Tax Reduction: When to Incorporate Your Business

This article was written by HeiKin Wong

Enjoying the fruits of a successful business as a sole proprietor in Japan can be great. What’s not so great is the tax you will have to turn over every year as the business grows bigger. This is when you might consider transitioning from a sole proprietor to a corporation. There are numerous benefits to incorporating your business in Japan like looking more credible to other Japanese companies or tax reduction. The concern many sole proprietors share is when they should transition from a sole proprietor to a corporation in Japan. In this article, we will provide you with some tips on deciding when to incorporate your business.

If you wish to know more about the techniques of reducing corporate and self-proprietor taxes, then visit our business owner resource page to see more articles on how you could pay fewer taxes this year.

Disclaimer: Please note the information provided on this website does not and is not intended to constitute legal advice. All the information, content, and materials available on this site are for general informational purposes only and you agree to not hold us liable for any damages incurred based on the following information.

Seeking Expert Advice from An Accountant?

Deciding when to transition from a sole proprietor to a corporation in Japan is no small feat. From weighing the pros and cons of incorporation to understanding the nuances of tax benefits, it’s a journey filled with critical decisions. While this guide offers insights, having an expert accountant by your side can make all the difference. They can provide tailored advice, run simulations, and ensure you’re making the most informed choice for your business. Dive into the world of Japanese accountancy and see how an expert can guide you in our Ultimate Guide to an Accountant in Japan.

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Pros and Cons of Incorporation

Pros of Incorporating

  1. Board member housing allowance – up to 50% of rent.
  2. Longer period for applying previous losses to future gains and thereby reducing taxes.
  3. Lower tax rates for revenue.
  4. Brings more credibility when dealing with business clients.
  5. Easier to borrow from Financial institution
  6. Having limited liability as a LLC (合同会社)

Cons of Incorporating

  1. Having to enroll employees in social insurance premiums.
  2. Having your finances audited by the government.
  3. Higher accountant costs (potentially 3x – 5x higher) due to auditing requirements.
  4. Pay around 70,000 yen more regardless of financial situation (more on this below)

If incorporating your business brings only benefit, then why wouldn’t every sole proprietor make the transition? There are, of course, downsides to incorporation. For one, your business will now be audited by tax authorities, which may bring up all sorts of unwanted trouble. Second, your accounting fee will see a significant jump. Depending on your business operation, the cost might go from around 60,000 – 120,000 yen yearly to around 360,000 yen a year. Finally, as a corporation even if the income and expenditure earned from the business are in the red, you are still obligated to pay around 70,000 yen a year as part of the “per capita rate of corporate inhabitant tax” (法人住民税の均等割).

Therefore, while reading all the benefits from incorporation listed below, it is crucial to keep these downslides in mind and make a balanced decision on whether to incorporate your business.

Incorporation Timing 1 : Revenue

The timing of when to incorporate based on net earnings is rather simple. As a sole proprietor, you will be subjected to paying consumption tax when your taxable revenue reaches 10 million Yen. Naturally, the timing to switch to a corporation would be this 10 million Yen mark. That does not mean you won’t have to pay consumption tax as a corporation. The benefit of switching to a corporation at the 10 million mark comes from the 2 year exemption period you will receive. Let’s look at an example below.

Say you have hit the 10 million sales revenue mark in 2022. Because of the 2 year exemption period, you won’t have to pay consumption tax for the years 2022 and 2023. You will, however, need to start paying consumption tax starting in 2024. Alternatively, you could incorporate your business in 2024 and receive another 2-year exemption from paying consumption tax. In total, you would have 4 years of consumption tax exemption even if you reach the 10 million Yen mark 4 years prior. To understand and better visualize how the tax exemption period works, consult this article (in Japanese) to get a better picture of this handy tax reduction tool.

Incorporation Timing 2 : Net Profit

As a sole proprietor, all of your profits are subjected to income tax. While the tax amount might seem insignificant when you just started your business, it will quickly put a dent in your wallet as your business revenue increases. This is because income tax in Japan is a progressive tax, which scales quite rapidly as your income increases. By contrast, corporate tax in Japan is a proportional tax, where business owners pay the same tax rate regardless of their profit (there are only two brackets for small to medium businesses). This is why once your business has reached a certain threshold, you might want to incorporate your business. 

