Application Timing and Business Continuity After Incorporating a Sole Proprietorship#

In Japan, it is a common progression for foreign entrepreneurs operating as a sole proprietorship (known as Kojin Jigyo) to eventually incorporate their business into a company, such as a Kabushiki Kaisha (KK) or Godo Kaisha (GK). This process is often referred to as “Hojin-nari” in Japanese business terminology.

While incorporation offers tax advantages and increased social credibility, it raises significant questions for foreign nationals holding a “Business Manager” visa. The primary concern is often: “How will the Immigration Services Agency evaluate the continuity of my business during a visa renewal or change of status application immediately after incorporation?”

This article provides an objective and detailed explanation of the appropriate application timing and the criteria used to evaluate business continuity in such scenarios.

Legal Separation vs. Practical Continuity#

To understand the immigration process, one must first recognize the legal premise: under Japanese law, a sole proprietorship and a corporation are two entirely distinct legal entities (legal personalities). Therefore, in principle, the track record of the sole proprietorship does not automatically transfer to the new corporation from a strictly legal standpoint.

However, in the practical application of immigration examinations, the authorities place significant emphasis on the “substantive identity of the business.” If the new corporation operates the same business activities, utilizes the same office space, maintains the same client base, and uses the same assets as the former sole proprietorship, the Immigration Bureau tends to evaluate this flexibly as a “continuation of business.”

The success of an application often hinges on the applicant’s ability to document and prove this “substantive continuity.”

When to Apply After Incorporation#

A frequently asked question is, “Should I wait until the first fiscal year is over and financial statements are ready before applying for my visa renewal?”

The conclusion is that it is not necessary to wait for the first fiscal year to end. Once the company registration is complete and necessary notifications to the tax office have been submitted, it is possible to apply for an Extension of Period of Stay or a Change of Status of Residence.

However, since a newly established corporation has not yet reached its first fiscal year-end, it naturally lacks corporate financial statements (Balance Sheet and Profit & Loss Statement). For existing companies, these documents are crucial for judging business stability. In the case of a new corporation resulting from Hojin-nari, a “Business Plan” plays a vital role in substituting for these missing financial statements.

Key Considerations for Document Submission#

For an application submitted immediately after incorporation, it is essential to combine two sets of documents:

1. Documents demonstrating the future of the new corporation:

   • A Business Plan covering at least the next one year (specifically focusing on income and expenditure projections).
   • The Opening Balance Sheet at the time of incorporation.
   • A lease agreement in the company’s name (or a permission of use document).
   • Minutes of the shareholders’ meeting determining the director’s remuneration.

2. Documents demonstrating the past track record as a sole proprietor:

   • Tax return documents (Kakutei Shinkoku) from the sole proprietorship era (preferably for the last few years).
   • A copy of the Notification of Discontinuation of Sole Proprietorship.

By submitting these sets together, the applicant proves that “although the corporation is new, the business reality is built upon past achievements, and the foundation for revenue is already established.”

The 5 Million JPY Capital and Investment Continuity#

One of the requirements for the Business Manager visa is typically an investment of 5 million JPY or more (or the employment of two full-time staff).

Even if an applicant had already invested over 5 million JPY during their time as a sole proprietor, care must be taken regarding the formation of capital when incorporating.

• Cash Contribution: Funds are transferred from a personal account to the corporate account. It is necessary to clarify that the source of these funds comes from the profits of the sole proprietorship or past savings.
• Contribution in Kind (Genbutsu Shusshi): This involves capitalizing assets used in the sole proprietorship (vehicles, inventory, equipment, etc.) into the new company. While this allows meeting the capital requirement without moving cash, it involves complex procedures under the Companies Act, such as proper asset valuation and listing in the Articles of Incorporation (Teikan).

Immigration examiners look beyond the registered capital amount; they verify whether the assets actually exist within the company and are being utilized for the business.

Director’s Remuneration and Financial Independence#

For a sole proprietor, “business income” is essentially the profit remaining after deducting expenses from sales, which serves as living expenses. In a corporation, however, since the company and the manager are separate entities, the manager receives a fixed “Director’s Remuneration” (Yakuin Hoshu) from the company.

In a visa application immediately following incorporation, the authorities strictly examine “whether the company has sufficient profitability to pay the director’s remuneration regularly and stably.”

If the business was operating at a loss or had very low income during the sole proprietorship era, setting a high director’s remuneration immediately upon incorporation will be viewed as unnatural. The business plan must logically explain the basis for sales projections and demonstrate that the remuneration can be paid without straining the company’s finances. The amount of remuneration must be sufficient for the manager to live independently in Japan (generally, a monthly amount of 200,000 to 250,000 JPY or more is considered a baseline, depending on the region and family size).

Handling Past Deficits#

It is a misconception to think that incorporating a business wipes the slate clean regarding past financial performance. If the sole proprietorship was in the red (deficit) immediately prior to incorporation, the Immigration Bureau will scrutinize the application.

Because they look at substantive continuity, the applicant must reasonably explain the cause of the deficits during the sole proprietorship period and how incorporation will resolve these issues (e.g., cost reduction, increased sales due to higher corporate credibility). Without this explanation, the stability and continuity of the business may be called into question.

Conclusion#

Applying for a visa immediately after changing from a sole proprietorship to a corporation involves elements of both a “new” application (formally) and a “renewal” (substantively).

To summarize the key points:

1. Immediate Application: It is possible to apply without waiting for the first corporate financial closing.
2. Proof of Continuity: Use the new “Business Plan” in conjunction with “Personal Tax Returns” from the sole proprietorship to prove business history and stability.
3. Financial Viability: Objectively demonstrate the company’s ability to pay the director’s remuneration.

By accurately addressing these points and preparing documents that present a consistent narrative, applicants can expect a fair and smooth examination process. Understanding the system correctly and preparing materials with sincerity is the most effective approach to securing a visa status.