Setting up a business in Japan as a freelancer or small business

There are no formal requirements to start a business in Japan, as long as it is permitted by your visa. You can simply start doing business.

The exception is regulated businesses, which require licenses. Examples include those related to food, alcohol, recruitment, finance, cosmetics, medicine, real estate, construction, and dealing in second hand products.

However, even if there are no formal requirements to start your business, there are tax advantages to registering it before starting.

Setup options

The two main legal structures for setting up a business in Japan are: sole proprietor (個人事業 · kojin jigyō) or company (会社 · kaisha).

Sole proprietor

A sole proprietorship means doing business in your own name, as an individual. Most freelancers and small businesses choose this option.

As a sole proprietor, you can do business immediately, without registration. But registration is a good idea, because you can apply for the blue return system, which offers several benefits that can reduce your taxes.

Company

The two most common forms of company are the gōdō kaisha (合同会社) and the kabushiki kaisha (株式会社).

A kabushiki kaisha is an ordinary company, that has shareholders and directors. It is the most commonly used form of company. It is similar to a coporation (US) or limited company (UK, Australia).

A gōdō kaisha is a simplified company, which only has "members", who both own and operate the company. It has some similarities to an LLC (US).

It is typical to start with a sole proprietorship, and then to switch to using a company only after business income approaches ¥10,000,000, due to tax treatment.

People like the idea of doing business through a company due to limitation of liability. But company formation in Japan is relatively onerous for new small businesses. For instance, even if a company makes no profit, it still needs to pay a minimum corporate residence tax of around ¥70,000 per year. No form of company offers pass-through taxation (the only business structure in Japan that has both limitation of liability and pass-through taxation is the LLP).

Companies are also complicated, expensive, and time-consuming to incorporate. They also don't work the same as western companies regarding distribution — director's salaries must be fixed at the start of the year (no ad-hoc bonuses).

Forming a company requires the services of a notary public. So if a company is needed, outsource the task to company formation professionals.

Registering as a sole proprietor

Registering is as simple as mailing one set of registration forms to your local tax office.

See this guide for filling in your registration forms: Tsunaga Local - How to Start Your Own Business in Japan as a Sole Proprietor

The guide includes the blue return registration form, which is sent at the same time.

Be sure to include the return envelope for the tax office, as well as the 2nd copy of the sole proprietor registration form. They will use these to send you back a receipt.

Operating your business

Once your registration forms are mailed, you can now operate your business. You can transact using cash or your personal bank account or credit card, or you can set up additional separate accounts for your business.

For businesses that receive payments from overseas in other currencies, "Wise Business" from wise.com is useful. You can also use their debit card for making payments. However, they do not have a full banking license in Japan, so they have limitations, such as not having a dedicated JPY account number, and having a maximum balance cap. So Wise isn't a good fit for businesses that need to receive money locally.

Each year you must file your tax return, including the "blue return" forms. You are required to keep track of all income and expenses, and keep all receipts. This task is not easy, so use local accounting software to help you. The software freee.co.jp is a good option. Their starter plan is enough, which costs ¥980 / month. This software also covers the non-business parts of your tax return, like salary income and dependents deductions.

Note that scanning and throwing away receipts isn't permitted by default in Japan. The physical copy of receipts and other tax related documents must be kept, typically for seven years. To store these electronically you need to use an approved third party service. However, freee.co.jp is one such service. If you upgrade to their standard ¥1,980 / month plan, they give you a function to scan receipts.

In principle, you can file your tax electronically. This qualifies you for a slightly higher blue return deduction. However, as of 2023, their e-tax system is still too complicated and difficult to use. There are also additional documents that you may need to include beyond what your accounting software can generate or support. One example is the tax residency questionaire form that foreigners may need to include ("Confirmation of the Type of Resident Status etc"). Therefore, it is easier to just print out the tax return, include all other documents required, and mail it.