MAX LAW OFFICE, JAPANESE MARITIME LAW

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ESTABLISHING A COMPANY IN JAPAN (1)

Assumptions and Background
You are a foreign company and it has an interest in establishing a 100% owned subsidiary company in Tokyo, Japan, with approximately ten employees at the beginning. You would like to know the process, requirement and possible options as well as recommendations from a local consultant.
Purpose of This Memo
At the first stage, we would like to explain various types of companies which can be established under the new Corporate Law of Japan (Corporate Law), which came into effect on May 1, 2006. We will explain the outline of each type of companies including its advantages and disadvantages. At the end, we will make a recommendation regarding which type of company is suitable for our client.
Authorization Fee/Tax and Duty
In order to establish a company in Japan, we need to pay the following authorization fee, tax and duty to a Notary Public and the authorities.
1. Authorization of Articles of Incorporation
  Stamp duty: Yen 40,000.- (US$ 342.-) ¹
  Authorization fee for a Notary Public: Yen 52,500.- (US$ 449.-)
2. Commercial registry
  Registration and License Tax: 0.7% of the capital amount
  Minimum: Yen 150,000.- (US$ 1,282.-)
Above amount includes only the license fees, taxes and duties to be charged by a Notary Public and the authorities. Relative fees for a commercial registry consultant and other miscellaneous expenses (official company seal, rubber stamps, certified copy of Articles of Incorporation etc.) will be necessary in addition to these items. We will discuss these additional expenses in the next memo.
Available Types of Companies
Under the Corporate Law, four types of companies are available for establishment in Japan:
- Joint-Stock Company: Kabushiki-Kaisha (KK)
- Limited Liability Company (LLC): Godo-Kaisha
- Goshi-Kaisha
- Gomei-Kaisha
According to the statistics in 2004, there were 1,040,379 KKs (41.2%), 1,432,883 YKs² (56.8%), 7,775 Goshi-Kaisha (0.3%) and 43,504 Gomei-Kaisha (1.7%) in Japan.
Kabushiki-Kaisha (KK)
1. Incorporation - This is the most common form of corporate entity used for medium to large businesses. Since the establishment of YK is no more possible, KK should be used more commonly for small sized businesses as well. There are two main categories of KK:
  1. Open KK (Kokai Kaisha) There is no restriction on the transfer of all or part of the shares of these KKs. (Corporate Law Article 2, 1 (5)). This definition of "Open KK" does not necessarily mean a listed company whose shares are listed at a stock exchange. However, Open KKs are in general relatively large sized companies. They may adopt the usual KK governance structure or a committee governance structure (described at below).
  2. Share Transfer Restriction KK (Joto Seigen Kaisha) This is a KK where the transfer of shares in the KK requires the prior approval of the company (usually, the approval of the Board of Directors). Though this type of KK does not fit the original concept of KK, this structure is very common among small to medium sized KKs with limited and stable shareholders. Most of Japanese subsidiaries of foreign companies adopt this type of KK.
2. Governance Structure
  1. The most common governance structure of a KK requires at least three directors (who form the Board of Directors) and at least one statutory auditor. However, under the Corporate Law, a KK requires only one director. It may appoint one representative director who controls the every day management of the company and is the only director to have authority to bind the company. It used to require at least one representative director but under the Corporate Law, the appointment of a representative director is mandatory only if the company has the Board of Directors. He or she must reside in Japan, but does not need to be a Japanese national. If the capital of the KK is JPY 500 million (US$ 4,723,504) or more, or if its total liability is JPY 20 billion or more, it will be a "large" corporation for the purposes of Japanese auditing regulations. Such "large" corporations must appoint an auditor (certified accountant) to audit its financial statement.
  2. The "committee governance structure" is mainly adopted by large scale Open KK, however other companies can also adopt this structure. It is where the company is operated by Operating Officers (shikko yaku) and a group of committees (appointment, remuneration and audit committees) whose members are directors and appointed by the Board of Directors, govern the company under the control of the Board of Directors. This structure is effective to separate the role of Operating Officers and Directors, thus strengthen the corporate governance. The biggest disadvantage is this structure requires to appoint a lot of officers and directors, which is not very realistic for small to medium businesses.
3. Capital Requirements - A KK may be established with a capital of only JPY 1, however, KKs with net assets of less than JPY 3 million (US$ 25,641) cannot pay dividends to shareholders even if they have enough retained profits to do so, in order to protect the interests of creditors. Usually, it is recommended that a KK should be established with a capital amount of JPY 10 million (US$85,470) or more, which shall cover the initial cost to establish the company.
4. Legal Liability - Since KK is a separate legal entity to its parent company, the liability for activities undertaken by the KK will, generally, remain with the KK itself and the parent company will be protected in this respect.
5. Time to incorporate - The formation of a KK can be achieved in three to four weeks providing we have all the required information and documents.
Godo-Kaisha (LLC)
1. Incorporation - The Corporate Law introduced a new structure called a "Godo-Kaisha" or an LLC, which is a commercial partnership company with limited partners. It can be established by one or more members and each member may engage in the business of the LLC. A managing member, who is engaged in the business of the LLC, may be appointed but this is not mandatory.
