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Japan Proprietorship

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159148
Sun 2007/04/15 18:50 JST
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Why is it that time seems to pass quickly the older one gets?
A philosopher called Paul Janet many moons ago came up with Janets Law which basically says that young folks feel that time passes slowly and old farts (like me) feel time passes quicker. The reason given is that a person of 10 years of age will experience 1 year as a tenth of their current life time. A person of 34 (me ^^;) will experience 1 year as a mere 1/34th of their life time.
Before I know it, time will come to an end for me and I want die in knowledge that I lived my life the way I wanted. For me, that means to work for myself building/achieving goals and aiming for destinations that I set for myself as opposed to working for others and achieving goals that they set for me.
I believe that one should always invest time in reflecting on what they want from life before its too late. The saying goes that "its never too late to start" but the fact is that we wont be as physically able when we are of an older age unless we can easily replace our body parts ala Ghost in the Shell.
This post will be of interest to folks who have a feeling that they want to work for themselves at one point in the future.

A step to starting your own business

No matter whether you are working for others or schooling, if you are making money on the side or intend to (no matter the amount) then I recommend that you set up something called a Sole Proprietorship. A proprietorship is a business entity which allows you to declare your expenses against your earnings as opposed to declaring just your earnings.

Lets say that you earn 100,000 USD per annum. Lets also presume you make 50,000 USD from advertising on your site/consulting services that you provide etc.
Usually, you would pay taxes on your total income of 150,000 USD. Getting the full amount of 150,000 USD taxed is not funny at all.
BUT! Lets say you had a proprietorship. When you declare your earnings, you will also declare your expenses. Lets say your expenses were 50,000 USD. The tax declaration that you make at the end of the fiscal year will be...

(100,000 USD (your annual salary) + 50,000 USD (money you make from the side)) - (50,000 USD (your expenses)) = 100,000 USD Taxable
The above means that you only need to pay taxes on your annual salary (100,000 USD).

Now lets go a bit more into detail. Lets presume you declare expenses of 70,000 USD...

(100,000 USD (your annual salary) + 50,000 USD (money you make from the side)) - (70,000 USD (your expenses)) = 80,000 USD Taxable
The above means that you need only pay taxes on 80,000 USD and will end up with you getting a tax refund. I have simplified this but thats the general idea.

What can you expense?

You can expense anything related to running your proprietorship. For example lets say that you use 75% of your apartment/house as your office - you can expense 75% of your monthly rent/mortgage. Your Internet/phone/mobile connection can be expensed under "communications". Your trip to Japan can be expensed under "business trips". If you are making money from running a figure site for example, then the figures are an essential part of your proprietorship which can be expensed.
If you buy a computer however, you can only expense 20% of it for the first year, another 20% the next year until a full 5 years are up (this percentage varies depending on where you live).

How to set up a proprietorship in Japan

Setting up a proprietorship is as easy as farting. Go to Japan's National Tax Agency site and download the PDF file you see on that page. Decide on a name for your proprietorship (in my case I called it Mirai) and fill in the nature of your business (web design/IT consulting etc). Also fill in your address and send it off to the tax office that represents your ward - you can find out which is your nearest on this list. Done. You can call up the tax office to see if they received your form (but you dont have to). You dont get anything sent back to you. You dont need any special tax IDs or anything either. All you have to do is use a different form when declaring your taxes at the end of the fiscal year.

Who runs proprietorships in Japan

Go to your nearest shotengai (shopping district) and look around - most of the small ramen, sushi, bakeries, dry cleaners etc will be proprietorships. Theres no reason for them to incorporate and they rarely do.

Proprietorships in your country

I only know how to set up one in Japan but dug around to find info for America, Singapore, Canada - a search for "sole proprietorships + your country name" should bring up results as this business entity seems to be globally recognized.

What you will learn

It took me ages to make the decision to set up a proprietorship (known as 個人事業(こじんじぎょう)in Japanese) as it just seemed like a pretty big step. The perception is that its too bothersome or another case of afraid-of-unknown-territory. There is really nothing to it...

1.Send form to declare that you are starting up a proprietorship.
2.Keep tidy records of your income and expense. Keep all receipts.
3.Use your tidy reports and receipts to make a Profit and Loss statement - hand it in with your declaration forms at the end of the fiscal year.
4.Depending on how much you declared (income vs expense), a tax return for 900,000 yen (for example) is deposited in your bank account 30 days after you send in your tax declaration.

As you can see - proprietorships are no brainers. Theres no reason not to do it and so many reasons *to* do it.
I learnt so much through my proprietorship in terms of issuing invoices, receipts, keeping good accounting records etc. You cant expense everything under the sun and each item has to be filled under a particular category - learning business accounting together with the other bits n pieces that go together with running my proprietorship has made the transition to incorporate my company an easy one.

If you read Rich Dad, Poor Dad then this should sound familiar as this was something the author suggested.

Saving tax

Now that you know about the huge tax benefits of owning a proprietorship, you can see that many set up proprietorships just to save tax. This however may only work for the first few years. Making a loss for the first few years of starting up a proprietorship is normal but when one continues to make a loss every year - a tax wo/man may knock on the door one day to ask questions.
If you have not done so already, you may want to read my reasons for starting up a proprietorship.

The next step

Those who want to go beyond working for others can incorporate themselves like I did. Leaving a comfortable job and-a-not-so-bad salary is a big risk. My personal recommendation is to secure a steady flow of side income/clients while you work for others.
While I do already have clients and that steady flow of income from online activities - incorporating and going it alone is still a big risk. Personally, I decided that I would take that risk to achieve my goals in life rather than sit at a well paid conformable job and forget about my life goals.

A well paid comfortable job is the worst kind of job to have for folks wanting to start their own business and I have met many during my AMZN/MSFT years. Their comfy status prevents them from doing anything to jeopardize their current situation as that would affect the safety layer in Maslow's triangle.

Anyway enough babbling for one day - next will be the long awaited Blog Monetization post ^^;
Nearly forgot to mention about the image in this post - not absolutely nothing to do with proprietorships but is a hint to the next feature that I'm launching in a few days - I'm really excited about it ^^. Its also to keep people awake after reading a long post like this ^^;

Tokyo · CEO Mirai Inc
http://www.dannychoo.com/profile

Director for Culture Japan. Creator of Mirai Suenaga. Member of the Japanese governments METI CIIC.
経済産業省クリエイティブ産業国際展開懇談会委員。
テレビ番組カルチャージャパンのディレクターと司会。
twitter.com/dannychoo
facebook.com/dannychoodotcom

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