jp-incorporation

Japan Incorporation (法人成り) -- Self-Employed Skill v1.0

Based on work by Kazuki Nagata (@kazukinagata), licensed under MIT. Adapted for the OpenAccountants format.

Section 1 -- Quick Reference

Quick Reference Table

Field	Value
Country	Japan (日本)
Topic	Sole proprietor → Corporation transition (法人成り)
Legislation	Companies Act (会社法), Corporate Tax Act (法人税法), Income Tax Act (所得税法), Consumption Tax Act (消費税法)
Tax Authority	National Tax Agency (国税庁 NTA), Legal Affairs Bureau (法務局)
Contributor	Open Accountants Community
Validated by	Pending -- requires sign-off by a Japanese 税理士 (Zeirishi)
Skill version	1.0
Tax year basis	2025 (令和7年)

Key Decision Thresholds

Key Decision Thresholds Table

Business Income	Recommendation
Under JPY 5,000,000	Stay as sole proprietor
JPY 6,000,000 -- 7,000,000	Sole proprietor slightly favorable; prepare for future incorporation
~JPY 8,000,000	Breakeven point -- evaluate with social insurance benefits
JPY 9,000,000 -- 10,000,000	Corporation slightly favorable
Over JPY 10,000,000	Corporation clearly favorable
Over JPY 15,000,000	Strong case for incorporation

Section 2 -- Tax Burden Comparison: Sole Proprietor vs Corporation

2.1 Sole Proprietor Tax Structure

Sole Proprietor Tax Structure Table

Tax	Rate/Rule	Legislation
Income tax (所得税)	Progressive 5%--45% on taxable income	Income Tax Act Art. 89
Reconstruction surtax (復興特別所得税)	Income tax × 2.1% (through 2037)	Reconstruction Finance Act Art. 13
Resident tax (住民税)	10% of taxable income + per-capita levy ~JPY 5,000	Local Tax Act
Enterprise tax (個人事業税)	3%--5% on income over JPY 2,900,000 (deduction)	Local Tax Act Art. 72-49-17
National health insurance (国民健康保険)	Income-based + per-capita; cap ~JPY 1,090,000/year (2025)	Per municipality
National pension (国民年金)	Flat JPY 17,510/month (JPY 210,120/year, 2025)	National Pension Act

• Total formula (sole proprietor) — Income tax + reconstruction surtax + resident tax + enterprise tax + NHI + national pension

2.2 Corporate Tax Structure

Corporate Tax Structure Table

Tax	Rate	Legislation
Corporate tax (法人税) -- income ≤ JPY 8M	15% (reduced rate for SMEs)	Corporate Tax Act Art. 66; Special Measures Art. 42-3-2
Corporate tax -- income > JPY 8M	23.2%	Corporate Tax Act Art. 66
Local corporate tax (地方法人税)	Corporate tax × 10.3%	Local Corporate Tax Act Art. 6
Corporate inhabitant tax (法人住民税) -- tax portion	Corporate tax × ~7%	Local Tax Act
Corporate inhabitant tax -- per-capita (均等割)	JPY 70,000/year minimum (capital ≤ JPY 10M, ≤ 50 employees)	Local Tax Act
Enterprise tax (法人事業税)	3.5%--7.0% (progressive by income bracket)	Local Tax Act Art. 72-24-7
Special enterprise tax (特別法人事業税)	Enterprise tax × 37%
Social insurance (健康保険 + 厚生年金)	~28--30% of officer compensation (split employer/employee)	Health Insurance Act; Employees' Pension Insurance Act

• Total formula (corporate) — Corporate taxes + officer's personal income tax/resident tax + social insurance (both halves)

2.3 Enterprise Tax Brackets (Corporate)

Enterprise Tax Brackets Table

Taxable Income	Rate	With surcharge
Up to JPY 4,000,000	3.5%	3.75%
JPY 4,000,001 -- 8,000,000	5.3%	5.665%
Over JPY 8,000,000	7.0%	7.48%