While there isn’t the best cutoff on when you should incorporate your business, the consensus among tax accountants is to review your business status when the net profit reaches 5 million Yen. That being said, depending on other conditions like whether you have income outside of your business and income tax deduction, the optimal timing for your business to go through incorporation will change. Therefore, it is best to consult with a tax accountant before making the decision to incorporate. Below is a comparison on the difference between income tax and corporate tax: (translated income tax sheet and corporate tax sheet (in Japanese) from the National Tax Agency)

Tax Rate Comparison

Sole Proprietorship (income tax)

Corporate (Corporate tax) only applies to small and medium corporations*

Taxable income

Tax Rate

Deductible amount

Taxable income 

Tax Rate

1.95 million yen or less



8 million yen or less


Over 1.95 to 3.3 million yen or less



Over 3.30 to 6.95 million yen or less



Over 6.95 to 9 million yen or les



The amount that goes over 8 million yen


Over 9 million to 18 million yen or less



Over 18 million to 40 million yen or less



As you can see, you may need to seriously consider incorporating once you reach around 10 million yen in annual revenue and definitely when you reach over 18 million yen. There are many factors to consider, so we highly recommend working with a certified accountant to make the decision.

Did you know you can have your company pay up to 50% of your rent? This is another handy technique used by small to medium business owners. To learn this useful technique, check out our Board Member Company Housing Deduction article to see how you can further cut your costs for your business; To learn more about the calculation and comparison between income tax and corporate tax, consult this article (in Japanese). 

Japanese Taxes Are Too Difficult?

Check our accountant recommendations to find the right Japanese tax accountant for you!

Incorporate Timing 3 : Business Reputation

While foreign corporations in Japan may overlook whether you are a sole proprietor or incorporation, the same cannot be said for many Japanese businesses. Many Japanese businesses (especially medium to large businesses) are more willing to do business with corporations, which they believe to have better creditworthiness than sole proprietors. If your business has to deal with Japanese companies a lot, then incorporating your business can give you a boost if you do not have a reputation or history with your clients already. Ultimately, if you have a working relationship with your clients and a positive reputation in the industry, then this should have little influence on your decision to incorporate.

Another important point of merit for incorporating is when borrowing from a financial institution. In general, the examination is stricter for sole proprietors, and in many cases, a guarantor is required. Incorporation will increase creditworthiness and increase your financing options and advantages. Furthermore, it is more difficult for sole proprietors to attract quality human resources compared to a corporation in Japan. A final point of note is the amount of initial setup capital you have will have an effect on your creditworthiness. So make sure to gather up enough capital before making the transition to a company.

Having Limited Liability 

Another advantage of incorporation is having limited liability. Basically, it protects you from the debts and liability of your business. Other entities cannot personally pursue you for the money they lend to the company. To learn more about the Japanese version of a LLC (合同会社), consult this article (in Japanese) for more information.

Cautionary Point : Social Insurance Premiums

Unless you are employing more than 5 members in one of the listed industries (article in Japanese), you are under no obligation to join the social insurance premiums. However, once you have become a corporation you will be required to join the social insurance premiums depending on the number of employees you have regardless of industry. There are benefits of incorporating your business and joining the social insurance premiums. Below are some of the benefits you may get from incorporating and entering social insurance premiums:

First, the compensation provided by the social insurance premiums is better compared to the NHI (national health insurance) and national pension, which is usually one of the larger incentives for business owners to incorporate their business. Second, as a sole proprietor, you cannot apply for a Spousal or family-dependent tax deduction for family members who are involved in the business (learn more about them in this article in Japanese). However, you can still apply for the said tax deduction if you are a corporation. Third, the amount of pension given out to employees will increase; Finally, social insurance premiums are more attractive to potential employees. 

There is no easy cutoff point of when a business owner should incorporate and join the social insurance premiums. By incorporating your business you will need to bear the social insurance premiums for the employees, which depending on the intensity of labor your business requires, can cost more than simply staying as a sole proprietor. To take full advantage of the potential benefits of incorporating and joining social insurance premiums, please consult a tax accountant to see when it is best for you to transition your business.

Videos on when to incorporate your business

From 両学長 リベラルアーツ大学

From 社長の資産防衛チャンネル

Concluding Thoughts

The process of incorporation might be simple (consult this article in Japanese if you wish to learn more), but the complex cost and benefits calculation that goes into incorporation makes this a difficult decision to make for any sole proprietors. Usually, a simulation should be run before incorporating your company to see what kind of cost will increase/decrease. We cannot stress enough that the decision to incorporate should be made with the advice of a tax accountant to maximize the benefit from transitioning your business.

Having trouble developing your business in Japan? Then check out our article on the Capability Maturity Model and see how it can improve your business!


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