Doing business as freelance or with company?
It is possible to work as freelance (sole proprietor) in Japan. Even foreigners can work as individual, and also open company to the extent permitted by the immigration law and other laws and regulations.
Advantage of making company
- Social credibility
- More options for tax saving
- Social insurance
Some Japanese traditional companies don’t do business with individual freelances under their internal criteria. Also it is easier to hire people if it’s company, including sponsorship of visa of foreign employees. There are more options of finance.
Individual income tax rate is at most 45% based on progressive taxation, and resident tax rate is 10%. In addition, they need to pay social insurance cost based on their income. Company tax rate is lower than that of individuals who have much income. It is 20-30%.
Generally if the freelance has profit of more than 5,000,000 yen, tax rate is higher if they do business as freelance than doing business with company. Director’s salary can be expense of the company and can be deducted from its profit. And there are more ways to reduce profit, for example by using health insurance system.
Also if the sales of freelance is more than 10,000,000 yen, they are subject to the payment of consumption tax. If they open company, it is exempted for first 2 fiscal years. It is benefit of opening company as well.
If business situation is not so good, if it’s individual freelance, they can carry over deficit for 3 years. If it’s company, it can carry over deficit for 9 years. After these terms, the deficit can’t be offset against profit.
Social insurance can be advantage and disadvantage at the same time. But if income of freelance is very high, the social insurance cost is high also. Sometimes social insurance cost gets cheaper in that case.
Easily explaining, almost 30% of salary is social insurance cost of employees of company. It is born half and half by the employee and company. So company pays 15% insurance cost in addition to salary itself.
Disadvantage of making company
- Higher running cost
- More paperwork and procedures to do
Company needs to pay at least 70,000 yen as corporate resident tax, regardless of its business situation. If it hires accounting firm, it needs to pay accounting fee, also social insurance cost can be disadvantage.
Accounting fee totally depends on each firm. Fees of some of them are very cheap. But if you need bilingual service, normally it is higher than that applicable to Japanese domestic clients.