The Driver's Seat -- Company Types & Capitalization

By Terrie Lloyd

What type of company is best when starting up in Japan and how much capital should it have?

Probably the two most common questions asked by foreign CEOs wanting to establish a presence in Japan are what type of corporate structure they should use and what the capitalization should be. The good news is that things are way more flexible than they were, thanks to a new company formation legislation enacted in May 2006. The bad news is that this has increased the scope of choice—meaning that the foreign founders need to be more aware of the implications of their early-stage actions.

Right now, there are five corporate entities to choose from when starting up in Japan:

“Closed” Kabushiki Kaisha (Joto Seigen KKK), “Open” Kabushiki Kaisha (Kokai KK)
The Kabushiki Kaisha (KK) is a joint stock company that looks most like a US style C-corporation. There are two types: the so-called Closed and Open variants. Fundamentally the structure for both is the same, but since Closed corporations can be run by just one director, they don’t require a board of directors nor the meetings that go with them. This means less reporting and compliance work and is best suited for a smaller operation run by one person. Open corporations on the other hand offer better transparency and control for external investors and this can mean a lot to certain types of partners when doing business in Japan.

Godo Gaisha (GK)
While the GK is often referred to as the Japanese version of a US-style Limited Liability Corporation (LLC), in fact there are some very important differences which are not particularly favorable, and instead make the GK look more like a US-style Partnership. Chief among these differences are: 1) the business can only be run by someone who is an investor, thus removing the possibility of a neutral board of directors, and 2) the executives of the business are jointly and separately liable in case of legal actions taken against the firm—effectively removing the protection that limited liability structures are supposed to offer. The one main benefit of a GK is that it is 150,000 yen cheaper to incorporate, in terms of incorporation fees.

Yugen Sekinin Jigyo Kumiai
Japan’s equivalent of a Limited Liability Partnership (LLP) is a partnership rather than a corporation. Formed by the equity participants and offering limited liability, it provides for freely structured agreements between the partners, and taxes are levied on profits earned by the partners, not on the LLP itself.

Gomei Gaisha
Little-used structure that provides for a professional partnership where one or more partners have unlimited liability.

Goshi Gaisha
Little-used structure that provides for at least one general partner to have unlimited liability while the other partner(s) may have limited liability.

The best option for foreign start-ups to choose from is that of a full-fledged Open KK—one that has a board of at least three directors, a statutory auditor, and which conducts quarterly directors’ meetings. The Representative Director has to be resident in Japan, but this person doesn’t need to be the President. Alternatively, it’s possible to have two Representative Directors, with one conducting in-country business and the other back at the headquarters controlling things.

Capitalization
One good aspect about the legislative changes is that the requirement for the minimum capital for a Kabushiki Kaisha has dropped substantially—from a prohibitive 10 million yen to just one yen. So the question is: how much above one yen should you capitalize your new company at? One cent companies are common in Western nations, so will this work in Japan? Yes, technically it will work, however, it is advised to make the capital an amount that is high enough to indicate to Japanese partners a commitment to the Japan business.

Therefore, the best amount of capital is the same amount that has defined companies for the last 50 or more years—I.e. 10 million yen. While this may seem high, remember that as soon as the money is recorded as having been allocated as capital, it may be used immediately for running the business. Considering there aren’t many companies that cost less than 10 million yen to run in their first few months when setting up in Japan, this level of capitalization is not as unreasonable as it may sound. Further, as a bonus, it enables the founder to claim, as company expenses, the actual set-up costs even before the company actually existed.

Above 10 million yen, the next significant capital milestones are 20 million yen and 100 million yen. 20 million yen indicates the company is strong financially and 100 million yen indicates some serious investment commitment to production or R&D. Conversely, below 10 million yen, the meaningful amounts are 5 million yen— showing some skimping but nonetheless enough to meet the Immigration Bureau requirements for a foreign CEO to obtain an investment visa, and 1 million yen, which would represent the typical capital for a local start-up by founders who don’t have much cash.

Terrie Lloyd is the publisher of J@pan Inc and he has started 15 companies in Japan. He can be reached at terrie.lloyd@ japaninc.com