types of business in Japan

by m. werneburg, 2009.03.05

updated 2010.08 to include JETRO guide and correct some mistakes

As I've said elsewhere, I am not a business consultant, nor a lawyer or accountant, but I am a business-owner and I have made some observations. While this information is provided solely as a description, I hope it will add clarity to what is for foreigners a very alien landscape. Below is a description of Japanese company types. If I could boil this down to one sentence, it would be this:

Hire an accountant that speaks English. Get references when selecting one, and then listen to him/her.

Also, please see this handy guide from JETRO.

Not that an accountant is a magical cure-all. As any accountant in Japan will tell you, the rules do not all seem hard-and-fast in all cases, and certainly not well-explained. I can't explain this, but having asked around it seems to be accepted as a facet of doing business in this country. The typical approach by an accountant in Japan is to act conservatively, and work with the tax agency when and if they come knocking.

Kabushiki Kaisya (株式会社)

This is the "respected" type of incorporated company in Japan. This is your choice if you need the company's incorporated form to impress anybody. Seriously, being the President of a KK carries weight with everyone in Japan from your clients to your bankers. As a Director of a KK you are assumed to be someone who can invest significantly in a new business and know how to run a significant business.

open versus closed KK

There are two forms of KK. The following excerpt is by Terrie Lloyd—who, unlike me, is an acknowledged expert on these matters:

“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.

benefits

Essentially, it boils down to "a KK just looks good". The KK is the standard for doing business in Japan. Other options—especially the LLC and LLP—are newer and "less familiar to the public". And familiarity counts in Japan. As I say, if you're in a business where you have to watch your image, this is the corporation for you (with exceptions). This hinges, I suspect, on the requirement that every founding shareholder must invest money in their own name.

restrictions

This form of incorporation has a number of restrictions that might surprise foreigners used to the relatively unrestricted Western-style corporation.

pay restrictions

One person must be nominated the Representative Director. This is the human face of the company, and it's not just a title. The Representative Director, for instance, has to declare his income at the start of the fiscal year, and any (upward) changes to that income during the year will require filing with the tax agency. All shareholders have this same income restriction.

addition, 2010.08 Please also note that it is actually possible to change your stated income mid-year, but that this requires a vote by shareholders. In reality, this only lets you change the stated income once at the six month mark, and not by a lot. The Taxation Bureau will take notice of anything that smacks of the company's on-paper profits being manipulated.

Mid-year alternations notwithstanding, there is a small amount of wiggle room in this, as any profits in the company can be paid to shareholders at the end of the year. But if the tax office decides that you're keeping your expected income artificially low while paying yourself a huge payout at year's end, they'll come calling and ask you to explain yourself and reshape your forward-looking income declarations. Not how I want to spend my time!

These pay restrictions mean that you can't simply set up a KK and name yourself the Representative Director and use the KK as a pay-through corporation to shield you from liability the way you would with a Western corporation. Naturally, the tax agency is aware of all of the attempted maneuvers that people attempt to get around this. Naming a family member to the position is out of the question, for instance—if that family member is too close the same restrictions will still apply.

See the 'final analysis' section below on strategies used in getting around these pay restrictions.

representative director

Not just anyone can be a Representative Director. Anyone without legal status in Japan is disqualified. This includes anyone on a temporary visa such as an "engineer's visa". So a) citizens, b) permanent residents or c) holders of long-term (e.g. spousal) visa.

Once named as a Representative Director, it takes an act of the company's Directors to have another party named to the position. Otherwise, a Representative Director has a fixed term (often two or four years). See the JETRO article linked above for more detail.

other directors

You have to file with the tax agency to name anyone to a KK as a Director.

shareholders

Shareholders have exactly the same pay restrictions as the Representative Director. This is a considerable limitation, because even if you do manage to find a non-involved party to be your Representative Director, you still can't simply rummage about in your company's earnings looking for paychecks because you still have to declare your income in advance to the tax office.

costs

Creating a KK is typically done through an accountant, and costs in excess of ¥300,000. It also takes weeks (if not months) to sort out all of the paperwork because there are a lot of finicky questions. Hire an accountant who speaks your language.

KK: final analysis

My partner and I opted for a closed KK due to:

our desire to be "reputable" (at last!)
the reduced paperwork and audit load
the reduced rigmarole in making decisions
the limited ability of either partner or anyone else to wander off with the loot and/or control over the company

pay strategies

We have been presented with two strategies for setting pay for our shareholders.

In the first, we set a nominal income for ourselves, then do not pay it. This has two immediate benefits, and one (potentially whopping) restriction. The benefits are:

health insurance costs are low (these depend on your on-paper salary)
you don't have to draw an income if the KK is not yet earning money

The restriction here is that any monies not paid to employees and directors is treated as corporate income and taxed hard (see the corporate tax page). But any bonuses you may want to pay yourself will be subject to the same problems as changes in your base pay. This leaves you looking at sky-high taxation or paperwork should you want to pay yourself more than you declared at the beginning of the fiscal year. Wheee!

In the second strategy, you set yourself a high salary. This will have the downside of increasing (drastically) your health insurance payments. But it will have the upside of allowing you to set your income at any amount up to that limit, and simply telling the tax office "we couldn't match the Director's pay due to lower-than-expected earnings".

Goudou Kaisha

This is an LLC. It's a form of corporation that is similar in broad strokes to a KK. The distinctions with the KK are:

easier and cheaper to create
easier to formally make decisions
carries less reputation than a KK

See the Wikipedia entry for more details, but do not take that content any more seriously than you do this page: I think I can spot some patent errors/inconsistencies there, and I am not an expert. I would seek professional help from someone used to creating businesses.

advantages

With a GK, you can pay out earnings without regard to percentage of equity held. This gives you flexibility in setting up a company with shareholders. But you must state how you're dolling out payments in your articles of incorporation.

In my in-expert and non-legally-sufficient opinion, the GK is the way to go if you're simply looking for a corporate platform through which to do some billing while offset some expenses like rent.

restrictions

This form of company cannot be taken public.

LLP

This is effectively a paper shell for allowing business partners to collect income indirectly. It is not a corporation, and it requires two more partners. See this terse explanation or (again) the JETRO document linked above. I'm yet to understand the purpose of this form of company.

final disclaimer

As I've said above, find yourself professional advice. My understanding (and my publishing of that) are not sufficient. This is intended as a helpful illustration only.