Choosing Between a Company and a Sole Proprietorship in Japan

If you’re considering creating a company in Japan, 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. It avoids the overhead of a company, and any income you make goes directly into your own bank account. With a sole proprietorship, you can still hire people, self-sponsor your own visa, and even those of others.

I initially ran TokyoDev as a sole proprietorship. It was a side project making a small amount of income, and so it didn’t seem worth the overhead of setting up a company for it. Even as it grew, and I took on some of Japan’s biggest companies, I continued as a sole proprietorship. It wasn’t until I was making significant revenue that I transitioned it to be a company instead.

Companies allow assets to exist independently of you

For TokyoDev, a major driver for switching from a company was that I wanted the business to be able to continue independently of me. For example, if I was to sell the business in the future, it would be much easier if all the assets were packaged up in a company, as they could be easily transferred.

I didn’t have any concrete plans about this, but when I sold Doorkeeper, it made me realize that if a business doesn’t eventually change hands it will die. Every time I signed a new contract for TokyoDev as an individual, I saw it’d be a little bit more painful to transition to a company in the future, so I decided to pull off the band-aid and do it.

Companies allow for shared ownership

Another reason for creating a company is if you want to share the ownership with others. This was the primary reason I established my first company, a development consultancy, with two partners. We wanted to be able to take on development consulting gigs as a group, as it would both allow us to do bigger projects, and also help spread the risk over us doing freelancing individually.

Companies limit liability

With Doorkeeper, an event registration platform I founded, we processed hundreds of millions of yen in payments on behalf of organizers. I would never want to do that as an individual, as if something major went wrong (for instance a hacker gained access to the system), there could be the possibility of huge financial liability. In the case of an individual, the liability I’d have would be unlimited, meaning if something went terribly wrong, it could bankrupt me personally. Companies limit this liability.

The tax benefits of a company are overstated

Accountants in Japan will often tell you that you should switch from a sole proprietorship to a company if you’re making at least ¥8 million per year, as you’ll pay less tax. While this may be true in some cases, when TokyoDev was making significantly more than that, I had an accountant simulate my different tax bills if I was to run the business as a sole proprietor versus as a company, and there wasn’t an obvious winner. This article is the best explanation of the tax tradeoffs of the two approaches that I’ve seen.

Conclusion

When starting a business, I’d default to a sole proprietorship, unless you have a strong reason to do otherwise. You can always convert a sole proprietorship to a company later. It is simpler to get started with, simpler to wrap, and simpler to run. Companies have their place, but aren’t always necessary.