Sole proprietor vs company: income threshold, income structure, and social insurance/dependents

Chat consensus holds that once annual income exceeds roughly 9-10 million yen, a sole proprietor's total tax burden overtakes that of a company (kaisha) — above this level it is almost always more efficient to incorporate rather than stay a sole proprietor or private individual. This is an informal benchmark, not an official rule, and depends on expense structure and number of dependents; Yayoi offers an online calculator to compare the two. The underlying reason is structural: a sole proprietor's entire income after business expenses automatically becomes personal income, with no need to set a specific salary, whereas a KK or GK owner must formally declare a director's salary (役員報酬); part of the company's funds stays on the corporate account as a buffer and as the base for calculating corporate tax. A company can close a loss-making year and carry the loss forward to future periods; the mechanism works differently for a sole proprietor (see the record on 損益通算 loss offsetting and loss carryforward). Social insurance also differs: an employee's pension and health insurance (社会保険) at a company is usually cheaper than a sole proprietor's national health insurance and pension (国民健康保険/国民年金), because the company co-funds part of the contribution. A common optimization is for the owner (and a spouse formally hired as a second employee) to set a minimal official salary, which minimizes 社会保険 contributions while living expenses are covered from personal savings; spending company money directly on personal needs without proper documentation is illegal. Dependent allowances add another gap: a spouse or child is exempted from separate insurance if their annual income is below about 1,200,000 yen, but sole proprietors have no equivalent dependent allowance. In the annual year-end adjustment done by an employer (年末調整, December), a dependent is listed together with their annual income; if that income exceeds 1.2 million yen, the company will not register them for its insurance. Source: https://www.yayoi-kk.co.jp/kigyo/oyakudachi/simulation/ — Yayoi's calculator comparing the tax burden of a sole proprietor versus a company..