There are various types of business forms a foreign investor can choose from when opening a company in Japan. Among these, the sole proprietorship is the simplest structure which can be employed by both local and foreign entrepreneurs as it can be established by one member.
Compared to any other type of company which can be established in Japan, the sole proprietorship will be subject to fewer requisites. Among these, the future business owner will need to consider having a trade name for the sole proprietorship – his or her family name is used, and it must be reserved and registered with the Companies Registrar. Then, the sole trader must have a legal address, however, the home address can be used, as the requirements are less stringent in this case. It should be noted that the address provided will be used by the authorities to send official notifications, which is why it is important to use an address which can be checked periodically.
Other than that, the business owner will only need to file an application form with the Companies Registrar and one with the tax authorities. Then, the licenses or approvals for operating the business must be obtained. The sole trader must also have a seal created.
Our Japanese company formation consultants can offer more information on the requirements related to starting a sole proprietorship as a foreign entrepreneur.
There are only a few categories of individuals who can open sole proprietorships in Japan. Apart from Japanese citizens, these are:
Freelancers with labor permits are also allowed to offer their services as sole proprietors in Japan.
Operating as a sole trader in Japan is simpler than opening a new company. Even so, the sole trader must still register with the Japanese Companies Registrar and obtain a tax number in order to be able to perform economic activities.
The sole trader can reserve a business name or can use his or her own name as a trading name. He or she will also need a valid address in Japan. For foreign citizens, the residential address will suffice.
In order to become a sole trader in Japan, an application must be filed with the Trade Register in Japan. The application can be filed online or sent through the post office.
The business owner will also need to set up a bank account and register for tax purposes.
Our Japan company formation consultants can help foreign investors who want to open sole proprietorships here.
It is important for the sole trader to enroll with professional associations in order to gain more visibility on the Japanese market. It is just as important to promote small businesses set up as sole proprietorships considering the large number of companies operating in Japan.
Being recognized as a legal business form by the Japanese Commercial Code, the sole trader will be subject to the same obligations as other types of companies. It must conclude contracts with all the clients it has and must fulfill his or her obligations based on those agreements. It is also possible for sole traders to enter into employment relations with Japanese companies as contractors.
From a taxation point of view, the sole proprietorship will need to register any amount of money entering or exiting the business. However, it is not required for the sole proprietor to hire an accountant. Foreign entrepreneurs who are not acquainted with the local tax laws can ask for the services of professionals in case they need to, as they will need to file tax returns according to the local legislation.
From a taxation point of view, a Japanese sole trader will be imposed the income tax and the sole proprietor tax, as this type of business is not considered a legal entity. The sole proprietorship will also be subject to the residential tax in Japan.
The sole trader will be subject to several taxes in Japan, among which:
These taxes are paid on a self-assessment basis and are imposed at progressive rates, based on the annual income reported with the tax authorities. The lowest rate is 5% and the highest is set at 45%. The other taxes to be paid are the municipal tax which is applied at a rate of 6%, the prefectural income tax which is levied at a flat rate of 4% and the enterprise tax which is levied at rates ranging between 3 and 5%.
It should be noted that foreign sole traders will be taxed based on the type of visa they operate under in Japan. This is why it is important to ask for professional accounting services.
It is also possible for foreign entrepreneurs doing business in Japan as sole proprietors to benefit from the country’s double taxation agreements in order to reduce the tax burden.
It is advisable to hire a local accountant to handle the finances and the relations with the tax authorities.
Our Japan company formation advisors can offer more information on the taxation requirements imposed on sole traders here.
An important aspect to consider is that the sole proprietor could be required to change the business form of his or venture if its profits increase. The sole trader can also change its form if the business will be expanded or have new partners. The simplest way is to convert the sole proprietorship into a limited liability company.
Changing the sole trader into another business form is quite simple even if it implies shutting down the sole proprietorship first. Nevertheless, all the assets of the sole trader can be acquired by the new business form.
Our company formation experts in Japan can guide foreigners who want to change the form of their businesses, including if this is a sole proprietorship.
The sole proprietorship can be set up as a small business, therefore the risks of bankruptcy are rather low. Once the business expands, the sole trader can be changed into a limited liability company very easy.