Advantages of Incorporating Your Sole Proprietorship in Japan

Hi, my name is Taisei Koshida, and I am a certified public accountant and licensed tax accountant in Japan.

I help foreign business owners navigate Japan’s tax system in English. If you find Japanese tax procedures or paperwork challenging, I can assist you with your accounting and tax filings.

If you are wondering whether incorporating your business in Japan is the right choice, this article explains the main advantages of incorporation for sole proprietors.

Your Salary Becomes a Deductible Business Expense

For sole proprietors, money you withdraw from your business is not a deductible business expense. In contrast, a corporation can generally deduct the president’s salary as a business expense.

Although the president’s salary is still subject to individual income tax, executive compensation also qualifies for Japan’s employment income deduction, which reduces taxable income. In addition, corporate tax rates are generally lower than Japan’s highest individual income tax rates.

For example, if your annual salary is ¥5,000,000, you are entitled to an employment income deduction under Japanese tax law. If your taxable income as a sole proprietor is around ¥8,000,000 or more, incorporating your business may result in meaningful tax savings.

Salaries Paid to Family Members Are More Flexible

Sole proprietors can deduct salaries paid to family members only if specific requirements under Japanese tax law are met. After incorporation, salaries paid to family members are generally deductible under more flexible rules, provided they are reasonable for the work performed.

You Can Deduct a Retirement Allowance

Sole proprietors cannot deduct a retirement allowance paid to themselves. However, a corporation can generally deduct a retirement allowance paid to its president, provided it is reasonable.

Retirement allowances also receive favorable tax treatment under Japanese tax law, making them an effective way to transfer profits from the company to the owner.

A Wider Range of Business Expenses Can Be Deducted

Compared with sole proprietorships, corporations can generally deduct a wider range of legitimate business expenses. These may include travel allowances, company housing for directors under certain conditions, and various employee welfare benefits.

Business Losses Can Be Carried Forward for Ten Years

Corporations can generally carry forward business losses for up to ten years (subject to the applicable tax rules), whereas sole proprietors can generally carry forward losses for only three years.

Our accounting and tax office has extensive experience assisting foreign business owners in Japan with accounting and tax matters.

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