Incorporating in the Land of Opportunity

Back to Contents of Issue: July 2002

Japanese entrepreneurs avoid high domestic fees by setting up shop in the US first.

by Sumie Kawakami

WANNABE ENTREPRENEURS IN JAPAN often find it too expensive to establish a corporation. But a few enterprising sorts are spreading the word that there's no need for despair -- all you need is a few hundred dollars and you can have yourself an American company with a Japanese subsidiary. Many entrepreneurs are following this advice and incorporating companies in the land of opportunity; the US.

Take gemeinschaft, which was founded by three high-school students into market research. Company president Kohei Takiguchi says: "While high-school and middle-school students make up a huge market, big business doesn't really know what we want. We saw opportunities there and decided to start a business of our own while still at school." In order to get going, they found that having a corporation was a must, so within two months they had all the necessary papers and had even registered a domain name.

These teenagers didn't have to work grueling hours to save up the money to launch their company. Instead, they incorporated themselves in Hawaii and created a Japanese subsidiary. Their total cost was about JPY400,000 -- JPY200,000 for an agency that handled the paperwork in Hawaii and JPY90,000 to register a subsidiary with Japanese authorities. The company's total capital is only JPY100,000.

They are all still planning to go to university, but "running a business seems so much more important than studying management at university," says Takiguchi. "If we start now, we'll be five years ahead of those who start after finishing college. In the US, many high-school kids are starting businesses, so we just felt why not?"

In general, the system in Japan makes it harder for an entrepreneur to set up a company than in any other industrialized nation. One of the biggest obstacles is cost. Minimum requirements for initial capital (shihonkin) are JPY10 million for an incorporated entity (kabushiki-gaisha) and JPY3 million for a limited liability company (yugen-gaisha). Together with registration fees, one needs at least JPY10.5 million for a kabushiki-gaisha and JPY3.2 million for a yugen-gaisha. If you run an Internet business, having some sort of legal entity seems almost a must because Japanese regulations require that you have a company in order to have a domain. Unlimited liability companies, known as goshi-gaisha, don't have a minimum capital requirement, but there is no limit on what a company owner is legally liable for. Even a goshi-gaisha still requires a JPY60,000 registration fee.

Another thing that holds down entrepreneurs working out of home or a small office is that in Japan anything less than kabushiki-gaisha is regarded as a second-class entity. The image of a yugen-gaisha or goshi-gaisha is still a bit negative, making their value limited.

"I wonder how many wannabe entrepreneurs have given up their dreams or have been deprived of their right to start their own business because of (Japan's) obsolete set of laws and regulations, the JPY10 million capital requirement in particular, " says Jun Mizuguchi, president and CEO of Holon Virtual Network, one of the leading agencies helping Japanese entrepreneurs establish US companies.

Mizuguchi says that in a perfect world everybody -- rich and poor alike -- should be given an equal opportunity to set up a company if they so desire. In contrast, the Japanese system allows only those who can afford to pay JPY10 million to attempt to make their entrepreneurial dreams come true. That kind of restriction "exists only in Japan," he says. "You can establish a company with the equivalent of several hundred thousand yen almost anywhere else in the world. If people ask me why incorporate in the US, not in Japan, I would say it's because America is a free country with assorted benefits for entrepreneurs."

Small Japanese companies started to spring up in the US in the late 1990s. Originally they were set up mostly in Delaware and California. Holon Virtual Network, for one, started offering services to help them incorporate back in 1997. The company initially set its focus on Delaware because the East Coast state not only allows nonresidents to found a company, but it also allows one person to be president, secretary and treasurer concurrently. One still needs to pay $300 a year to the US government and $50 to the Delaware government to maintain a company, plus the costs of filing financial statements. But Mizuguchi says that's not such a bad deal -- maintaining a company incorporated in Japan would cost just as much.

But psychologically, Delaware is a long, long way from Tokyo. Recently, more and more companies are being set up in the more Japan-friendly environs of Hawaii. "Delaware is too small and too far if you are serious about entering the US market," says Hiroshi Kawasaki, president and CEO of Digital Point, one of the many agencies based in Honolulu that help Japanese entrepreneurs set up their companies. "In contrast, there is a big Japanese population and many tourists in Hawaii. There is a market for a Japanese company to sell to the Japanese."

Many of Kawasaki's clients may be motivated to incorporate a company in the US because of tax or status reasons, he says, but most of them actually dream that someday their business will become global. "Japanese people simply feel more comfortable in Honolulu because there are many of them there. Plus, it's much closer to Japan," he says.

Digital Point wasn't initially planning to become an agency, Kawasaki says. He entered the Internet business back in 1997, before the Net bubble started in Japan. He started providing services such as domain registration, rental servers and online credit card settlement and his business began to take off. He struck a deal with a company in Oregon and soon his business was simply too big to handle without a corporate entity to support it. In 2000, he located a Honolulu-based agency, took a 4-night, 6-day trip to incorporate in the US and established a Japanese subsidiary. When he got back, he even wrote a book about how to form a corporation for only JPY300,000.

To Kawasaki's surprise, he received an unexpectedly large number of letters from readers who wanted to do the same thing. "We weren't really planning to become one of these agencies initially, but we had received so many responses, we felt why not," he says. Word of mouth increased the company's presence. Within a year, Digital Point helped form more than 380 corporations. No one knows exactly how many of these Japanese companies have been formed in Honolulu. But Kawasaki estimates that at least a thousand have been incorporated over the past two years.

While Delaware used to be a favorite destination for dot-com or venture companies dreaming of an easy entry onto Nasdaq, those who head to Hawaii are smaller, down-to-earth businesses, says Kawasaki. About 30 to 40 percent of his clients are those who are already in business but cannot afford to establish a Japanese kabushiki-gaisha. Many are owners of online shops. Some are salesmen asked by their companies to become independent agents, software developers who want to base themselves in Hawaii, or construction companies that need to incorporate so that they can participate in auctions held by governments. The list of occupations also includes freelance cameramen, architects and game software producers. The rest are wannabe entrepreneurs, who dream about the future and getting a US green card someday.

No matter what their business, the Japanese who incorporate in the US often feel that having a US company is like having a slice of the American dream. Kawasaki advises his clients not to dream about making money on IPOs or suddenly getting rich "because the core of the idea is to establish a solid legal base for a small business." @

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