Intro to Starting a Company in Japan

By @jmichaels | 15 Apr 2013 | Community Small Business

Hi, my name's Jonathan Michaels, freelance patent translator based in Ibaraki. Well, technically I'm the CEO of Wordstream Translations, Inc., but it feels kinda pretentious to use that title given that it's just a two-person company. Anyway, that's what I'm going to be talking about today—I've been asked to make a guest post about starting a company in Japan, so here goes.

I'm not going to spend much time talking about how I acquired clients and otherwise set up my translation business itself, since there are lots of different possible businesses out there and the details of mine would only be interesting to some (digest version: after JET I got a translation/​interpretation master's at the Monterey Institute of International Studies, between years did an internship at the World Intellectual Property Organization, and since graduation have been doing contract work for them). I'll start with having a sole-proprietor business up and running and talk about incorporating and the tax reasons therefor.

By the way, by "sole-proprietor business," I mean just providing a product on your own without forming a company. Even without forming a company, you can do business under a name separate from your own (called a 屋号 yagō in Japanese, and mine was "Wordstream Translations" without the ", Inc."; there are even banks, such as the Japan Net Bank, that allow sole proprietors to open bank accounts under their business names) and put away tax-exempt savings using the Small-Scale Enterprise Mutual Aid System, which I highly recommend. Of course, being a sole proprietor doesn't provide you with a visa; I had the luxury of not having to worry about that thanks to a spouse visa.

However, as a self-employed American in Japan, I had to pay the U.S. self-employment tax (15.3%) in addition to the Japanese income tax (at least 20%), the Japanese residency tax (10%), and the health-insurance "tax" (over 8% where I'm living). With a back-of-the-envelope total marginal tax rate of over 50% (around 90% of my otherwise-disposable income), I didn't have a lot of motivation to work harder. So I decided to work smarter.

Even as a sole proprietor, you can pay a family member (as an 青色専従者 aoiro senjūsha) a salary to help out, which I did to cut down on my self-employment tax somewhat and also save a bit due to the progressive structure of the Japanese income tax. But when a U.S. CPA pointed out to me that starting a company would save me from having to pay the self-employment tax, I decided to make that plunge, and it's turned out to have lots of other tax benefits as well.

The number one piece of advice I have for anyone who wants to start a company (or even a non-incorporated business) in Japan is to find a good Japanese accountant. Since I'm still (or rather again) living in the area where I did JET, I was able to get an introduction from an old work contact, and the amount of money my accountant has saved me far surpasses what I've paid him. He in turn introduces me to other professionals from his network when the need arises. For example, when I told him I wanted to incorporate, he introduced me to a judicial/​administrative scrivener who guided us through decisions such as:

  • the name of the company, including whether to put the 株式会社 kabushiki gaisha before or after the company name (before is more common for younger companies)
  • the company's fiscal year (which I just set equal to the calendar year since that's what both Japanese and U.S. taxes use)
  • the number of initial shares of stock and the price of each, the product of which is the initial investment amount (which now can be as low as ¥1 but I went with ¥300,000 so that the company would have enough money to pay the startup costs—see below—without going into the red)
  • who will invest that money and thus own the shares—we made my wife the 100% owner since the abovementioned U.S. CPA told me that a U.S. citizen who owns 10% or more of a foreign company has to file a time-consuming annual information return
  • whether or not to set up restrictions on stock transfers (no, I think?)
  • who the board members would be (my wife and me with me as chairman)
  • the exact form of the company's address (our apartment address minus the building name so as not to make it unnecessarily obvious that it's a home address)
  • the official description of what the company will be doing (can be whatever you want; the scrivener dug up examples from companies in the same industry, and you can see ours under 事業内容 here)
  • and the day on which to incorporate the company (some people like picking auspicious dates; we just said "as soon as the paperwork is ready")

When all that was decided, the scrivener collected a total of ¥290,000 in notarial fees, her fees, and taxes (taken from the ¥300,000 initial investment ostensibly from my wife although originally from me), then went and did a bunch of stuff at various public offices, and told me when it was all done, about a week later.

So it took some time and money at the beginning, but it's all been worth it many times over, because in addition to getting rid of the U.S. self-employment tax (of course, that's not a free lunch: the purpose of the U.S. self-employment tax is basically to collect pension i.e. Social Security contributions, and the flip side of being employed by a Japanese company is that most Japanese companies are required to enter their employees into the 厚生年金 kōsei nenkin pension system, although rumor has it that the compliance rate among small companies is very low—not that I would recommend or condone non-compliance), we keep our other taxes low by keeping the monthly salary our company pays us as low as possible and finding other ways to get money from the company to us, such as having it pay us daily allowances (日当 nittō) for business trips in addition to the actual expenses incurred. I suppose, if I'd known what I know now and had the time and money when I first started my business in Japan (about two years before incorporating), I'd have incorporated earlier and saved myself a ton in taxes.

Finally, a note about bookkeeping. Before incorporating, I just kept track of all my revenue and business expenses in a spreadsheet and gave that to my Japanese accountant come tax time (doing my U.S. taxes myself in TurboTax), but since incorporating and starting to have to deal with things like annual 決算 kessan, paying my wife and myself monthly salaries, and withholding portions of those as income tax, I've found it to be a lot less hassle and cheaper (in terms of the accountant's fees) to keep track of all transactions using actual Japanese accounting software, namely Yayoi. When I bought my copy it came with a nice little intro-to-accounting book that I read on a train trip one day. Call me crazy, but I actually find it interesting.

Ok, I think I've gone on long enough and used up my parentheses quota for the month, so I'll end it here. Feel free to ask me questions in the comments, and I'll respond as soon as I get a chance.

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