Explain the advantages and disadvantages when a sole proprietor is incorporated

1.1 What is a corporation?

Incorporation (corporation) This means that a sole proprietor becomes a corporation (a joint-stock company or a limited liability company). The procedure for establishing a business is the same for both private shop owners and freelance engineers.

1.2 Timing of incorporation of free engineers

Generally, when income exceeds 9 million yen, it is said that corporate tax is more profitable than income tax in terms of tax system. In particular, it seems that many freelancers start thinking about incorporation when sales exceed 10 million yen, which requires payment of 8% consumption tax.

The merits of incorporation can be broadly divided into “merits in terms of expense recording,” “merits in taxation,” and “merits in credit.”

2.1 Benefits of expense recording

Incorporation greatly expands the range of expenses that can be recorded as “expenses”.

■ The president’s salary can be expensed

You will be able to expense the salary of the president, that is, yourself, as executive compensation. In addition, the deduction of salary income can be deducted from the executive compensation, so a large tax-saving effect can be expected.

■ Make your family an employee and pay your salary

For example, by hiring a spouse as an employee, you will be able to expense that amount of salary. Should I raise the president’s compensation? You might think, but by reducing and diversifying the per capita amount, you can reduce the final income tax burden.

However, if there is no actual work situation, the tax office may deny you. You need to actually do some work, such as leaving the paperwork to you.

Even if you are a sole proprietor, you can diversify your income tax, but there are conditions such as “being a relative who makes a living” and “being engaged for 6 months or more”.

■ You can expense the retirement allowance of the president and employees

When the president or employee retires, the severance pay can be expensed and paid.

■ If the company is the contractor, the insurance premium can be fully expensed.

For sole proprietors, various types of insurance such as life insurance and long-term care insurance were only eligible for deduction up to 120,000 yen. On the other hand, if the company becomes a contractor, the insurance premium can be recorded as half or full expense, although there are some conditions.

■ Welfare expenses can be expensed

For example, if you have a family member as an employee, there are conditions such as “travel expenses per person is 100,000 yen or less”, but if you make a family trip a comfort trip, you can record expenses.

2.2 Benefits of tax burden

When business income, or business profit, exceeds a certain level, corporate tax is lower than personal income tax.

■ Corporate tax has a fixed tax rate

Since sole proprietors pay taxes based on the “income tax” that employs a progressive tax system, the burden of income tax increases as income increases. On the other hand, if incorporated, the tax will be paid based on the “corporate tax (corporate income tax)”, which is a uniform tax rate, and a tax-saving effect can be expected.

■ Exemption from payment of consumption tax for 2 years

If the sales exceed 10 million yen, even a sole proprietor must pay the consumption tax. The consumption tax will be exempted for two years after the corporation is established. Now that the consumption tax is 8%, the two-year consumption tax exemption is a big advantage.

2.3 Credit benefits

If you are a corporation, your creditworthiness will generally be significantly higher than that of a sole proprietor.

■ Increases trust from business partners (makes it easier to receive orders)

■ Increases credit from financial institutions (makes it easier to get loans)

Specifically, it is advantageous in these situations, but it may not have much effect on freelance engineers.

On the other hand, the disadvantages of incorporation are as follows.

3.1 Disadvantages of paperwork

■ Procedures and financial processing become complicated

Incorporation increases the number of officially submitted documents and greatly complicates paperwork. It may be necessary to ask a professional office staff or tax accountant to do all the work that you have done on your own. Knowledge of finance and accounting is also required more than a sole proprietor.

■ The registration procedure is complicated, and it costs more to ask an expert.

Registration requires some specialized knowledge and complicated procedures. Many of those who are going to be incorporated are busy, and the procedure for incorporation is often a burden. In that case, you will have to ask a judicial scrivener etc. to act for the procedure, but the fee may increase unexpectedly.

Depending on the content of the support, simple support such as document preparation costs tens of thousands of yen, and many offices require a request fee of about 300,000 yen for generous applications including various applications.

■ Complicated tax returns for the year when the sole proprietorship is closed

Although it is a one-time event, it is necessary to calculate back what was done in the final tax return for the following year, such as recording business tax expenses, so as not to forget it in the final tax return. If you forget this, you will have to process a more complicated request for rehabilitation.

3.2 Cost disadvantages

■ It costs to establish a corporation

When registering the establishment of a corporation, registration fees such as the articles of incorporation stamp fee and registration license tax will be incurred.

If you want to establish a joint-stock company, you need to pay about 240,000 yen, and if you are a limited liability company, you need to pay about 100,000 yen.

■ Social insurance is obligatory

Once incorporated, you will be obliged to take out social insurance, including employees. Generally, if the income is the same, the premium will be “health insurance association + welfare pension”> “national health insurance + national pension”. However, it is certain that the coverage is also “health insurance association + welfare pension”> “national health insurance + national pension”, so it can be considered as a merit. (Because sole proprietors do not want to enter the welfare pension)

■ You will not be able to record entertainment expenses unconditionally

If you are a sole proprietor, there is no limit to the amount that can be included in entertainment expenses. Corporations, on the other hand, may be capped by timed legislation. However, it seems that small companies are not subject to such strict restrictions.

3.3 Disadvantages of tax burden

■ There is a tax to pay even if it is in the red

Taxes paid by corporations include “corporate inhabitant tax” paid to local governments. Even if sales are in the red, the per capita rate of corporate inhabitant tax must be paid every year. This per capita rate is calculated uniformly from the capital, but at least about 70,000 yen per year is required.