Since coming to Japan, I've started two companies. Although creating a company isn't a walk in the park, I think it is easier than the general perception is. Part of the problem is the lack of English-language information about it. I hope by sharing my experiences I can help other people get started. This article is aimed at individuals already living in Japan, who want to create their own business, as opposed to companies looking to establish a Japanese subsidiary.
Do you need a company?
If you're considering creating a company, you probably have something you want to sell, be it your time in the form of services, or a product. However, that doesn't mean you need a company. Japan has the legal concept of sole proprietorship, under which you and your business are the same entity (though it is possible to use a different name for your business).
For people looking to run a business by themselves, sole proprietorship can be an attractive option. Because you're the same entity as your business, taxation is simpler, and can be advantageous over having a company. Other benefits include being able to expense a portion of your apartment rent (if you work out of it) and not needing to hire an accountant. With a sole proprietorship, you can still hire people, and self-sponsor your visa.
So why wouldn't you want to use a sole proprietorship? If you want to share ownership of a business, either with other partners or investors, you need a company. Another reason is that a because the business is not a separate entity, you have unlimited liability - so if your business go bankrupt, is litigated, or something else happens, you are personally liable for it.
Choosing a company type
There are two types of companies you can create in Japan: Godo-Kaisha and Kabushiki-Kaisha. The differences between them is something that is already widely covered in English. From a high level perspective, a Godo-Kaisha is a bit easier to establish and manage than a Kabushiki-Kaisha, but is unable to have outside investors. Which one is best really depends on your individual business.
How your company pays you
As a director of a company, Japanese law requires you to set your salary to fixed amount for a given financial year. Once you've fixed your salary, you aren't allowed to change it.
If your company makes profit, you are allowed to issue dividends to the owners of the company (which will just be you if you don't have any partners or investors). However, profit will be taxed at a rate of about 42%. On top of this, you'll still need to pay income tax normally on any dividends.
So from a tax perspective, you don't want your company to be profitable. When you're starting out, your own salary will probably be the main cost of business, so this leads to a tricky juggling act, where you need to guess how much your company will make in the next year, and set your salary accordingly.
Because your salary needs to stay the same, but especially when you're starting a business, cash flow isn't consistent. When you don't have enough money to pay your salary, you normally record paying yourself the full salary in the books, but instead of giving yourself cash, you'll record it as a debt from the company to you. Later, when the company has enough money, they'll repay you.
So why wouldn't you just set your salary to some amount so high you're guaranteed not to exceed it? Well, firstly directors are only allowed to be compensated a "reasonable amount". More importantly though, even though your company isn't giving you the cash, you still need to pay personal income tax and pension/health insurance, which are based on your salary regardless of this debt. This means if you set your salary too high, you'll end up paying tax on money you never get (maybe there is someway to claim it as a loss, but I've never investigated it).
What visa do you need to create a company in Japan?
Probably the most frequently asked question, and the one that it hardest to answer. Perhaps an easier way of looking at it is with a given visa, what kind of company can you create (and run).
Spouse Visa / Permanent Residency
Anything goes. Nothing special to worry about here.
With this visa, you are allowed to run any kind of business, and is the most commonly recommended option. The downside of this visa are its requirements: a permanent office (not a coworking space or virtual office) and a ¥5,000,000 investment in the company. Anecdotally, I've heard immigration is stricter on investor visa than other visa types.
This is the visa I had when creating my company, and renewed after creating it. My understanding is if the primary thing you do for the company is engineering related activities, such as developing software like I do, you're allowed to run a company using it. Right now, my company is just myself and my partner. I suppose the situation would be different if I had dozens of employees, but at that point, getting an investor visa wouldn't be an issue.
The most important thing when renewing your visa is that you can demonstrate your company can pay you a salary sufficient for you to support yourself. This is considered to be around ¥250,000 to ¥300,000 per month. The easiest way to do this is if you can actually show that your company has paid you a salary. This means that if you're already in Japan, it's probably easiest to start a company when you have at least a year or so left on your visa. Failing that, contracts with customers are the next option, and theoretically even if you just have a business plan, you can still get it renewed.
The paperwork itself for obtaining/renewing a visa isn't so complicated, so if you're doing something standard, you can do it yourself (such as renewing a spouse visa). However, because what I wanted to do fell a bit outside the normal area (renewing a engineering visa sponsored by a company I was director of), I decided to go through an immigration lawyer, which ended up costing about ¥80,000.
Addendum: Since I've had several people asking me if it is really possible to self sponsor an Engineering visa while running a company, I'll elaborate further.
When I started my first company, Mobalean, I had two other partners. When we created the company, I was on an engineering visa, along with one of my other partners, Michael. The other partner, Henri, had a spouse visa. The company was a godo-kaisha, and Michael and I were partners, whereas Henri was a "managing partner". On paper he was above us.
