Setting Up a Company in Japan: Kabushiki Kaisha (KK) vs Godo Kaisha (GK) — Differences, Costs and Procedure

When setting up a company in Japan, the two main choices are the kabushiki kaisha (KK, stock company) and the godo kaisha (GK, limited liability company). The minimum statutory cost of formation is ¥165,000 for a KK (notarial fee for the articles plus registration and licence tax) and ¥60,000 for a GK (registration and licence tax only), so a GK is cheaper to set up. A KK, on the other hand, has well-developed rules for taking investment in exchange for shares and transferring shares, which suits businesses planning to raise outside capital. A GK allows profit allocation and management arrangements to be set flexibly in the articles, and has no obligation to publish its accounts.

• Two or three founders are starting a business and want to keep costs down while leaving room for future investment.
• An overseas parent is establishing a Japanese subsidiary and must choose between a KK and a GK.
• A sole proprietor wants to incorporate an existing business and is concerned about how customers and banks will view the company form.
• Co-investors want profit shares that differ from the amounts they contributed.

The statutory costs that always arise on formation are as follows.

The notarial fee is reduced to ¥15,000 for a KK with capital under ¥1 million where (1) all promoters are individuals and there are no more than three of them, (2) the promoters subscribe for all shares issued on formation, and (3) the company has no board of directors (Notary Fees Order, Art. 35(i)).

Because the registration tax is proportional to capital, it exceeds ¥150,000 for a KK with capital above about ¥21.43 million, and exceeds ¥60,000 for a GK with capital above about ¥8.57 million. Other costs include fees for certified copies of the articles and certificates of registered matters, and professional fees if you use an adviser.

Governance

A KK must have a shareholders' meeting and at least one director (Companies Act, Art. 326(1)). A board of directors or a statutory auditor may be established by the articles (Art. 326(2)), and a non-public company can do without them; a public company, among others, must have a board (Art. 327(1)). A director's term is two years as a rule; a company that restricts share transfers (a non-public company) can extend it to up to ten years in its articles (Art. 332(1) and (2)). Each time a term ends, a change of officers must be registered, even on reappointment.

In a GK, the members who contribute capital manage the business themselves unless the articles provide otherwise, and where there are two or more members, decisions are taken by majority (Art. 590). The Companies Act sets no term of office for managing members, so no re-election registrations arise. All members have limited liability (Art. 576(4)).

Profit distribution

Dividends in a KK are, as a rule, paid in proportion to shareholdings. In a GK, the ratio for sharing profits and losses can be set freely in the articles; if the articles are silent, it follows the value of each member's contribution (Art. 622(1)). The method of claiming distributions can also be set in the articles (Art. 621(2)). This makes it possible, for example, to allocate a larger share of profits to a member who contributed less capital but more to the business.

Transfer of shares and interests

Shareholders may, as a rule, transfer their shares freely (Art. 127). Most small companies provide in their articles that transfers require the company's approval (Art. 107(1)(i)). A GK member cannot transfer an interest without the consent of all other members (Art. 585(1); for a non-managing limited liability member, the consent of all managing members is enough, Art. 585(2)). For bringing in outside investors, the KK structure is generally easier to work with.

Public notice of accounts

A KK must publish its balance sheet (and, for a large company, its profit and loss statement) without delay after its annual shareholders' meeting (Art. 440(1)). A GK has no such obligation, although its creditors may ask to inspect its financial statements at any time during business hours (Art. 625).

Converting later

A GK can become a KK through an entity conversion (Art. 746). This requires a conversion plan, creditor protection procedures and registration, and takes time and money. If you expect to list or to raise significant capital, choosing a KK from the start may make sense.

For a KK formed by its promoters, the process is broadly:

1. Decide the trade name, business purposes, head office, capital and officers, and prepare the articles of incorporation (Companies Act, Art. 26; the articles may be prepared electronically, Art. 26(2))
2. Have the articles notarised (Art. 30(1))
3. The promoters pay in the capital
4. File for registration of incorporation at the Legal Affairs Bureau for the head office; the company comes into existence on registration (Art. 49)
5. Within two months of incorporation, file a notification of incorporation with the tax office (Corporation Tax Act, Art. 148), and make the local tax filings
6. A corporate workplace that regularly employs staff is covered by health insurance and employees' pension insurance (Health Insurance Act, Art. 3(3)(ii); Employees' Pension Insurance Act, Art. 6(1)(ii)); check the Japan Pension Service guidance on when and how to register with the pension office

For a GK, the prospective members prepare the articles (Art. 575), make their contributions and file for registration. No notarisation is required, and the company comes into existence on registration (Art. 579).

The steps and costs for forming a KK or GK are the same when the founder is an overseas company or a foreign national, but some additional points need checking.

• Inward direct investment by a foreign investor in a Japanese company is subject to either prior notification (Art. 27(1)) or a post-investment report (Art. 55-5) under the Foreign Exchange and Foreign Trade Act. Whether either is required depends on the business purposes and form of investment, as set out in Cabinet Orders and related rules.
• The articles and registration documents are prepared in Japanese. For signatures of promoters or members located abroad, prepare certificates following the guidance of the Legal Affairs Bureau and the notary office.
• A residence status for running a business in Japan is assessed separately from incorporation. Check the requirements, such as investment amount and business premises, with the Immigration Services Agency.

For an overseas parent, how the Japanese company form is treated for home-country tax purposes is also relevant, and it is usual to consider this together with home-country tax and legal advisers.

• Check whether your three-to-five-year plan involves outside investment or a listing.
• If there are co-investors, write down how you want contributions to relate to profit shares and voting.
• Decide the amount of capital and work out the notarial fee and registration tax.
• Check with the relevant authority whether your business needs a licence and whether that licence has conditions on capital or company form.
• If foreign nationals will manage the company, check the residence status requirements with the Immigration Services Agency.
• Draft the business purposes in the articles to cover the activities you plan to carry on in future.

• You need an agreement with co-founders or investors on ownership percentages, treatment on departure or profit allocation.
• You are considering classes of shares or a shareholders' agreement to take investment.
• An overseas parent is setting up a Japanese entity and the choice of form depends on its home-country corporate law and tax position.
• You want to convert an existing GK into a KK, or move part of a business into a new company.

Q. How much more does a KK cost to set up than a GK? Comparing the statutory minimums, a KK costs a notarial fee of ¥15,000 to ¥50,000 plus at least ¥150,000 in registration tax, while a GK costs at least ¥60,000 in registration tax. With paper articles, both also pay ¥40,000 in stamp duty.

Q. Will a GK be at a disadvantage with customers or in hiring? Legally there is no difference in the validity of its transactions or contracts. A GK is a corporation under the Companies Act and all its members have limited liability. If you are concerned, check with key customers and banks in advance.

Q. Can a company be formed with capital of ¥1? Yes. The Companies Act has no minimum capital. However, licences, residence status requirements and customer or bank reviews may call for a certain level of capital.

Q. Can a GK be changed into a KK? Yes, through an entity conversion (Companies Act, Art. 746). Creditor protection procedures and registration are required, so plan back from the date you want the change to take effect.

Q. When is the notarial fee reduced to ¥15,000? When a KK has capital under ¥1 million, all promoters are individuals and there are no more than three, the promoters subscribe for all shares issued on formation, and there is no board of directors (Notary Fees Order, Art. 35(i)). It does not apply where a corporation is a promoter or the company has a board.