Section 3 -- Breakeven Simulations

Assumptions

• Sole proprietor: blue return (JPY 650,000 deduction), single, no dependents
• Corporation: capital JPY 1,000,000, single-person company, one officer
• Social insurance: Kyokai Kenpo (Tokyo), under 40 (no nursing care insurance)
• Officer compensation optimized to keep corporate profit under JPY 8,000,000
• Consumption tax excluded (same for both)

3.1 Business Income JPY 5,000,000 -- Sole Proprietor Wins

JPY 5,000,000 comparison table

	Sole Proprietor	Corporation (officer comp. JPY 4M)
Income/corporate tax + surtaxes	~JPY 620,000	~JPY 516,000
Social insurance	~JPY 610,000 (NHI + pension)	~JPY 1,200,000 (both halves)
Total burden	~JPY 1,230,000	~JPY 1,764,000

Verdict: Sole proprietor saves ~JPY 530,000. Social insurance costs overwhelm the corporate tax advantage.

3.2 Business Income JPY 8,000,000 -- Breakeven

JPY 8,000,000 comparison table

	Sole Proprietor	Corporation (officer comp. JPY 6M)
Income/corporate tax + surtaxes	~JPY 1,398,000	~JPY 870,000
Social insurance	~JPY 910,000	~JPY 1,500,000
Total burden	~JPY 2,308,000	~JPY 2,370,000

Verdict: Nearly equal. Factor in social insurance benefits (disability coverage, employer pension, sick pay) to tip the decision.

3.3 Business Income JPY 10,000,000 -- Corporation Wins

JPY 10,000,000 comparison table

	Sole Proprietor	Corporation (officer comp. JPY 7M)
Income/corporate tax + surtaxes	~JPY 2,188,000	~JPY 1,240,000
Social insurance	~JPY 1,110,000	~JPY 1,700,000
Total burden	~JPY 3,298,000	~JPY 2,940,000

Verdict: Corporation saves ~JPY 360,000.

3.4 Business Income JPY 15,000,000 -- Corporation Clearly Wins

JPY 15,000,000 comparison table

	Sole Proprietor	Corporation (officer comp. JPY 9M)
Income/corporate tax + surtaxes	~JPY 3,938,000	~JPY 2,250,000
Social insurance	~JPY 1,270,000	~JPY 2,200,000
Total burden	~JPY 5,208,000	~JPY 4,450,000

Verdict: Corporation saves ~JPY 760,000.

3.5 Business Income JPY 20,000,000+ -- Corporation Strongly Wins

JPY 20,000,000+ comparison table

	Sole Proprietor	Corporation (officer comp. JPY 10M)
Income/corporate tax + surtaxes	~JPY 5,518,000	~JPY 3,620,000
Social insurance	~JPY 1,270,000	~JPY 2,400,000
Total burden	~JPY 7,638,000	~JPY 6,020,000

Verdict: Corporation saves ~JPY 1,620,000.

Section 4 -- Corporate Forms: KK vs GK

4.1 Comparison Table

KK vs GK Comparison Table

Feature	Kabushiki Kaisha (株式会社/KK)	Godo Kaisha (合同会社/GK)
Legal basis	Companies Act Art. 25+	Companies Act Art. 575+
Establishment cost (electronic articles)	~JPY 200,000	~JPY 60,000
Establishment cost (paper articles)	~JPY 240,000	~JPY 100,000
Articles of incorporation notarization	Required (notary public)	Not required
Registration tax (minimum)	JPY 150,000	JPY 60,000
Social credibility	High	Moderate (less recognized in B2B)
Decision-making	Shareholders meeting + directors	Majority of members (flexible)
Financial statement disclosure	Required (official gazette, etc.)	Not required
Officer term	Up to 10 years (private company), re-registration required	No term limit
Profit distribution	Based on shareholding ratio	Freely determined by articles
IPO possibility	Yes	No
Transfer of interest	Share transfer (relatively easy)	Requires all members' consent

