Sole proprietorship vs. corporation
When establishing a business, there are advantages and disadvantages to starting a business as an individual or as a corporation, as shown below.
Please consider the advantages and disadvantages of each method of establishing a business.
Our firm has a team of administrative scriveners, tax accountants, attorneys, and certified public accountants, so we can provide comprehensive advice not only on the initial application for incorporation but also on tax affairs and legal matters after incorporation.
Establishing a business as a sole proprietorship
| Advantages | (1) Low cost (2) Simple procedures (just submit a notification of business opening to the tax office) |
|---|---|
| Disadvantages | (1) Inability to obtain external credit (2) Often unable to borrow from city banks If personal funds are available, it does not seem to affect the screening process much. (3) Difficulty in renting an office. (4) Limitations on certain transactions such as not being able to open a store in an online shopping mall |
Establishing a business as a corporation
| Advantages | (1) External credit can be obtained. (2) Taxes are lower for companies above a certain size. (3) In some cases, no consumption tax is charged for the first two fiscal years after establishment. (4) Smooth business continuity and succession |
|---|---|
| Disadvantages | (1) Costly to establish and maintain (2) Procedures are complicated |
Currently, due to the Act on Prevention of Transfer of Criminal Proceeds and other regulations, please note that in order to open a bank account for a newly established corporation after registration, the bank will require the submission of an office lease agreement to investigate the actual business status of the corporation and will require a considerable amount of time for examination. Please take this into consideration when deciding schedules and other details.
Types and characteristics of corporations
In Japan, there are generally two types of corporations: a “stock company” and a “limited liability company.”
There are advantages and disadvantages as shown below.
Please consider the advantages and disadvantages of each type of company.
Stock company
| Advantages | (1) High level of external trust (2) Because of the high level of recognition, it is usually highly unlikely that transactions will be restricted |
|---|---|
| Disadvantages | (1) Cost of establishment is higher than that of a limited liability company. (2) Complicated organizational design and operation such as a general meeting of shareholders and a board of directors. Our firm can assist you in establishing a stock company at almost the same cost as a limited liability company. |
Limited liability company
| Advantages | (1) Cost of establishment is lower than that of a stock company. (2) Simple organizational design and operation such as general meeting of shareholders and board of directors (3) Simplified establishment procedures (Articles of Incorporation can also be simplified) (4) Possible to flexibly design the distribution of profits, etc. (5) Advantageous for U.S. tax purposes (this is the reason why many U.S. headquartered foreign companies in Japan are limited liability companies) |
|---|---|
| Disadvantages | (1) Compared to a stock company, it is less recognized and therefore has less external credibility (2) If the other party wishes to do business with a stock company, certain transactions will be restricted A limited liability company is a system modeled after the LLC in the U.S. but the members are not taxed (pass-through taxation) as in a U.S. LLC, but are taxed as a corporation. (3) Because the history of the limited liability company system is still short, the practice has not been established yet |
Creating a corporation
Stock company
- Establishment costs
(a) Certification of Articles of Incorporation, etc.: Revenue stamp 40,000 yen + Certification fee 50,000 yen + Issuance fee about 2,000 yen
(b) Registration and license tax: minimum 150,000 yen (or 0.7% of the capital, whichever is greater)
(c) Fee for issuance of certified copy of registration: 600 yen (per copy)
(d) Professional fee: usually 50,000 yen
A discount is available for those who conclude an advisory contract with us
(e) Total of (a) to (d): approximately 300,000 yen
Additionally, you will need to pay for a seal, etc.
(However, since 2021, some documents no longer require a seal, and electronic certification has been introduced.)” - Preparation for Incorporation
(a) Decide on head office location (address for registration).
* If the address is an apartment building where you live, you will need to obtain permission from the property owner
(b) Decide on the company name.
* Check to make sure that there is no similar company in the same city or town.
(c) Determine the purpose of the business.
* To avoid violating the law, confirm in advance whether the business requires a license or approval
(d) Determine the amount of capital.
1 yen or more is possible, but it should be determined in consideration of tax affairs, business law, and external credibility - Organizational Design
In the simplest form, there is one director.
However, in cases where there are family members who are candidates for the position of director, the company may be able to take advantage of certain tax and corporate law benefits by devising an organizational design. - Preparation of Articles of Incorporation
Enter the decisions made in (2) “Preparation for Incorporation” and (3) “Organizational Design” into the Articles of Incorporation.
It is important to include as much information as possible in the Articles of Incorporation and to reduce the number of other registration forms - Certification of Articles of Incorporation
Bring the Articles of Incorporation prepared in (4) Preparation of Articles of Incorporation above to a notary public for certification.
(Since 2021, stock companies have been able to apply online or at the same time as applying for registration in (6).) - Application for Registration of Incorporation
Apply for registration together with the articles of incorporation and other documents certified in (5).
Since there is a personal seal and a corporate seal to be registered, be careful when affixing your seal - Completion of Registration
Registration will be completed in about one week after the application in (6) above. - Creation of a Seal Card
For the representative seal of the corporation, a registered seal certificate can be obtained with the card.
(However, it has been possible to submit seals online since 2021.)
Limited liability company
- Establishment costs
(a) Articles of Incorporation, etc.: Revenue stamp 40,000 yen + issuance fee of about 2,000 yen
In the case of a limited liability company, no Certification fee is required.
