Creating a business in Japan: lessons from a 3 time entrepreneur

Photo of Paul McMahon

Paul McMahon

Founder of TokyoDev
Last updated May 29th, 2024.

This article gives an overview of running a business in Japan, both as an individual sole proprietorship (個人事業, kojinjigyo), and a company under the two major types of entities, Kabushiki Kaisha (株式会社) and Godo Gaisha (合同会社). It is based on my own experience of being an entrepreneur for more than 15 years in Japan, where I’ve run a business under all three of these entity types.

Companies vs sole proprietorships in Japan

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. 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 (for more details, see my article on converting a Japanese sole proprietorship to a company).

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.

Types of companies in Japan

There are two types of companies you can create in Japan: Godo-kaisha (GK) and Kabushiki-Kaisha (KK). The following table gives a quick overview of the differences between the two.

Kabushiki-Kaisha (KK) Godo-kaisha (GK)
Introduced 1873 2006
Ownership Clear distinction between ownership (shareholders) and managers (directors) Investors considered partners who will run the company
Incorporation fees ¥150,000 ¥60,000
Regulatory requirements Stricter Lower

I’ve ran both types of companies, and from a day-to-day perspective I didn’t notice any substantial difference. So personally I’d go with the KK by default, as it provides more flexibility. For instance, it made it easy for me to partially buy out my cofounder with Doorkeeper. It was also straightforward to later sell my shares to the buyer, who then had someone else actually run the company.

How do you get money out of the company?

After you create a company, it will hopefully start creating value, either in revenue from its customers, or something like intellectual property it creates. At some point, you’ll want to move some of that wealth from the company to you. Depending on how you do that has some pretty severe tax implications, so it’s important to understand the options.

Paying yourself a salary

As an employee of a company, you’re paid a salary: a fixed amount you receive at regular intervals. Directors can also receive a salary, but to ensure it is counted as an expense, you need to fix it within the first three months of your fiscal year.

If your goal is to maximize your personal wealth, then paying salary is one of the most tax efficient ways to move the wealth from the company to you as an individual. By successfully predicting what your income will be for a given fiscal year, you can effectively take all the profit for yourself as salary, ensuring the company itself isn’t profitable (and thus avoiding corporate income tax).

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 social 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 some way to claim it as a loss, but I’ve never investigated it).

Paying yourself a bonus

You can also declare a fixed bonus with the tax authority within the first three months of your fiscal year, and decide whether or not to pay it in an all or nothing thing at the end of the fiscal year. The main downside to this approach is that social insurance is calculated separately on income received from a normal and bonuses, and each of these have their own separate maximum contribution. So you’ll potentially save money if you only pay yourself a salary, and not a bonus.

Paying yourself dividends

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 31%. On top of this, you’ll still need to pay income tax (not capital gains) on any dividends. So from a tax perspective, you normally don’t want to issue dividends.

Deducting expenses

Japan seems fairly generous in what you can call company expenses. An accountant will be able to tell you what you can and can’t expense, but there are two major ones to consider.

First is your rent. If your company makes a rental contract for your residence, the company can count all the fees associated with making the contract as an expense (e.g. the real estate agent fee, the “key money”, etc), and can pay for 50% of your rent as an expense. There are some limits on what kind of accommodation they can provide, but my understanding is that any “normal” rental will be apply.

The other is a company car. As I understand it, as long as you have a reason why you need to sometimes use a car for work, you can purchase it for the company, and use it for personal purposes as well. This isn’t something I’ve investigated myself, but I had one accountant suggest I could buy a used Ferrari as a business expense, which I found pretty amusing. It felt like he was saying my business was doing good, but not that good.

Setting up a retirement allowance

Retirement allowance is a lump sum payment you receive from a company when you leave it. There’s certain conditions about the length of stay with a company, but it’s one way that’s incredibly tax advantaged to get money from the company to you. The biggest trade off is that it means you’re leaving cash in the company for long periods of time, where it likely isn’t growing like it would if you invest it as an individual.

It is theoretically possible to set up a brokerage account for your company and invest those retirement funds, but my accountant recommended against that as it introduces other complications. So to me, this seems like a good option for moving extra money that happens to be lying about in the company’s accounts when you move on from it, but otherwise probably isn’t as good as it looks at first glance.

Selling your company

Depending on the nature of your business, the value you’re building up in your company can be more than just the cash coming in. At some point, you may be looking to cash that out as well, like I did with Doorkeeper.

In this case, I already had a buyer lined up who I thought would be a good match. If you don’t have this, there are a number of marketplaces such as Manda, Tranbi, and Batonz, but I don’t have any personal experience with these.

The sale of Doorkeeper involved me selling all my shares in the company to a buyer. When I did this, I had to pay capital gains tax of 20.315%, which is substantially lower than what I would have had to pay if I had received it as income instead.

In my case, the sale went as smoothly as I could have hoped it would. After the buyer made me an offer, I contacted the law firm southgate, who specializes in small-medium scale M&A transactions like mine. Having them represent me was good for my peace of mind, as I wanted to be careful not to accidentally take on more liabilities with the sale.

What residency status do you need to create a company in Japan?

Probably the most frequently asked question, and the one that is hardest to answer. Perhaps an easier way of looking at it is with a given residency status, what kind of company can you create (and run).