4.2 Establishment Cost Breakdown

Kabushiki Kaisha (electronic articles) Cost Table

Item	Amount
Notarization fee	JPY 30,000--50,000 (depends on capital amount)
Certified copy fee	~JPY 2,000
Registration tax	JPY 150,000 (or capital × 0.7%, whichever is higher)
Total	~JPY 182,000--202,000

Godo Kaisha (electronic articles) Cost Table

Item	Amount
Notarization fee	Not required
Registration tax	JPY 60,000 (or capital × 0.7%, whichever is higher)
Total	~JPY 60,000

Paper articles add JPY 40,000 in revenue stamps for both forms.

4.3 When to Choose Which

Choose KK when:

• B2B sales where counterparties conduct credit checks
• Future financing, capital raising, or IPO is planned
• Hiring multiple employees
• "Kabushiki Kaisha" brand recognition matters to customers

Choose GK when:

• Minimizing startup costs
• Solo or very small team (1--3 people)
• B2C business where corporate form is invisible to customers (IT, consulting)
• Faster decision-making and lower administrative overhead

Section 5 -- Officer Compensation Strategy (役員報酬)

5.1 Fixed Monthly Compensation Rule (定期同額給与)

• Fixed monthly compensation requirement — To deduct officer compensation as a corporate expense, it must be paid monthly in equal amounts. (Corporate Tax Act Art. 34, para. 1, item 1)

Fixed Monthly Compensation Rules Table

Rule	Detail
Amount must be equal each month	Set once at the start of the fiscal year
Change window	Within 3 months of fiscal year start (at shareholders' meeting)
Mid-year changes	Prohibited except for extraordinary reasons
Bonuses to officers	Not deductible unless pre-registered (事前確定届出給与)

5.2 Employment Income Deduction Advantage (給与所得控除)

This is the key advantage of incorporation. Sole proprietors only get the blue return deduction (max JPY 650,000), but officers get the employment income deduction:

Employment Income Deduction Table (2025)

Annual Compensation	Employment Income Deduction (2025)
Up to JPY 1,625,000	JPY 650,000 (minimum)
JPY 1,625,001 -- 1,800,000	Compensation × 40% − JPY 100,000
JPY 1,800,001 -- 3,600,000	Compensation × 30% + JPY 80,000
JPY 3,600,001 -- 6,600,000	Compensation × 20% + JPY 440,000
JPY 6,600,001 -- 8,500,000	Compensation × 10% + JPY 1,100,000
Over JPY 8,500,000	JPY 1,950,000 (cap)

5.3 Optimal Compensation Targets

Optimal Compensation Targets Table

Business Profit	Officer Compensation Target	Corporate Profit Target	Rationale
JPY 8,000,000	JPY 6,000,000	JPY 2,000,000	Keep personal tax at 20% bracket
JPY 10,000,000	JPY 7,000,000	JPY 3,000,000	Good balance of deduction and rate
JPY 12,000,000	JPY 8,000,000	JPY 4,000,000	Maximize deduction; corporate profit at 15% rate
JPY 15,000,000	JPY 9,000,000	JPY 6,000,000	Watch social insurance upper bounds
JPY 20,000,000	JPY 10,000,000	JPY 10,000,000	Retain profits in corporation
JPY 30,000,000	JPY 12,000,000	JPY 18,000,000	Significant corporate retention

Optimization principles:

1. Keep corporate profit ≤ JPY 8,000,000 for the 15% reduced rate
2. Maximize employment income deduction (peaks at JPY 1,950,000 for comp. over JPY 8,500,000)
3. Consider social insurance cap: pension tops out at standard monthly compensation JPY 650,000 (~JPY 7,800,000 annual)
4. Balance personal progressive tax rates against flat corporate rate

