Sole proprietorship versus corporation: how to compare taxes, social insurance and proceduresHow do you decide whether to run a shop as an individual or as a company?
When you start a business, whether to stay a sole proprietorship or become a corporation (a stock company, a limited liability company and so on) affects both how much money stays in your hands and the burden of procedures. Income from a sole proprietorship is subject to income tax (progressive, 5 to 45%) plus resident tax and individual business tax, while a corporation's profit is subject to corporation tax and related taxes. Becoming a corporation requires enrolment in social insurance (health insurance and employees' pension), and the officer's remuneration can use the employment income deduction. Which is better depends on the level of profit and the family situation, so comparing the numbers is the starting point.
Key points
- Income from a sole proprietorship is subject to income tax at seven bracket rates, progressive from 5% to 45% (National Tax Agency No. 2260)
- For a small or medium-sized corporation, corporation tax is 15% on the part of income up to 8 million yen a year and 23.2% on the part above that (National Tax Agency No. 5759; conditions apply to the special rate)
- Once you become a corporation, officers are also covered by health insurance and employees' pension, and the company and the individual each pay half of the premiums (sole proprietors generally use National Health Insurance and the National Pension)
- In general, a sole proprietorship tends to leave more in hand while profit is small, and a corporation tends to once profit grows, but the turning point shifts with family, location and social insurance circumstances
- A corporation pays local corporation tax, corporate resident tax and corporate business tax in addition to corporation tax, and pays the per-capita levy of corporate resident tax even in a loss
What to do in practice
- Set the expected annual profit in two ways: a conservative amount and an optimistic amount
- Use the free tool "Sole proprietorship or corporation: which is more advantageous?" to see how much remains in hand and a guide to the profit level at which the advantage switches
- Also compare the differences that do not show up in numbers (credibility, licenses, business succession, procedures and costs), and if you incorporate, check the timing of setup and the treatment of social insurance and consumption tax with a tax accountant or a labor and social security attorney
When you start a shop or a job, you can choose between a "sole proprietorship", done in your own name alone, and a "corporation", where you make a company. The taxes and insurance systems differ, so both the money left in your hands and how hard the procedures are will change. It is said that staying an individual is easier while the profit is small, and a company is often more advantageous once the profit grows, but this also changes with the number of people in your family and where you live. First, it is important to compare using numbers.
- ○Applies: The profit has grown to more than several million yen a year
- ○Applies: A business partner asked me to become a company
- ○Applies: I want to hire people and grow the business
- ×Does not apply: The profit is still small and I want to reduce the burden of procedures (staying an individual is fine too)
Points
- A sole proprietorship pays "income tax" on its profit, and the more the profit, the higher the rate (5% to 45%)
- A company pays "corporation tax" and other taxes on its profit. A small company pays a light 15% on the part up to 8 million yen a year
- Once you make a company, you also join the company's health insurance and pension. The company and you each pay half of the premiums
What the words mean
- Corporation
- An organization, like a company, that is recognized in law as a "person" separate from people
- Officer's remuneration
- The pay that the president of a company and others receive from the company
- Social insurance
- A system in which everyone pays premiums together to prepare for illness, injury and old age
- National Tax Agency: National Tax Agency, No. 2260 Income tax rates
- National Tax Agency: National Tax Agency, No. 5759 Corporation tax rates
This article summarizes and explains materials published by government agencies and is not advice on any individual case. Rules can change, so for actual procedures and decisions always check the latest original materials and consult professionals such as tax accountants or labor and social security attorneys. English, Simplified Chinese and Traditional Chinese versions are translations prepared from the Japanese articles for convenience. If anything differs, the Japanese text and the original source take precedence.