Spouse of Japanese National / Permanent Residency

Anything goes. Nothing special to worry about here.

Business Manager

With this residency status, you are allowed to run any kind of business, and is the most commonly recommended option. The downside of this status are its requirements: a permanent office (not a coworking space or virtual office) and a ¥5,000,000 investment in the company (or employing two Japanese nationals). Anecdotally, I’ve heard immigration is stricter on this visa than other visa types.

Startup Visa

With the startup visa program, you can get a visa much like the business manager one, only with less requirements. However, there are certain other conditions, and they are only offered for certain municipalities.

Engineer/Specialist in Humanities/International Services

If you’re already on an Engineer/Specialist in Humanities/International Services visa, you can work as a sole proprietor and self-sponsor a renewal. I have first hand experience helping freelancers I’ve contracted with do this.

It’s also my understanding that there is nothing preventing you from incorporating a Japanese company on this visa.

Where things get less clear is what is permitted when you want to work for your own company on this status. If you ask immigration about this, they’ll tell you to get the Business Manager visa. And yet, I renewed an engineering visa while I was a partner of a Godo Gaisha (and didn’t hide this in my application). This company did have a “managing partner” who was on a spouse visa, so perhaps that was why it was permitted. It was also around 2010, and so perhaps things have changed since then.

Corporate bank accounts in Japan

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. However, they rejected me. Maybe I should have gone to the same branch as my personal account, as I heard that’s easier (as apparently they “know” you better). But it was on the other side of town, so I tried a couple of the other major banks, only to be rejected too.

I ended up going with PayPay Bank, as they accepted me with a simple online application. They give you an Visa debit card, which works well for company expenses. The main downsides of them are that they don’t support automatic bill payments, so you need to manually pay your social insurance every month, and they don’t accept SWIFT transfers, only domestic ones.

These downsides weren’t a big deal for Doorkeeper, so I ended up never opening another bank account.

When I incorporated TokyoDev, I looked into using Rakuten Bank, as their business accounts do support SWIFT transfers. However, their application form required you to enter a landline phone number, so I gave up, and just used PayPay Bank again.

Since then, I also opened an SBI Sumishin Net Bank account, as they provided SWIFT transfers, along with an easy application process. However, I found a couple of downsides to them:

  1. They require you to manually accept each incoming overseas payment. This is done by them sending a single email. If you miss that email, the transfer will be stuck in the pending state indefinitely.
  2. They require you to use an intermediary bank account when accepting overseas transfers. This was an issue for one US-based client of mine, as their bank account only supported a domestic (US) intermediate bank account.

Who can help you with running a company in Japan?

You’re probably overwhelmed by all of this. But there are people and organizations that can help you.

Accountants

When you’re running a company, an accountant will be the professional you’re going to have the closest relationship with. I suggest taking your time to find the right one for you. This is best done before you incorporate, as they can make suggestions for how to structure things, and also make other relevant introductions

With Doorkeeper, I initially looked for a bilingual accountant. However, I found that they typically charged twice (or more) what ones who only spoke Japanese did. So despite not having stellar Japanese abilities, I went with a Japanese speaking one. It seemed to work in the beginning, but whether it was the nature of the product I was offering, or my poor Japanese skills, I felt like the relationship wasn’t ideal.

When I incorporated TokyoDev, I had a better understanding of how taxes in Japan worked, and as the business was already doing well, also wasn’t so constrained financially. I talked with several firms, and ended up going with Hisa from J Bridge Partners, who was fully bilingual and could answer my questions well.

Judicial scriveners

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 I incorporated TokyoDev, I decided to hire a “judicial scrivener” to do everything for me. I went with SHIMAX Legal, who was recommended by my accountant. They offered bilingual services, and everything went smoothly.

Governmental initiatives

In recent years there have been a number of governmental initiatives attempting to foster innovation among international entrepreneurs within specific municipalities. Through these programs you can obtain things like support with establishing your company, special entrepreneur visas, and even loans. Here’s some programs I’ve heard of: Shibuya Startup Support, Tokyo One-Stop Business Establishment Center, Startup City Fukuoka, and Startup Ecosystem Kobe.

Online communities

Talking to other entrepreneurs is a great way to figure out how you should go about creating your company. HN Tokyo is a Slack community where most of the active members are coming from a background in tech, and many are entrepreneurs. Small Business Owners in Japan is a Twitter community that’s contains entrepreneurs of all sorts, including those running brick and mortar businesses. Business in Japan is a LinkedIn community with over 70,000 members, making it probably the biggest international online community about Japan.

Podcasts

There’s a couple of English language podcasts that provide business advice about Japan. Disrupting Japan tells the stories of founders of Japanese startups. Japan’s Venture Leaders also speaks with Japan-based founders. Scaling Japan provides Japan-specific advice about growing your business.

Thanks

Thanks to Lars Cosh-Ishii, Peter Jacobs, Timothy Langley, Mark McFarlane, Tim Romero, Jay Winder, Miho Tanaka, and Matthew Romaine for providing advice about starting up a business here in Japan.

More about the author

Photo of Paul McMahon

Paul McMahon

Founder of TokyoDev

Paul is a Canadian software developer who has been living in Japan since 2006. Since 2011 he’s been helping other developers start and grow their careers in Japan through TokyoDev.

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