427,500 yen. In the range of 6,950,000 yen to 8,999,000 yen, the tax rate is 23%, accompanied by a deduction of 636,000 yen. A further increase in the tax rate to 33% applies to the income range of 9,000,000 yen to 17,999,000 yen, with a deduction of 1,536,000 yen. For earnings between 18,000,000 yen and 39,999,000 yen, the tax rate is 40%, and the deduction is 2,796,000 yen. Finally, for incomes of 40,000,000 yen and above, the tax rate is set at 45%, with a deduction of 4,796,000 yen.

What's the difference between a sole proprietorship and a KK (Kabushiki Kaisha) in Japan?

Sole proprietorships are operated by individuals while a KK is a joint-stock corporation with shareholders.

Can I convert my sole proprietorship into another type of business in Japan?

Converting a sole proprietorship into another type of business entity such as a KK or GK (Godo Kaisha) is possible. Keep in mind that the procedure may involve additional legal procedures and costs.

In closing

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