For expatriates keen on starting a business in Japan, it’s essential to grasp the country’s distinct requirements. From visa classifications to taxation intricacies, this guide provides a step-by-step overview to ensure you’re well-prepared for your entrepreneurial journey in Japan. Whether you’re eyeing a tech startup or a community-based service, here are the essentials.
1. Check Your Startup is Legally Compliant
Before diving into the business endeavor, ensure that your business is fully compliant with Japanese law, because any breach might lead to losing your lawful status.
Ensure Your Visa Allows Owning a Business
If you possess any of the following visas, you’re good to go. Otherwise, consider switching to a business management visa:
- Permanent Resident
- Long-Term Resident
- Spouse or equivalent of a Japanese National
- Spouse or similar of a Permanent Resident
- Highly Skilled Professional (Category 1 a, b, or c) (Limited Scope)
- Highly Skilled Professional (Category 2)
Make Sure Your Business Doesn’t Need Special Licensing – or Obtain One
Ensure you’re not diving into a business that mandates licensing. Some ventures, especially those risking customer or employee safety, have stringent safety standards that its operator must comply. Operating without the necessary permissions or licenses is a no-go. This usually applies to industries related to consumables or services that involve direct physical interactions. Examples of such industries includes:
2. Decide on a Business Structure
Two main structures exist: Solo proprietorship (often called “ko-jin ji-gyo”) and Company.
Company: This involves setting up a firm where the company holds the business responsibility. You become an executive, drawing a salary. Realistically, this choice suits those residing in Japan or those having a resident co-rep. Both a Japanese bank account and a local company address are prerequisites. For insights into Japan’s real estate rental process, see “Finding Housing in Japan: An Expat’s Guide“. Companies are more suited for large-scale operations because of responsibilities such as covering employees’ health insurance and pensions, navigating intricate tax documentation, and adhering to stringent financial regulations. Moreover, publicly-listed companies must disclose financial results, leading to potential privacy concerns.
Solo proprietorship: Often referred to as self-employment or freelancing, it boasts straightforward processes. Here, you are the sole entity bearing all duties, from contracting to tax payments and hiring. Ideal for smaller ventures, for instance, businesses with under five employees aren’t obliged to cater for health insurance or pensions. Another advantage is the simple tax declaration process. On the flipside, its laxer financial oversight could lead to reduced social trust and challenges in securing loans.
So, which type of business should you choose? Unless you have a specific reason for choosing a company structure, my advice is to start as a solo proprietor. Typically, many opt for starting as solo prop until their profit hits 10 million yen.
Okay then, I want to know how to kick off a sole prop.
Alright! The procedure becomes more intricate for a company, so we’ll cover it in a separate article.
3. Filing Documents
You will need to submit several documents to start your business.
Notification of Business Commencement to Tax Office
Ensure you submit the Notification of Business Commencement (called “kai-gyo todoke“) to the appropriate tax office in Japan within a month of starting your business. You might later need a copy of this notification for things like grant applications, so it’s wise to retain one. If you’ve applied online, hold onto the receipt notification you receive. The key details include:
- Your name and DOB
- Tax domicile
- My Number (Japan’s version of a social security and tax number)
- Occupation
- Business start date
- Business name
- Business description
- Decision on using the blue return system (called “ao-iro shin-koku“)
- Status regarding consumption tax
- Number of salaried employees
The blue return system offers an attractive tax incentive. In return for maintaining meticulous account books, you get a tax cut. If you aim to trim down your tax bill, this system is worth a look. Online accounting systems allow for swift preparation of the necessary ledgers. Generally, these systems cost anywhere between 10,000 to 30,000 yen annually. For reference, I use the system named “Yayoi.” Its app is particularly handy. You can keep records for deposits, withdrawals, and even store receipts effortlessly on your smartphone.
If you’re a foreign national considering business in Japan, you might wonder about avoiding Japanese taxation. To put it simply, if you classify as a “non-permanent resident”, you won’t be taxed on income transacted outside of Japan. It’s crucial to note that the terms “permanent resident” and “non-permanent resident” pertain to tax classifications and not don’t directly corelate with visa statuses. For a deep dive, follow this link: https://www.nta.go.jp/english/taxes/individual/12006.htm.
Notification of Business Commencement to Local Government
You must also inform the local government about the commencement of your business. Local governments also levy taxes on businesses independently, so it’s necessary to notify them as well. Bear in mind that the exact naming and process can differ from one municipality to another.
Notifications to Social Insurance Bureaus
If you are planning to hire employees, notfication to public offices overseeing social insurance is mandatory. Employing even one mandates joining the labor insurance. Submissions go to the Labor Standards Inspection Office and Hello Work. With five or more full-timers, health insurance becomes obligatory. Documentation heads to the Pension Office. Seeking professional advice about labor? Consider a social insurance labor consultant (called “sha-ro shi“).
4. Bookkeeping and Tax Filing
Tax declarations align with the fiscal year, running from January 1st through December 31st. Once the year concludes, financial results should be reported between February 16th and March 15th of the ensuing year. Afterward, ensure the timely payment of the four listed taxes:
Income Tax: This is due no later than March 15th.
Consumption Tax: Payable by March 31st. Notably, businesses that have profits under 10 million yen and are tax-exempt are exempted from this payment.
Resident Tax: This is divided into four payments, specifically due in June, August, October, and the subsequent January.
Personal Business Tax: Settle this in August and November. If your profits don’t exceed 2.9 million yen, you’re not obligated to pay.
On a daily basis, it’s essential to keep and archive precise financial records. Whether you choose to update this weekly or monthly, ensure that all revenues and expenditures are recorded, always accompanied by their respective receipts. As a best practice, retain these records for a minimum of seven years. There are numerous savvy approaches to expense processing, so invest some time in learning these to optimize your finances. For example, if part of your home serves as an office, you can allocate a segment of the costs as business expenses. Several products including Yayoi are available on the market to help you gain insights on such tips and simplify bookkeeping — it’s worth exploring.
List of Things to Prepare Before Starting a Business
- Accounting Software: As explained above.
- Business Bank Account: It’s advisable to keep your business transactions separate from your personal finances. Additionally, when receiving payments from clients, an account in the name of your business tends to be more credible than one in an individual’s name.
- Business Cards: You can easily and affordably order them online.
- Website: Even a single-page site can make a difference; it’s good to have an online presence.
- Application for Social Insurance: If you decide to leave your company, you’ll transition from employer-provided insurance to a completely self-financed social insurance system. Your health insurance will be under the National Health Insurance, and the pension system will be the National Pension. Generally, the fees are higher in this system. However, you can choose to continue your employer-provided health insurance for up to two years.
Conclusion
As you set out on your entrepreneurial path in Japan, bear in mind that local rules and procedures might vary from your previous experiences. But with the right preparation and resources, you’ll be well-equipped to navigate these challenges. Whether it’s understanding tax nuances or setting up your business structure, this guide aims to equip you for success. Enjoy your entrepreneurial journey in Japan!