(b) Registration and license tax: 60,000 yen
Compared to the case of a stock company, it is 90,000 yen less
(c) Fee for issuance of certified copy of registration : 600 yen (per copy)
(d) Professional fee: usually 50,000 yen
A discount is available for those who conclude an advisory contract with us.
(e) Total of (a) to (d): approximately 160,000 yen
Additionally, you will need to pay for a seal. etc.
(However, since 2021, it has been possible to submit seals online.) - Same as “stock company” above.
- Organizational Design
In the simplest form, there is one representative member who executes the business.
Since there is no need to hold a general meeting of shareholders as in a stock company, organizational design can be simpler than that of a stock company. - Preparation of Articles of Incorporation
Enter the decisions made in (2) “Preparation for Incorporation” and (3) “Organizational Design” into the Articles of Incorporation. - Certification of Articles of Incorporation
Not required for a limited liability company. - Application for Registration of Incorporation
Apply for registration together with the articles of incorporation and other documents prepared and stamped in (4).
Since there is a personal seal and a corporate seal to be registered, be careful when affixing your seal - Completion of registration
Registration will be completed in about one week after the application in (6) above. - Creation of a seal card
For the representative seal of the corporation, a registered seal certificate can be obtained with the card.
(However, it has been possible to submit seals online since 2021.)
Notifications after establishment, etc.
To the tax office
- Notification of Corporation Establishment (application to report to the tax office that a corporation has been established)
- Notification of Establishment/Relocation/Closure of a Salary-Paying Office (application to report to the tax office that the corporation pays salaries, etc. and that withholding tax will be incurred)
- Application Form for Approval of Filing Blue Return (application for corporations to receive tax benefits)
* Be aware of the deadline for submission (three months after the date of incorporation or the day before the end of the first fiscal year of incorporation, whichever comes first).
→ Therefore, it is important to carefully consider the submission deadline for the fiscal year. - Application for Approval Made in Relation to the Special Provision for Due Dates for Withholding Income Tax (application to make payment of withholding tax twice a year)
- Application for Special Provision for Extension of the Due Date for Filing a Final Return Form (application to extend the due date for corporate tax returns by one month)
*An extension of the due date is also permitted for a limited liability company, but it differs slightly from a stock company, such as having no need to convene a general meeting of shareholders
To metropolitan tax office / municipal government
- Notification of Corporation Establishment (application to report to the metropolitan tax office / municipal government that a corporation has been established)
- Application for Special Provision for Extension of the Due Date for Filing a Final Return Form (application to extend the deadline for filing local tax returns by one month)
After establishing a business (borrowing, etc.)
In general, the following methods can be considered.
Regardless of the borrowing method used, a business plan is always required, not only for borrowing, but also for business expansion and tax purposes.
The important elements of a business plan are market analysis, feasibility, consistency, theoretical armor, and enthusiasm.
Our firm consists of partners with experience in venture companies listed on the Mothers section of the Tokyo Stock Exchange, and we assist in the preparation of business plans from the pre-startup stage.
Japan Finance Corporation (formerly National Life Finance Corporation)
| Advantages | (1) The threshold is not high (2) Branches nationwide (3) Offers multiple types of loans |
|---|---|
| Disadvantages | (1) Importance of formal audit and past performance (2) Difficult to borrow money for large capital investments |
Financing program (borrowing from private financial institutions + guarantee fees to the Credit Guarantee Association)
| Advantages | (1) Application can be made from each financial institution (2) Comparison of terms and conditions of multiple financial institutions possible (3) Using the Tokyo Metropolitan Government’s system, a discount on guarantee fees is available. |
|---|---|
| Disadvantages | (1) Existing relationship with financial institutions is necessary. (2) Difficult to borrow from financial institutions with no track record (3) Difficult to borrow large sums of money without collateral |
Grants
| Advantages | (1) No need to return the money (2) Numerous national and prefectural application centers are available |
|---|---|
| Disadvantages | (1) Competition and inspection are severe when there are many applications (2) The period of public offering is limited (the status of public offering must be researched from time to time) (3) Certain requirements such as reporting on the use of the grant are required |
Setting up a Japan branch
For business reasons or for strategic reasons, some foreign companies establish a Japanese branch of a foreign corporation (a corporation with its head office overseas) instead of a local Japanese corporation such as a stock company.
In the case of a Japanese branch, it is often treated in the same way as a local Japanese corporation for tax purposes, but there are some special systems and treatments, and it may be difficult to obtain information from the head office, so a certain amount of caution is required in managing the branch after its establishment.
Setting up an overseas corporation
To reduce the cost of establishing a corporation, some corporations are set up overseas, such as in the United States.
Recently, we have also seen cases where corporations are established in regions with lower corporate tax rates than Japan’s, especially in Asia, in an effort to save on taxes.
In the case of a foreign corporation, taxes are basically levied according to the tax laws of the foreign country. However, due to special systems and treatments such as tax treaties, transfer pricing, and tax haven taxation, if the corporation is deemed to be operating its business in Japan, it may be taxed in Japan. Therefore, care must be taken when simply transferring business overseas.
Our firm has multiple partners with experience in foreign accounting firms, so if you are planning to expand your business overseas in this way, please do not hesitate to contact us in advance.