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Incorporating in Japan: Avoid These 5 Common Pitfalls

The decisions you make when incorporating in Japan can cost you big time (and we mean BIG)

Quick! Before you move too fast with incorporating in Japan…

When new businesses are incorporating in Japan, they often aren’t aware of the impact of how they fill out company registration forms. They typically complete the minimum information required for filing and decide to “figure out the rest, later”. 

Down the line? Problems. Obstacles. Hindrances. There’s a host of challenges that can arise based on how the forms are completed. And Japan is a country where the process of refiling is a long, drawn-out pain, so fixing the forms won’t happen quickly. Yikes.

Here’s an example: 

Let’s say you decide to register a branch. Legally, you’re not required to register an address when establishing a branch in Japan (for entities like KK and GK you must designate an address). So, the professionals you hire for incorporation go ahead with the filing process without registering an address for the branch office. 

But then, you decide to open a bank account and find out that you can’t open one without having a registered address. You’ll have to wait for ages to amend your branch registration documents with your registered address just so you can move forward with opening a bank account!

But wait…you’d think this wouldn’t happen if you hired professionals when incorporating in Japan, right? “They should have warned me!”

Well, incorporation professionals can help you establish your business, legally. But they might not be aware of how the way you fill out the forms can affect topics outside of their specialty – like banking requirements. And it doesn’t stop there.

You need someone to help you have a holistic understanding of all aspects of your business, not just incorporation (“someone” = us!).  

Here are 5 common pitfalls we see when you’re not guided beyond incorporation, during incorporation (and these can really, really hurt, so let’s save you a ton of time and money!): 

1. Not thinking through your capital amount

When you incorporate your business in Japan, you have to set a capital amount (and the number can be anything). 

Depending on your business, you might want to set it to a number lower than 10 million JPY. This will allow you to keep Japanese consumption tax as additional revenue for a period of time. 

Here’s what happened to a client: they made 500 million JPY in their first year of business. They collected 40 million JPY in consumption tax (8% at the time). Because they had set their initial capital to above 10 million JPY, they had to pay that consumption tax to the tax office. Had they set their initial capital to below 10 million JPY, they would have been able to keep it. That is JPY 40,000,000 (nearly USD 400,000) in EXTRA profit completely missed which is now in the hands of the Japan tax office! OUCH.

The capital amount also affects your ability to apply for visas. If you need to get your staff a visa, we recommend setting your initial capital to at least 5 million JPY. Here’s what happened to another client: they set their initial capital to 500,000 JPY.  When they went to apply for a visa for one of their employees, the application was rejected. 

Your capital amount can even affect leasing office space, contracting for phones, and working with certain vendors. So needless to say, you’ll want to think through your capital amount!

2. Not knowing what happens when you pick a Japan-based Director

Having a Japan-based Director has its benefits: the director can set up your bank account, sign visa applications, and make your business look as domestic as possible. 

But you might want to avoid appointing a Japan-based employee to be your Director. Why? Because compensation will need to be paid in fixed monthly increments in order to be a tax-deductible expense for the company. 

For example, a client appointed their lead sales employee as director of the company. The employee received quarterly bonus incentives totaling 20 million JPY over the course of the year. The entire 20 million JPY was not tax-deductible for the company, so the company had to pay an additional 7 million JPY in taxes. 

Plus, if your employee is using company housing, then only 50% of the housing amount can be recognized as tax-free compared to 90% for non-Directors.  Be careful when thinking of appointing a local Japanese as a Director!

3. Only registering one seal

When you’re incorporating in Japan, you’re required to register one company seal with the legal affairs bureau, which represents the company’s Power of Attorney. Later, you’ll also have to register a seal for the bank and social insurance offices. But by only having one seal, you can’t segregate duties between legal, banking, and HR functions. 

One of our clients only had one seal. Each time a contract needed to be stamped, the documents had to be sent to the one person who had the seal. Because the seal was also registered with the bank, the person with the seal went rogue and accessed company accounts without permission and the company lost millions.

4. Getting a banned address (oops!)

It’s pretty common nowadays for new businesses to use a virtual address in the registration process. But what you might not know is that many addresses like these are banned by Japanese banks. Banks won’t reveal which addresses are banned, nor will they tell you why you’ve been rejected, so you won’t know that your address was the culprit! 

We had a client that got rejection after rejection from multiple banks. When they started working with us, we told them to change their address. Problem solved.

5. Registering a Board of Directors when you don’t really need one

Most people think that it’s required to have a Board of Directors when you’re incorporating in Japan. But it’s actually not needed. By registering a Board of Directors, you’ll be required to draft quarterly Board of Directors meeting minutes and file an annual audit report. If you don’t have a business purpose for a Board of Directors, then you can save yourself time and energy by not registering this section. 

Want to avoid any kind of mistake?

One of the easiest ways you can avoid any kind of mistake is to have one provider like us. We’ll help walk you through a 360-degree view of your business so that your company gets registered the right way. 

Plus, we can also help with other aspects of your business set up, like visas, taxes, seal and address registration so you don’t have to look for additional help. Feel free to contact us here to learn more!

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