Last week we discussed the simplest form of incorporation in Japan, the Godo Kaisha. The main drawback of this type of company is if you decide you want to grow it and bring in more shareholders (or, more correctly, "corporate members"). Doing this can cause a logistical nightmare, because unless you specifically state otherwise in your articles of incorporation, with a GK you need a unanimous vote of ALL members to amend the Articles of Incorporation, transfer ownership, and make major business decisions such as selling part of the business. Further, you can't earn "sweat equity" in a GK, and instead you need to pay your contribution in either cash or property.
Because of these issues with a GK, I usually advise people to consider a proper shares-based corporate entity, and this means moving to a Kabushiki Kaisha. Setting up a Kabushiki Kaisha (KK) is much easier than it used to be, and in practice it costs around JPY140,000 more than a GK to do. Therefore, I see little point in encouraging those wanting to build a business that they can sell one day, to pursue a GK. Although having said that, you can easily upgrade a GK to a KK.
In considering setting up a KK, many people are intimidated by the idea of having shareholders and director's meetings, keeping company records, dealing with statutory auditors, publishing annual reports etc. But in actual fact, just like accounting and other good-practice "house-keeping", the operation of a KK is not that hard. In fact, I'd have to say that employing people and registering them for Shakai Hoken may be as much of a challenge and can be just as time consuming. The core issue is to have someone on the payroll who understands the details of administration, and accordingly most smaller firms have a person (not always easy to find) who does the accounting, the HR, and the commercial code compliance work) all rolled into one.
Let's look at the major points of a KK.
Prior to establishing a KK you need to choose whether is should be a so-called "Closed" company or an "Open" one. The difference between the two is whether the company allows shares to be bought and sold without first having to go through the Board of Directors (i.e., the shares are restricted). Clearly if you are an investor, you would prefer the Open format, however, in Japan, Closed companies are more common. Regardless of the entity format, the actual handling of the shares can in any case be controlled by how you word your Articles of Incorporation. As I said last week, a good Judicial Scrivener can help you with these and is worth the extra money paid.
These days a KK can be set up with just one yen of capital and have just one director. In doing this, you can keep things quite simple, avoiding having to do directors meetings, and some of the other processes that having a board might require. While this may sound attractive, operating a one-man company can also be tough to do, since you get no input or shared responsibility from others on any major decision and furthermore you have to answer directly to the shareholders, who can challenge you in a General Meeting on business and other issues at any time. I usually recommend that there is a more traditional board of 3 people, who can provide better control and guidance to the Managing Director. I guess it boils down to whether you want to take a team-based approach to running your company, or an autocratic one.
When you have more than one director, you also need a Statutory Auditor. Originally this position was set up to provide some financial accountability by the company. The Statutory Auditor's job these days has been strengthened to better represent the interests of the shareholders, so they now not only vet the books but also the business operations of the company.
The Statutory Auditor can be anyone not working at the company as an executive director or employee. In practice, most companies appoint someone close to management to the role, a friend of the CEO's for example, and so the position is often a titular one. While this may be convenient for local companies, a problem for foreign companies is trying to find someone willing to take the legal risks of being a Statutory Auditor. Recent changes in the law solve this challenge by allowing the position to be substituted by an "Audit Referee", a position that can be filled by a suitably qualified external accounting firm.
Next week, we look at Representative and Branch offices - two entities most often used when you are being asked to set up a subsidiary for company headquartered overseas.