5.4 Family Income Splitting

A corporation can pay salaries to family members as employees or directors, achieving income splitting:

Family Income Splitting Scenario Table

Scenario	Effect
Sole proprietor: all JPY 12M to owner	Owner at ~23% marginal rate
Corporation: JPY 9M to owner + JPY 3M to spouse	Owner at ~20%, spouse at ~5%
Tax savings	~JPY 570,000/year

• Requirements for family income splitting — Family employees must have genuine work duties. Compensation must be reasonable for the role. No-work salary payments will be denied as a deductible expense.

Section 6 -- Social Insurance Comparison

6.1 Sole Proprietor vs Corporation

Sole Proprietor vs Corporation Social Insurance Table

Feature	Sole Proprietor (NHI + National Pension)	Corporation (Kyokai Kenpo + Employees' Pension)
Basis	Prior year income	Standard monthly compensation
Dependent coverage	None (each family member pays)	Yes (dependents covered at no extra cost)
Sick pay (傷病手当金)	None	2/3 of daily comp. for up to 18 months
Maternity pay (出産手当金)	None	2/3 of daily comp.
Pension benefit	Basic pension only (~JPY 810,000/year at full)	Basic + employees' pension (income-proportional)
Premium cap	NHI: ~JPY 1,090,000; pension: flat	Standard compensation table cap

6.2 Social Insurance Rates (2025)

Social Insurance Rates Table (2025)

Insurance	Rate	Burden
Health insurance (Kyokai Kenpo, national avg.)	~10.00%	Split 50/50 employer/employee
Nursing care (age 40--64)	1.59%	Split 50/50
Employees' pension (厚生年金)	18.3%	Split 50/50
Child-rearing contribution	0.36%	100% employer
Total (under 40)	~28.66%	~14.33% each
Total (40 and over)	~30.25%	~15.125% each

6.3 Social Insurance Cap

Social Insurance Cap Table

Insurance	Standard Monthly Comp. Cap	Annual Comp. Equivalent
Health insurance	JPY 1,390,000 (Grade 50)	~JPY 16,680,000
Employees' pension	JPY 650,000 (Grade 32)	~JPY 7,800,000

• Cap plateau note — Above the pension cap (~JPY 7,800,000 annual compensation), pension premiums stop increasing. Health insurance premiums stop at ~JPY 16,680,000.

Section 7 -- Consumption Tax Exemption Reset

7.1 The Two-Year Exemption

• Two-year exemption — A newly established corporation with capital under JPY 10,000,000 is generally exempt from consumption tax for the first two fiscal years. (Consumption Tax Act Art. 12-2)

Conditions:

1. Capital under JPY 10,000,000
2. First fiscal period: no base period exists → exempt
3. Second fiscal period: exempt IF specified-period taxable sales (or wages) ≤ JPY 10,000,000
4. Not a "specified newly established corporation" (特定新規設立法人)

7.2 Maximizing the Exemption Period

Maximizing Exemption Period Strategies Table

Strategy	Effect
Set capital below JPY 10,000,000 (e.g., JPY 9,990,000)	Qualifies for exemption
Make first fiscal period ≤ 7 months	Eliminates specified-period test for 2nd year
Delay qualified invoice registration	Preserves exemption (but may lose clients who need invoices)

Example: Establish on October 1 with March fiscal year-end → first period = 6 months → no specified period → second period also exempt → up to ~19 months exempt.

