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.
A sole proprietorship in Japan can be a good choice for a business person who has just begun a new business venture. In this country, the sole proprietor is held entirely responsible for the venture. As a definition, a sole trader is a business form owned by a single individual doing business in his or her own name.
Moreover, a person can start a sole proprietorship in Japan depending on his or her visa status or the spouse’s status. Our company formation advisors can provide assistance related to starting such a business entity in Japan, as well as on starting a company of any kind in Japan. You can rely on us for professional company registration services in Japan.
Characteristics of a sole proprietorship in Japan
When beginning a new venture in Japan, generally it is better to start it as a sole proprietorship in order to further grow it.
That is because the incorporation of such a business entity in this country is simpler and less taxation is due until it reaches a certain profit. Our company registration consultants in Japan can provide further details on this subject.
A sole proprietorship in Japan has the following advantages:
- it is owned and managed by one person;
- the sole trader will own all the profits, losses, debts and assets of the company;
- it may utilize a commercial name;
- it does not separate the owner and the business.
Requirements for opening a sole proprietorship in Japan
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.
Who can operate as a sole trader in Japan?
There are only a few categories of individuals who can open sole proprietorships in Japan. Apart from Japanese citizens, these are:
- those married to a Japanese national, those who have long-term or permanent resident permits;
- those to have valid working holiday permits which have no restrictions attached;
- those who have dependent or student visas and those who have cultural visas and who can work maximum 28 hours per week;
- specialists and work permit holders who have signed contracts with Japanese companies.
Freelancers with labor permits are also allowed to offer their services as sole proprietors in Japan.
How is a sole proprietorship registered in Japan?
Operating as a sole trader in Japan is simpler than opening a new company. Even so, the sole tradermust 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.
What permits are needed to open a sole proprietor
Subject to the kind of entity which is about to be set up, one or more permits will be required. Because the most common entities opened by foreign entrepreneurs in Japan are language schools, restaurants, and import-export businesses, they require licenses such as:
- language school: a permit from the Ministry of Education is needed to open a private school, but there are no permit requirements for after-school classes;
- restaurant: a restaurant has to obtain a permit from the Local Public Health Center and one from the Public Safety Commission in case it will be served after 10 p.m. or offer alcoholic drinks;
- exporting and importing: this type of entity is not required to obtain a license, however, the business owner has to acquit the customs tariffs for Japan. Our Japan company formation specialists can provide further information on this matter;
- professional activities such as accounting and medical ones can also be completed as a sole trader in Japan.
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.
What are the obligations of sole proprietors 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.
We invite you to watch a video about the sole trader in Japan:
How are sole proprietorships taxed in Japan?
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:
- the income tax;
- the consumption tax;
- the enterprise tax;
- the residence tax;
- the real estate tax, if applicable.
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%. Below, our Japan company formation agents list some of the most important taxation brackets according to the 2021 national income tax rates:
- 5% (5.105% including surtax) for taxable income up to 1,950,000 JPY;
- 10% (10.21% including surtax) for taxable income between 1,950,001 and 3,300,000 JPY;
- 20%(20.42% including surtax) for taxable income between 3,300,001 and 6,950,000 JPY;
- 23% (23.483%) for income between 6,950,001 and 9,000,000 JPY;
- 33% (33.693%) for income between 9,000,001 and 18,000,000 JPY;
- 40% (40.84%) for income between 18,000,001 and 40,000,000 and 45% (45.045%) for income over this amount.
Other taxes for individuals are the local inhabitants tax (10% plus a surtax and a levy) and the capital gains tax with effective rates of 20.315% and 39.63% including the national surtax and the local inhabitants tax.
Permanent residents in Japan are taxed on their worldwide income while non-permanent ones only on their Japanese-source income and their foreign income paid in or remitted in Japan. Non-residents are also taxed on their Japanese-source income. For the purpose of taxation, an individual who has resided in the country for one year or more is a resident. A non-permanent resident is a foreign national who has spent five years or less in the country in the 10-year period preceding the tax assessment.
Foreign nationals, permanent or non-permanent residents can benefit from deductions and allowances and our team can give you more details on how you can use these for the purpose of the sole trader.
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.
Changing a sole trader into another business form in Japan
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.
This business form can be suitable for a particular category of entrepreneurs, namely those who are interested in starting a small business at first that can be managed by a single individual. It is particularly advantageous for teachers, for example, who can have more benefits when they start their own business and are able to derive income in their own name, compared to continuing to work for an employer.
When starting your own business as a foreign national in Japan is an option, the sole trader encompasses much of the initial needs for many types of entrepreneurs. If your spouse is a Japanese national, you will encounter no issues when starting a sole proprietorship in Japan, because your visa situation is settled.
Making the initial registrations for the sole trader and making sure that one complies with the subsequent tax rules are two of the most important issues concerning this business form, however, they are part of the issues to consider when opening any type of company in Japan.
If you need to know more about starting a sole proprietorship in Japan, we invite you to get in touch with our friendly company registration consultants in Japan.
Doing business in Japan
The sole trader is an attractive option for a small business, however, investors also have other options and foreign companies can also open a branch in Japan.
Understanding the local business culture is an essential step for any foreign national who wishes to do business in Japan and those who have already been living in the country, or those who have been engaged in business relationships with Japanese before, are at an advantage. First-time investors, as well as those who need comprehensive and reliable information on the local business environment, workforce and the different laws and regulations can reach out to our company formation agents in Japan for details. Working with our team is helpful as many foreign nationals will find that the language can pose problems, especially when the forms also have to be written and submitted to the authorities in Japanese.
The Ministry of Foreign Affairs of Japan encourages foreign investments, supports employment and innovation and works to promote the country’s attractiveness as am investment destination.
According to JETRO, a government-related organization for promoting mutual trade and investment between Japan and other countries, the following business sectors are the most attractive:
- ICT: the country ranks third in this market worldwide, with a share of 6.4% in the industry;
- Life science: in 2019, spending on prescription medicines was $87 billion, meaning that Japan is one of the top three countries, after China and the United States, in terms of medicine spending;
- Manufacturing: Japan is know for its innovations in robotics; in 2019, approximately 49,900 industrial robots were introduced on the market, the largest number after China.
Other business industries also present important potential, among which the energy sector (Japan has important potential for offshore wind power generation). Tourism is also developed, making Japan one of the top destinations in Asia (an industry which is likely to recover from the 2020 pandemic restrictions).
We offer tailored services and answers to foreign nationals, companies and individuals, who wish to know more about how to do business in Japan.
We specialize in company incorporation services in Japan for both local and foreign investors interested in doing business here no matter the chosen business form. You can also rely on us for other services related to starting a business in Japan, such as business consulting and accounting services.
Call us now at(+44)203-287 0408 to set up an appointment with our company formation agents in Tokyo, Japan. Alternatively you can incorporate your company without traveling to Japan.
As our client, you will benefit from the joint expertize of local and international consultants. Together we will be able to offer you the specialized help you require for your business start-up in Japan.