Jp Incorporation

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

General reference only. This skill is general tax/accounting reference material for AI-assisted workflows. It has not been reviewed for any specific person's facts, documents, elections, deadlines, residency, filing status, or local procedures. Do not rely on it to file, pay, amend, or take a tax position without review by a qualified professional in the relevant jurisdiction.

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

Section 1 -- Quick Reference

Key Decision Thresholds

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

2.1 Sole Proprietor Tax Structure

Total formula: Income tax + reconstruction surtax + resident tax + enterprise tax + NHI + national pension

2.2 Corporate Tax Structure

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

2.3 Enterprise Tax Brackets (Corporate)

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

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

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

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

Verdict: Corporation saves ~JPY 360,000.

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

Verdict: Corporation saves ~JPY 760,000.

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

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

Section 4 -- Corporate Forms: KK vs GK

4.1 Comparison Table

4.2 Establishment Cost Breakdown

Kabushiki Kaisha (electronic articles):

Godo Kaisha (electronic articles):

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)

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).

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:

5.3 Optimal Compensation Targets

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:

Requirements: 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

6.2 Social Insurance Rates (2025)

6.3 Social Insurance Cap

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

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

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

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

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)

Prefectural/Municipal Tax Office

Pension Office (年金事務所)

Labor Insurance (only if hiring employees)

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:

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

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

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.

Source: OpenAccountants — open tax Guides for AI, reviewed by named CPAs/CAs/EAs. Quality: source-cited draft. For always-current figures and named-accountant backing, connect the OpenAccountants MCP server (openaccountants-mcp).