Work styles in Japan have become increasingly diverse, and more workers are employed online with overseas businesses. In particular, there are many workers who want to do business in the US—which has one of the world’s largest economies—and work for US businesses as freelancers or sole proprietors.
According to a 2024 Freelancer Survey compiled by freelancing platform provider Lancers, Inc., the number of freelancers in Japan reached over 13 million in 2024. In addition, the economic scale of the freelance sector reached ¥20.3 trillion, with the number of freelancers increasing by about 40% compared to 10 years ago. This group includes workers that are independently self-employed and those who work side gigs while having full-time jobs.
In this article, we explain the structure of sole proprietorship in the US, procedures for starting a business, and tax implications. We also outline the differences among sole proprietorships (i.e., self-employment), limited liability companies (LLCs), and C corporations. This can help workers who want to work as US sole proprietors or freelancers from Japan.
Key takeaways
- In the US, a sole proprietor is an individual who operates a business without incorporating it.
- Registering a “doing business as” (DBA), obtaining an Employer Identification Number (EIN), and opening a business bank account are typical steps when operating as a US sole proprietor. Required steps depend on the place of residence and nature of the business.
- Tax and filing obligations vary depending on residency status under US tax law and the location where services are provided.
- If a business expands, it can transition to a limited liability company (LLC) or C corporation.
- When conducting business with US clients from Japan, it is important to confirm payment methods, exchange rates, and Form W-8 BEN, among other information.
What is a sole proprietor in the US?
In the US, a sole proprietorship is a business type where an individual operates a business without incorporating. According to the US Small Business Administration (SBA), if an individual conducts business activities and is not registered as another business entity—such as an LLC or C corporation—they are generally treated as a sole proprietor in the US.
In the US, a sole proprietorship is not legally distinct from its owner. Therefore, the individual is generally responsible for any debts or legal liabilities arising from the business. On the other hand, one of the key features is that the procedures for starting a sole proprietorship are relatively simple compared to those for incorporating a business.
This is a convenient structure for individuals that want to start small businesses or test out business ideas. However, depending on the size of the business, risks involved, and funding plans, another business structure—such as an LLC or a C corporation—could be more appropriate.
Key differences from Japanese sole proprietors
Although both Japanese and US sole proprietors run their businesses as individuals, there are differences in the procedures for starting a business and their respective tax systems.
In Japan, when an individual starts a new business, they are generally required to file a Notification of Opening a Personal Business with the National Tax Agency. In the US, on the other hand, it might not be necessary to register with the state to operate as a sole proprietor. However, depending on the individual’s use of a trade name (i.e., “doing business as” [DBA]), type of business, and location of operation, they might be required to obtain a business license or permit from state, city, or county authorities.
The US tax system is also different from Japan’s tax system. In the US, sole proprietors report their business income as personal income and, depending on certain conditions, are subject to self-employment tax. Since filing procedures and social security systems vary, be sure to understand the specific rules for each in advance.
Residence status for working as a sole proprietor
Those who plan to work as sole proprietors in the US while residing there will need residence visas and work permits. Depending on the visa type, there can also be restrictions on where individuals can work and the nature of their employment. Ability to operate as a sole proprietor while based in the US must be verified on a case-by-case basis depending on residence status.
Those with Permanent Resident Cards (i.e., green cards) and individuals with work authorization that isn’t tied to a specific employer can also generally work as sole proprietors while residing in the US.
On the other hand, if an individual conducts business with US clients while residing in Japan, they generally do not need a visa to work in the US.
Procedure for starting a business as a sole proprietor in the US
If an individual wants to operate as a sole proprietor based in the US, registering a DBA, obtaining an Employer Identification Number (EIN), and opening a business bank account are the standard steps for starting the business.
Register a DBA
In the US, if a sole proprietor wants to operate a business under a name other than their own, they must register a DBA. Besides being an abbreviation for “doing business as,” this term is also known as a “fictitious business name,” “assumed business name,” or “alternate business name.” It is most similar to a Japanese trade name. Note that the registration process varies by state, county, and city.
Obtain an EIN
An EIN is a 9-digit number issued by the Internal Revenue Service (IRS) to businesses. While an EIN is required in certain situations—such as when hiring employees—not all sole proprietors need to have one.
Depending on the circumstances, it can be possible for a sole proprietor to use a 9-digit social security number (SSN) issued by the US federal government’s Social Security Administration (SSA). On the other hand, an individual can be asked to provide an EIN when opening a bank account or applying for certain licenses. There is no cost to obtain an EIN from the IRS.
