Overview

• The most common business structure in Japan is the stock company (Kabushiki Kaisha, “KK”). The limited liability company (Godo Kaisha, “GK”) became available under the current Companies Act, which was implemented on May 1, 2006, and has recently become a viable option.
• While both KK and GK have limited liability, where investors are liable up to the amount of their investment, GKs offer more flexibility as most default rules are optional and can be customized in the articles of incorporation. Unlike KKs, GKs do not require statutory officers, board of directors meetings, or shareholder meetings. Profit distribution to members can differ from their investment ratios in the articles of incorporation, and there is no requirement for public disclosure of financial statements. Unlike KKs, where ownership and management are separated, all members of a GK typically engage in business operations, although operational roles can be assigned to specific members through the articles of incorporation. GKs in Japan were introduced with reference to U.S. LLCs. It allows for flexible system design and is treated as a check-the-box entity under U.S. tax law, enabling U.S. corporations to enjoy the benefits of pass-through taxation for offsetting profits and losses. However, it is important to note that under Japanese law, GKs themselves are subject to taxation.
• Additionally, since 2015, the requirements for directors of KKs (including representative directors) and representative members and officers of GKs to reside in Japan have been abolished, making it easier for foreign companies to establish a presence in Japan.

Advantages of KKs and GKs

• KK Advantages:
  • KKs can be publicly listed, making them suitable for those who wish to raise funds from the capital markets.
  • The roles of shareholders (owners) and directors (management) are separated. In contrast, in GKs, the investors themselves perform operational duties.
  • Employees can be granted stock options.
  • For forming joint ventures with Japanese companies, KKs are more prevalent and thus more appropriate vehicles.
• GK Advantages:
  • No need for notarized articles of incorporation at the time of establishment.
  • No statutory officers are required and no need for a board of directors or shareholder meetings.
  • Profit distribution to members can be set differently from their investment ratios in the articles of incorporation.
  • No requirement for public disclosure of financial statements.
  • If the investor is a U.S. corporation, it can benefit from pass-through taxation.

Establishment Process of KKs

• Creation of the articles of incorporation
• Contribution of capital (cash or in-kind)
• Appointment of officers
• Application for registration of establishment
• Establishment

KKs can be established by registering its incorporation in the commercial registry at the local Legal Affairs Bureau that has jurisdiction over its principal office location. A registration fee, calculated at a rate of 0.7% of the capital, is required (minimum 150,000 JPY). Several documents are required for registration, but the most important one is the articles of incorporation. This document must clearly state the name of the KK, its business objectives, the location of its principal office, and other governance-related matters. The articles of incorporation must be notarized by a public notary at a Japanese notary office before registration.
When a foreign company establishes a subsidiary in Japan, several documents need to be prepared in the company’s home country. These documents include the articles of incorporation of the foreign company, a certificate of registration of the foreign company, and other official documents. Additionally, an affidavit notarized by a public notary in the company’s home country is required. The specific documents needed are determined on a case-by-case basis for each company.

Establishment Process of GKs

• Among the above, the process of “appointment of officers” is omitted, but otherwise, it is generally the same. Since GKs can design flexible systems through their articles of incorporation, it is not necessarily required to conclude an operating agreement upon establishment.

Conversion from a KK to a GK

• The process includes creating an organizational change plan, placing and disclosing the plan, obtaining consent from all shareholders, dealing with claims for the purchase of rights to new shares, creditor objection procedures, and registration. As the consent of all shareholders is required, there is no right for dissenting shareholders to demand the purchase of their shares. 
• Organizational changes from KKs to GKs and from GKs to KKs are governed by company law.

Articles

• Japanese Corporate Law 1 (Differences between Stock Companies and Limited Liability Companies)
• Japanese Corporate Law 2 (Board of Directors, Shareholders’ Meeting, Annual Reporting Obligations)
• Japanese Corporate Law 3 (Corporate Governance)
• Japanese Corporate Law 4 (Dissolution and Liquidation)
• Japanese Labor and Employment Law 1 (Dismissal Regulations)
• Japanese Real Estate Law 1 (General Overview)
• Japanese Data Privacy Law 1 (the APPI regulations for Foreign Companies)
• Japanese Intellectual Property Law 1 (General Overview)
• Japanese Competition Law 1 (General Overview)
• M&A Laws in Japan 1 (Significance and Characteristics of M&A Laws in Japan)
• Joint Ventures in Japan 1 (General Overview)
• Renewable Energy Project Finance in Japan 1 (General Overview)
• Renewable Energy Project Finance in Japan 2 (Amendment on the Act on Special Measures Concerning Renewable Energy Requiring Resident Briefings Effective April 1, 2024)