7.3 Invoice Registration Caution

• Invoice registration caution — If the sole proprietor was already a qualified invoice issuer: - The corporation needs its own new invoice registration - Registering makes the corporation taxable from the registration date, losing the exemption - The individual's registration does NOT automatically cancel -- submit a cancellation notice (適格請求書発行事業者の登録の取消しを求める届出書) - The 20% special measure (2割特例) may apply to the new corporation through periods ending September 2026

Section 8 -- Establishment Procedure

Step 1: Pre-establishment Decisions

Pre-establishment Decisions Table

Decision	Considerations
Corporate form	KK vs GK (see Section 4)
Trade name (商号)	Check for conflicts at Legal Affairs Bureau
Business purpose	List broadly in articles (include future activities)
Registered office	Home address or office
Capital amount	Under JPY 10,000,000 for CT exemption
Fiscal year-end	Avoid March (tax adviser busy season); optimize for CT exemption
Incorporators	Confirm contributing members
Seals (印鑑)	Representative seal, bank seal, square seal

Step 2: Draft and Authenticate Articles of Incorporation

KK: Create articles → notarize at public notary office (公証役場) GK: Create articles → no notarization required

Step 3: Capital Contribution

1. Transfer capital to the incorporator's personal bank account
2. Prepare a copy of the bankbook page showing the transfer
3. Create a certificate of capital contribution (払込証明書)

Step 4: Registration at Legal Affairs Bureau

Submit: registration application, articles, capital contribution proof, officer acceptance letters, seal registration form. Pay registration tax.

Processing time: typically 1--2 weeks. Obtain certificate of registered matters (登記事項証明書) and seal certificate (印鑑証明書) after completion.

Step 5: Post-Establishment Filings

Tax Office (税務署)

Tax Office Filings Table

Filing	Deadline	Notes
Corporate establishment notice (法人設立届出書)	Within 2 months of establishment	Attach articles + registration certificate
Blue return approval application (青色申告の承認申請書)	Within 3 months of establishment OR fiscal year end (whichever is earlier)	Highest priority -- missing this means white return
Payroll office opening notice (給与支払事務所等の開設届出書)	Within 1 month	Required if paying officer compensation
Special withholding payment approval (源泉所得税の納期の特例)	As soon as possible	Allows semi-annual withholding deposits (≤10 employees)
CT taxable business election (消費税課税事業者選択届出書)	By end of fiscal year	If registering for invoices
Qualified invoice registration (適格請求書発行事業者の登録申請書)	Any time	If clients require invoices

Prefectural/Municipal Tax Office

Prefectural/Municipal Tax Office Filings Table

Filing	Deadline
Corporate establishment notice (prefectural)	15 days to 2 months (varies by municipality)
Corporate establishment notice (municipal)	15 days to 2 months (Tokyo 23 wards: file with Tokyo Metropolitan)

Pension Office (年金事務所)

Pension Office Filings Table

Filing	Deadline	Notes
New workplace application (健康保険・厚生年金保険 新規適用届)	Within 5 days	Mandatory for all corporations
Insured person qualification (被保険者資格取得届)	Within 5 days	Officers are also covered
Dependent notification (被扶養者異動届)	Within 5 days	If there are dependents

Labor Insurance (only if hiring employees)

Labor Insurance Filings Table

Filing	Submit To	Deadline
Insurance relationship establishment (保険関係成立届)	Labor Standards Office	Within 10 days of hiring
Employment insurance workplace (雇用保険 適用事業所設置届)	Hello Work	Within 10 days of hiring
Employment insurance qualification (雇用保険 被保険者資格取得届)	Hello Work	By 10th of following month

Not required for single-person corporations with no employees.

Section 9 -- Closing the Sole Proprietorship

If not maintaining a dual structure, file these to close the sole proprietorship:

Closing Sole Proprietorship Filings Table

Filing	Submit To	Deadline
Business opening/closing notice (開業・廃業等届出書)	Tax office	Within 1 month of closure
Blue return cessation (青色申告の取りやめ届出書)	Tax office	By March 15 of following year
Business cessation notice (CT) (事業廃止届出書)	Tax office	Promptly
Invoice registration cancellation (適格請求書発行事業者の登録取消届出書)	Tax office	15 days before start of desired cancellation period
Payroll office closure (給与支払事務所等の廃止届出書)	Tax office	Within 1 month
Enterprise tax cessation (個人事業税の事業廃止届出書)	Prefectural tax office	Promptly

