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which is better, corporate or sole proprietor from the point of view of taxation

which is better, corporate or sole proprietor from the point of view of taxation

Tax for company and sole proprietor in Japan

When you start business in Japan, you will deliberate whether to manage your business by company or sole proprietor (Kojin Jigyo).

I will take up this family as sample.
Mr Husband
Ms wife
Their child Mr child :  16 years old.
Their child Ms child :  17 years old.

Annual Sales amount of his business is 30,000,000 yen
Expense to operate his business is 22,000,000 yen (Advertisement fee )
Mr Husband is a lawyer in Japan.

When Mr Husband’s business is going well, he  will consider whether to incorporate a company or not.
Because he knows the huge merit of managing business under the name of company, especially as for taxation.

As for employment income deduction (Kyuyo shotoku kojo 給与所得控除)

Income tax(tax for individual) or corporation tax (tax for company ) is calculated as below.

1 )Sales  -  Expense = Profit

2) Profit  × Tax rate =   Tax amount

In the case of corporate,  Mr Husband is presumed to be a representative director.

In the case of sole proprietor (Kojin jigyo), in order to make sales, he spends money to  advertise his business, rent his office . The amount is assumed to be 22,000,000 yen. So, his profit is 8,000,000 yen.

30 million yen – 22 million yen = 8 million yen

With 8 million yen, he will sustain his family.

In the case he incorporates a company and he receives salary from his company, the amount of his salary is assumed to be 8,000,000 yen.
With 8 million yen, he will sustain his family.

He spends some money to buy suits, shoes, learn necessary knowledge.
In the case of salaried employee (Kyuyo shotoku sha 給与所得者), he can not deduct this actual expense from his profit of 8,000,000 yen.

But, certain rate is enacted in law to presume his expense to calculate his income tax.
This is termed ” Kyuyo shotoku kojo = 給与所得控除 “.

(https://www.nta.go.jp/taxanswer/shotoku/1410.htm website of national tax agency )

In the case of 8,000,000 yen, employment income deduction will be

8,000,000 yen × 10%+1,200,000 yen = 2,000,000 yen (employment income deduction).

Now, I calculate tax amount of both cases.

Assumed Mr Husband incorporates a company and he receives all profit  from his company as salary, the amount of his salary is 8,000,000 yen.
So, profit of his company is 0 yen.
(Even if there is not profit in his company, the company needs to pay tax of 70,000 yen per a year)

And his taxable income is 8,000,000 yen –  2,000,000 yen (employment income deduction) = 6,000,000 yen (his taxable income if he has a company).

Thus, by incorporating a company, he can reduce 2,000,000 yen from his taxable income ( 課税所得=-kazei shotoku)


When his taxable income ( without incorporation of company) is 8,000,000 yen, his income tax is

8,000,000 yen × 23% – 636,000 yen = 1,204,000 yen (income tax without a company).
(In the case of sole proprietor, there is not employment income deduction )

When he incorporates a company, his salary is 8,000,000 yen.

( 8,000,000 yen – 2,000,000 yen ) × 20% – 427,500 yen(deduction. please refer to below table) =772,500 yen (income tax in the case he incorporates a company)
——-  ①


1,204,000 yen (income tax in the case he does not incorporate a company) – 772,500 yen (income tax in the case he incorporates a company)= 431,500 yen (So, by incorporating a company of his law firm, he can reduce tax amount of 431,500 yen).

( Tax rate differs depending on taxable income. When the amount of taxable income becomes higher, tax rate becomes higher. ( Progressive taxation. )
( It is termed “Ruishin kazei seido =  累進課税制度 “)

You can find income tax rate at below table. “税率” means tax rate.

Please refer to website of National tax agency  https://www.nta.go.jp/taxanswer/shotoku/2260.htm)

 

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