Open a business bank account
While personal bank accounts can be used for business purposes, opening a business bank account to separate personal funds from business funds can make accounting easier and help ensure smoother tax filing processes.
The documents needed to open an account vary depending on the financial institution. In general, applicants need to submit documents such as the US corporation’s articles of organization or incorporation, an EIN or SSN, DBA registration documents, and a business license. If a corporation based outside of the US wants to open a bank account, additional documents—such as a passport or proof of local residence—can be required. It is important to check the requirements of the financial institution beforehand.
Note: Individuals who provide services to US clients as sole proprietors while continuing to reside in Japan might not be required to complete all procedures described here, such as registering a DBA and opening a bank account. Although it is possible to apply for an EIN from Japan, the requirements for registering a DBA and opening a bank account vary by region and financial institution.
Tax and filing obligations for sole proprietors in the US
Below, we provide basic tax information for sole proprietors in the US, including filing income tax returns (i.e., Form 1040), self-employment tax, and estimated tax.
Income tax and profit or loss forms
The US has an individual income tax filing system that is equivalent to Japan’s tax return system. US citizens and resident aliens (i.e., US tax residents) generally file their income using the US Individual Income Tax Return (Form 1040). Income, business expenses, and profits or losses from a sole proprietorship are reported by attaching Profit or Loss From Business (Schedule C) to Form 1040. Here is how resident status impacts these forms:
- US residents: Use Form 1040 and Schedule C to report worldwide income, typically by April 15.
- Japanese residents: Those who provide services from Japan generally do not need to file tax returns in the US. Instead, they file tax returns in Japan.
Self-employment tax
Self-employment tax is a federal tax paid by self-employed individuals primarily to fund Social Security and Medicare. In general, US citizens and US tax residents are subject to taxation if they earn a net income of $400 USD or more from a sole proprietorship. Based on the net income calculated on Schedule C, calculate the tax amount on Schedule SE and report it on Form 1040.
The self-employment tax rate is 15.3%, which consists of a 12.4% Social Security Tax and a 2.9% Medicare Tax.
On the other hand, for tax purposes, US nonresidents are generally not subject to self-employment tax. Therefore, residents of Japan are generally also exempt.
Estimated tax
Estimated tax is a system similar to Japan’s estimated tax prepayment. This involves taxpayers estimating their annual tax liability and paying it in advance for income that does not have taxes withheld, such as wages.
Sole proprietors typically use the Estimated Tax for Individuals (Form 1040-ES) to calculate their income tax and self-employment tax, among other taxes. They pay these amounts in four installments throughout the year. On the other hand, if a US nonresident is required to make estimated tax payments in the US, they need to use the Estimated Tax for Nonresident Alien Individuals (Form 1040-ES [NR]).
In general, this is not a requirement for residents of Japan.
State income tax
In the US, in addition to the federal income tax described above, some states impose state income taxes.
For example, some states—such as Florida and Texas—do not impose an individual income tax. Other states—such as California and New York—have a maximum tax rate exceeding 10%. Therefore, when establishing a business presence in the US, state income tax and applicable tax rates are factors to consider when selecting a location.
In many cases, freelancers residing in Japan who provide services within Japan are not subject to state taxes, just as they are not subject to federal taxes. However, it is important to be cautious because rules regarding the source of income and filing requirements vary from state to state.
Some states (e.g., California) have established their own rules for determining whether to withhold taxes from self-employed individuals residing outside of the state. Those who plan to do business with US clients on an ongoing basis need to consult with a US tax professional—such as a US certified public accountant—who specializes in international and state tax matters.
Differences among sole proprietorships, LLCs, and C corporations
When starting a business in the US, in addition to operating as a sole proprietor, you can also incorporate a business, such as an LLC or C corporation. By comparing each option and considering your business activities and future plans, you can determine which structure is the most suitable for you.
|
|
Sole proprietorship
|
LLC
|
C corporation
|
|---|---|---|---|
| Establishment | Comparatively easy | Must complete incorporation procedures with the state | Must complete incorporation procedures with the state |
| Legal liability | Generally, the business operator is personally liable | Generally, limited to the scope of investment | Generally, limited to the scope of investment |
| Taxes | Taxed as personal income | Generally, pass-through taxation | Corporate taxation with the possibility of double taxation on dividends |
| Administrative burden | Comparatively small | Larger than sole proprietorships | Largest of the three options |
| Fundraising | Difficult to receive outside investment | Possible to receive investment but not well-suited for large-scale fundraising, such as from venture capital (VC) firms | Well-suited for raising funds through stock issuing |
When to choose a sole proprietorship
Being a sole proprietor is a good option if you want to start your business on a small scale or keep the setup and management procedures as simple as possible. Another advantage is that you can start your business relatively quickly because sole proprietorships do not require complex procedures similar to those involved in incorporating a business.