Important notes:

• File the final year's individual income tax return (確定申告) as usual
• Transfer inventory to the corporation at fair market value
• Transfer fixed assets at book value or fair market value (beware of below-market transfers)
• Settle all receivables/payables between individual and corporation
• Consider filing for estimated tax reduction (予定納税の減額申請)

Section 10 -- Micro Corporation + Sole Proprietorship ("Two-Sword" Strategy)

Overview

Maintain the sole proprietorship while also establishing a micro corporation (マイクロ法人). The corporation pays minimal officer compensation to access corporate social insurance at the lowest tier.

Structure

Micro Corporation:
  → Officer compensation: ~JPY 63,000/month (JPY 756,000/year)
  → Social insurance: enrolled at minimum tier
  → Annual social insurance (personal share): ~JPY 107,000

Sole Proprietorship (continued):
  → Business income filed via 確定申告
  → No NHI or national pension obligation (covered by corporate insurance)

Compared to sole proprietor only at JPY 10,000,000 income:
  NHI + national pension: ~JPY 1,100,000/year
  Micro corp social insurance (both shares): ~JPY 210,000/year
  Potential savings: ~JPY 890,000/year

Risk Factors

Risk Factors Table

Risk	Description
Tax denial	If the corporation has no real business activity, it may be treated as a paper company
Same business split	Splitting the same client work between personal and corporate is high-risk for denial
Zero revenue corporation	A corporation existing solely for social insurance access may be challenged
Audit exposure	Cannot explain a reasonable business separation

Acceptable examples: Personal = freelance engineering (main); Corporation = SaaS product development (separate business). Unacceptable: Both entities doing the same programming work for the same clients.

Section 11 -- Optimal Timing

Optimal Timing Table

Factor	Recommended Timing	Reason
Income tax optimization	Mid-year	Split income between individual (first half) and corporation
Consumption tax reset	Before becoming a taxable business	Maximize exemption period
Accounting simplicity	January 1	Clean separation of individual fiscal year and corporate fiscal year
Client relationships	Start of quarter	Smoother invoice/contract transition
Fiscal year-end choice	Avoid March	Tax advisers are busiest in March; consider September or December

PROHIBITIONS

• NEVER present incorporation as universally beneficial -- at lower income levels, sole proprietorship is cheaper
• NEVER recommend specific officer compensation amounts as definitive -- individual circumstances vary
• NEVER ignore social insurance costs in the comparison -- they are often the largest single factor
• NEVER assume consumption tax exemption applies if the corporation registers for qualified invoices
• NEVER recommend the "two-sword" strategy without prominently disclosing tax denial risks
• NEVER omit the annual JPY 70,000+ corporate inhabitant tax (均等割) from cost projections -- it applies even when the corporation has no profit
• NEVER forget to mention tax adviser fees (~JPY 300,000--500,000/year) as a fixed cost of incorporation
• NEVER present simulations as definitive -- always label as estimated and direct to a 税理士 for confirmation

Disclaimer

This skill and its outputs are provided for informational and computational purposes only and do not constitute tax, legal, or financial advice. Open Accountants and its contributors accept no liability for any errors, omissions, or outcomes arising from the use of this skill.

Incorporation involves tax, legal, and social insurance considerations that vary significantly based on individual circumstances. All decisions must be reviewed and confirmed by qualified professionals (税理士 for tax, 司法書士 for company registration, 社会保険労務士 for social insurance) before acting upon.

Information is based on the 2025 tax year (令和7年分) tax system. Tax laws, social insurance rates, and registration fees change annually.

The most up-to-date, verified version of this skill is maintained at openaccountants.com. Log in to access the latest version, request a professional review from a licensed accountant, and track updates as tax law changes.

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