Today’s lecture is “Close your business”
Someday, you might need to close your business. For example, you are leaving Japan, you want to start new business or you want to shut down non-profitable business.
If your company has retained earning at the closure, you need to withdraw it from your company before the liquidation. What will be the best way?
There are 4 ways to withdraw money from you closing company.
1. Pay as dividend
2. Pay as retirement allowance
3. Sell your share
4. Pay as director’s salary in advance
1. Pay as dividend
You can receive the cash as dividend to you. Taxation for dividend it comprehensive taxation. The dividend income is combined with other income, such as salary and business income, and higher tax rate will be applied.
There is an exemption for dividends income.
Dividend exemption is calculated as follows:
Case 1. Total taxable income is 10M yen or less
Exemption amount of income: Dividend ×10%
Case 2. Total taxable income exceeds 10M yen
A: Dividend – (Taxable income -10M yen)
B: (Taxable income – A)
Exemption amount of income : A×5% + B×10%
2. Pay as retirement allowance
Retirement allowance is subject to income tax, but there are favorable tax rules for taxation.
First, only 50% of retirement allowance is treated as taxable income. Second, retirement income is subject to the separate taxation, which means that you can keep income tax rate lower.
For example, taxes for retirement allowance is calculated as follows:
(Retirement allowance – number of years you worked for a company ×400,000 yen ) × 50%
However, please note that the excessive amount of retirement allowance is not treated as deductive expenses.
3. Sell your share
You can sell company’s shares to someone else to get out from your business.
Capital gain from selling your share is subject to capital gain tax. Capital gain tax is separate taxation and tax rate is 20.315%.
Capital gain tax is calculated as follows:
(Sales price – acquisition cost of shares – sales commissions etc.) *20.315%
4. Pay as director’s salary
The company pay tax every year and you need to pay personal income tax when you received remaining cash from the company. This is called as double taxation. You can avoid double taxation by receiving company’s all earning as director’s salary every year. Director’s salary is treated as company’s expenses
However, please note that social insurance, such as health insurance and pension fees will become hire as your salary amount become higher. Also, you need to consider your company’s cash flow. Paying too much director’s salary will have negative impact on the company’s cash flow.