On the other hand, since business debts and legal liabilities are generally incurred by the individual, they cannot be separated from personal assets. In addition, sole proprietorships are not well-suited for large-scale fundraising from external sources. Therefore, it is important to consider the scale of your business and your future growth plans when deciding to become a sole proprietor.
When to choose an LLC
An LLC is a good choice if you want to separate your business liabilities from your personal assets—more so than with a sole proprietorship—or if you anticipate a moderate level of business expansion. As a general rule, individuals are not personally and directly liable for business debts or legal obligations. Therefore, risk management is generally easier with an LLC than with a sole proprietorship.
On the other hand, because it requires going through the state registration process and ongoing administrative management, the costs and administrative burden are greater than those for sole proprietors.
When to choose a C corporation
A C corporation is a good choice if you plan to raise funds from VCs or other such sources in the future. It can also be a good choice if you anticipate considerable business growth. Issuing stock makes it easier to raise capital from outside investors and is also well-suited for recruiting talent through stock options and other incentives.
However, post-incorporation management and tax matters are more complex for a C corporation than those for a sole proprietorship or LLC. You will also be required to file tax returns as a corporation.
Legal considerations for operating as a sole proprietor in the US
Sole proprietors are personally liable for their business obligations. It’s important to manage business risks in advance, such as contracts with business partners and intellectual property.
Understanding the risks of unlimited liability
As a general rule, US sole proprietors are personally liable for debts or disputes that arise from their businesses. Because business and personal assets are not legally separated with sole proprietorships, personal assets can be affected in the event of claims for damages or unpaid debts.
For example, if a business dispute results in a large financial obligation, personal assets—such as bank deposits—can be subject to debt collection after certain legal procedures. Although certain aspects of real estate are protected or exempt under state law, real estate can still be subject to seizure depending on the circumstances.
As a business grows and transaction amounts increase, the risk of litigation and other issues also rises. It’s important to consider transitioning to an LLC in these cases to separate personal assets from business liabilities.
Properly managing contracts and intellectual property
When doing business with clients in the US, clearly specify work details, compensation, payment terms, contract duration, and termination conditions in the contract. Also, confirm the scope of liability for damages, governing laws, and methods for resolving disputes before entering into the contract.
When delivering work—such as designs, written materials, and software—confirm who holds the copyrights and other intellectual property rights. Sole proprietors can transfer the rights to clients or grant them use permission, which determines whether sole proprietors can reuse the deliverables. Before including them in a portfolio, it is important to decide whether or not that’s permitted.
How to receive payment from a US client
In this section, we explore challenges that freelancers living in Japan can encounter when doing business with US clients and receiving payment.
When receiving payments from overseas, it is important to confirm wire transfer fees, exchange rates, and payment methods. If transactions increase, it can be beneficial to establish a US corporation to set up a payments infrastructure.
Receiving international money transfers
If a US client sends a payment via wire transfer to a Japanese bank, international wire transfer fees and currency conversion fees apply. In addition, because the exchange rate between USD and Japanese yen fluctuates, there is an exchange rate risk. The amount received in Japanese yen will also vary.
When making an international money transfer directly through a bank, the client must also register the recipient’s information—such as the Society for Worldwide Interbank Financial Telecommunication (SWIFT) code and account—and configure the international money transfer settings.
When receiving payments from US clients for services provided from Japan, sole proprietors can be required to submit Form W-8 BEN to prove that they are foreign individuals. It’s important to understand that Form W-8 BEN is not a tax return; it is a document submitted to the party remitting payment.
Establishing a business in the US to expand payment options
If a business with US clients grows, operating as a sole proprietorship can become too burdensome in terms of financial management and legal liability. In this case, it can be beneficial to form an LLC or a C corporation and transition from a sole proprietorship.
After establishing business in the US, sole proprietors can use local bank accounts and online payments. Since they can pay expenses directly in USD, sole proprietors can reduce unnecessary currency conversions and foreign exchange fees.
In addition, this allows sole proprietors to offer payment methods that are convenient for US clients, such as domestic bank transfers and online payments.
How Stripe Atlas can help
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FAQs about US sole proprietors in Japan
The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accurateness, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.