  The LLC is intended to be a more flexible organization than a KK. For example, profits do not have to be shared in proportion to members' investments, there is no requirement to publish financial reports and capital contributions can be made in the form of money and property.
  Considering these characteristics, LLC is a suitable structure for small businesses like a venture company consisting of members who have skills or know-how and other members who have enough money for investment.
2. Capital Requirements - There are no minimum capital requirements for the setting up of an LLC.
3. Legal Liability - Members' liability is limited to their respective contributions, however, just as a director of a KK may be liable for the manner in which the KK is managed, so a managing member may be liable for the manner in which the LLC is managed.
4. Time to incorporate - The formation of an LLC can be achieved in three to four weeks providing we have all the required information and documents.
Goushi-Kaisha
This type of entity is similar to a partnership and consists of limited and unlimited liability partners. Limited partners' liabilities to the creditors of the entity are limited to their respective contributions. In Japan, this type of company is usually adopted by small businesses with very limited members. Foreign capital companies rarely use this structure since unlimited liability partners bear unlimited liability to creditors and it is not practical as a subsidiary.
Gomei-Kaisha
This type of entity is similar to a partnership and consist of partners whose liabilities to creditors of the entity are unlimited. Again, due to this factor, it is rarely used for a subsidiary of a foreign company.
This type of organization is mainly adopted for very small (family business type) businesses.
Discussions
Considering the fact that our client is a foreign company and trying to establish its 100% subsidiary in Japan, we do not need to consider Goshi-Kaisha or Gomei-Kaisha.
Regarding LLC (Godo-Kaisha), we do not yet know how popular this kind of company will be in Japan in the near future. Considering the fact that our client shall be the 100% owner of the Japanese subsidiary, again, it will not be reasonable to adopt LLC.
The most common structure (Kabushiki-Kaisha) should be the best choice for the new company. We now need to think about the best organization structure.
1. Open KK or Share Transfer Restriction KK
  If our client has the intention to transfer all or in part the shares of its Japanese subsidiary to another party, we should consider Open KK. Otherwise, Share Transfer Restriction KK is a reasonable choice for a 100% subsidiary of a foreign company since this type of KK has a lot of flexibility for organization structure compared with Open KK.
2. Number of Directors
  As mentioned above, under the Corporate Law, we have a choice to appoint only one or two director(s) without forming the Board of Directors, or to appoint at least three directors who form the Board of Directors, if we select Share Transfer Restriction KK structure. Appointing only one director has a good advantage on the aspect of director's fee amount and quick management decision if our client can find a very reliable director who is a Japanese resident. Otherwise, it is recommended that three directors should be appointed to form the Board of Directors. One of the directors must be a Japanese resident, but the other two directors can be a foreign resident, possibly directors or employees of our client.
3. Statutory Auditor
  If the company is a Share Transfer Restriction KK and does not have the Board of Director, with its capital amount of less than Yen 500 million and the total liability of less than Yen 20 billion, it is not mandatory to appoint a statutory auditor under the Corporate Law. If the operation of the new company will not be so large and complicated, we may not need to appoint a statutory auditor. However, we generally recommend that the company should have the Board of Directors (consisting of three directors) and one Statutory Auditor for more effective corporate governance.
4. Auditor
  Unless the company is a "large" corporation (capital amount of less than Yen 500 million and total liability of less than Yen 20 billion), it is not necessary to appoint an auditor to audit its financial statements. Since the auditors' fees are quite expensive, we do not recommend the company shall appoint an auditor, at least at the beginning stage.
5. Capital Amount
  As mentioned above, we do not have the restriction of capital amount. However, we would stress that a company with very little capital amount may invoke concerns among creditors and customers. It is recommended that our client should invest at least Yen 10 million (US$85,470) to the new company, which might be spent for the preparation of operation (rent of the office, office furniture, recruitment, security deposit etc.).
6. Conclusion
  Under the Corporate Law, we can consider below two options as a subsidiary of our client. (B) Simple Structure should be less costly, however, completely relying on one director may increase the risk of corporate governance. Therefore, our recommendation is (A) Standard Structure, which is more effective for better corporate governance.
  1. Standard Structure (recommended)
    Share Transfer Restriction KK
    Board of Directors consisting of three directors
    One Statutory Auditor
  2. Simple Structure (less costly)
    Share Transfer Restriction KK
    One (or two) director(s)

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¹ Calculated as US$ 1 = JPY 117

² We used to have another type of company called Yugen-Kaisha (YK) before April, 2006, which was popular for small to medium businesses, but this type is no more available for establishment under the Corporate Law. Presently, former YKs are legally recognized as KKs with some special treatments which allow them to continue using the name of Yugen Kaisha.

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