When we initially talked to immigration about visas, the person at the help desk said Michael and I needed investor visas. However, we talked to an immigration lawyer, and he said differently. After about a year of operations, we renewed my visa through the immigration lawyer, and I received a three year visa, so I guess it was fine. After the three year visa expired, I renewed it again, and I received a five-year engineering visa.
Since then, I've left Mobalean and started Doorkeeper, a kabushiki-kaisha where I'm a representative director (as is Michael, another fun fact, yes, a company can have two of them!). I started the company without any issue, and filed our change of position by mail with immigration, so if anything was wrong with this, I would have expected them to tell me that.
So I have never actually renewed my own engineering visa as a representative director, but am 95% sure there is no issue with doing so. If someone has done this, I'd love to hear about it.
On the other hand, I am 100% sure you can self-sponsor a sole-proprietorship as an Engineer. I know several people who have done this, and here is an article about it.
If you are looking to do your own company, and are wanting to go the Engineering visa route, I'd again suggest talking to an immigration lawyer.
Find an accountant
Before you file any paperwork, I'd suggest finding an accountant. As a company, you'll need to find one eventually anyways, but by finding one earlier, you can get advice on how to file the proper paperwork, or even have them do it for you (for a fee).
I initially looked for a bilingual accountant. However, I was not able to find a responsive, reasonably priced, bi-lingual accountant. So despite my poor Japanese skills, I ended up going with a Japanese speaking one who is affordable, responsive, and can explain things in a simple enough way that I understand his Japanese.
Filing paperwork to create a company
As an individual, you can file the paperwork necessary to create a company yourself. When I created my first company, one of my partners did this. In total, he probably ended up spending several days over a one month period getting all the paperwork in order.
When we created are second company, we went through Kazue Matsutomo, who we knew through Startup Weekend, and who specializes in incorporating companies. Through her, we were able to do everything in a couple of meetings, and benefited from the extra advice of someone experienced in creating companies.
Getting a bank account
To do business in Japan, you'll need a Japanese bank account. Unfortunately, since April 2013, it has become a lot harder for a new business to get a bank account - this isn't a problem just for international founders, Japanese have this problem as well. Apparently, Yakuza were getting people in debt to them to create a company, use the company to create a bank account, and then use the bank account for nefarious means. The solution to the problem: make it difficult for new businesses to create bank accounts.
After I had registered Doorkeeper Inc, the first thing I did was go to my local MUFJ (as I already have a bank account there, I thought it would be easiest), and try to open an account. It turned out to be one of the few times I've experience hostility from staff as a customer in Japan.
I already had the paperwork proving I had created the company, but in addition to that, she wanted a lease between my company and our office. I explained we were sharing an office with another company. Then she wanted a brochure describing my business. Well, we're a web service that doesn't have any of those, so I told her our website. When she went to our her site using her IE6 browser on Windows 2000, the CSS didn't render properly (I think her network was blocking CloudFront…). At that point, she seemed really suspicious of me, and told me I could apply, but I'd probably be rejected, and I should apply at other banks as well.
I tried a couple of the other major banks as well, and was rejected from them. Around that time, I heard about Japan Net Bank, who apparently only judges your business by your website, applied, and got accepted. They are an internet only bank, which for the most part doesn't cause any issues. The only problem I've had is it doesn't seem possible to set up automatic bill payments with them (mobile phones, pension payments, etc), so I need to go to the post office once a month to pay bills.
In addition, I heard some other tips to get a bank account. If you apply with one of the major banks where you have a personal account, create it at the branch where you created the account (apparently, they "know" you better). Another tip is to try using one of the non-major local banks.
National Pension / National Health Insurance
If you're a resident of Japan, law requires you to be enrolled in the National Pension and National Health Insurance programs. There are two ways of being registered: directly as an individual or through your company. In both cases, the amount you pay is based on your income, and as an individual, you pay about the same amount. However, by being registered through your company, your company does a co-payment of the same amount as you do as an individual.
So if you're company that only employs the directors, by going through the company, you have a significant cost increase over paying it as an individual, and thus can afford to pay yourself less salary. Technically, this is what you are supposed to do, but apparently if your company only employs the directors, it is a grey area, and you can get away with not going through the company. However, we're doing it through the company, as we assumed that was the only way to do it.
Get advice from others
Talking to other entrepreneurs is a great way to figure out how you should go about creating your company. Events are a great place to meet these people, and in particular I'd recommend the Hacker News Tokyo Meetup if you're looking to meet other international founders. Another good upcomming event is Startup Weekend Tokyo International, where you can experience what it is like to do a startup in a weekend. We also have a list of startup events on Doorkeeper.