Establishing a Company in Japan as a Foreigner: Joint-Stock Companies, Limited Liability Companies, General Partnerships, and Limited Partnerships

Japan offers an attractive market for entrepreneurs worldwide, thanks to its robust economy and innovative business environment. Launching a new venture in this vibrant country can bring about immense opportunities, yet the path to success begins with establishing a proper legal foundation. For foreigners setting up companies in Japan, understanding the complex Japanese legal system and selecting the optimal corporate form that aligns with their business goals is a critically important decision that can shape the future of their enterprise.

The Japanese Companies Act sets forth detailed rules regarding the establishment, organization, operation, and management of companies (Article 1 of the Japanese Companies Act). Foreigners establishing a company in Japan may face unique challenges not encountered by Japanese nationals. For instance, requirements for obtaining a “Business Manager” visa may include having a minimum capital of over 5 million yen or securing an independent business office. In such situations, the support of a law firm with specialized knowledge and experience is indispensable.

This article focuses on the main corporate forms available to foreigners establishing a company in Japan, namely the joint-stock company (Kabushiki Kaisha or KK), the limited liability company (Godo Kaisha or GK), the general partnership (Gomei Kaisha), and the limited partnership (Goshi Kaisha). By comparing the legal personalityistics, operational structures, and the respective advantages and disadvantages of these corporate forms in detail, we aim to assist you in making the best choice for your business objectives.

Understanding the Basics of Japanese Corporate Structures

Japanese Corporate Law provides various legal frameworks for conducting business activities. It primarily establishes four types of corporate structures, each with its own distinct personalityistics and scope of legal responsibilities.

Types of Companies Under Japanese Corporate Law

Article 2, Paragraph 1 of the Japanese Companies Act defines a “company” into the following four types:

• Joint-stock Company (Kabushiki Kaisha or KK): This type of company raises funds from a wide range of investors by issuing shares and operates a business. Shareholders have limited liability within the amount of their investment. It is the most common and widely recognized company structure in Japan.
• Limited Liability Company (Godo Kaisha or GK): Introduced by the revision of the Companies Act in 2006 (Heisei 18), this is a relatively new type of company. All investors have limited liability, and the owners and managers of the company are the same individuals. Modeled after the American LLC (Limited Liability Company), it is also referred to as the “Japanese version of LLC.”
• General Partnership Company: In this company structure, all investors bear unlimited liability for the company’s debts. This means that if the company cannot fully pay its debts, the investors are obligated to settle the company’s debts with their personal assets.
• Limited Partnership Company: This type of company has a mix of unlimited liability partners and limited liability partners. Some investors bear unlimited liability, while others have limited liability.

Among these types of companies, general partnership companies and limited partnership companies are rarely chosen by foreigners establishing a business in Japan due to the extremely high risk of unlimited liability imposed on investors. In the modern business environment, the principle of limited liability, which restricts the risk that investors should bear, is strongly demanded, enhancing capital liquidity and promoting investment. However, understanding the personalityistics of each company type is essential for making the best choice for one’s business.

Joint-Stock Companies: Choices for Trust and Growth

In Japan, joint-stock companies (Kabushiki Kaisha) are the most widely recognized and utilized corporate form. Their structure is well-suited for businesses aiming for large-scale operations and growth.

Definition and Legal Characteristics

A joint-stock company in Japan operates by issuing shares to raise funds from a wide range of investors, who then become part-owners of the company through their shareholdings. Shareholders are liable only up to the amount they have invested, even if the company goes bankrupt, as per Article 104 of the Japanese Companies Act. This principle of limited liability for shareholders creates a secure environment for investment, attracting more capital to the market and stimulating economic activity, which is essential for companies targeting large-scale operations and growth.

In a joint-stock company, the shareholders, who are the owners, are typically separate from the directors who manage the company’s day-to-day operations (Articles 326(1), 331(2), and 402(5) of the Japanese Companies Act). Shareholders indirectly participate in management through the shareholders’ meeting and can appoint directors with specialized knowledge and experience. This separation can lead to more efficient management and enhanced expertise.

Shareholders generally have the freedom to transfer their shares, as stipulated in Article 127 of the Japanese Companies Act, which facilitates capital recovery for investors and reduces investment risk. However, the company can restrict share transfers through its articles of incorporation (Articles 107(1)(i) and 108(1)(iv) of the Japanese Companies Act).

Shareholders are treated equally according to the number and type of shares they hold, as mandated by Article 109(1) of the Japanese Companies Act. This ensures fair corporate operations and is crucial for investors making long-term investment decisions.

A joint-stock company must include “Kabushiki Kaisha” in its trade name (Article 6(2) of the Japanese Companies Act).

Joint-stock companies have governance structures such as the general meeting of shareholders, board of directors, and representative director to ensure shareholders’ rights and achieve efficient and transparent management.

Advantages and Disadvantages

Choosing a joint-stock company comes with various advantages and disadvantages.

One advantage is that joint-stock companies are the most common corporate form in Japan, which lends them a high degree of credibility externally. This credibility translates into tangible business benefits, such as easier access to bank loans and increased opportunities for transactions with large corporations. Additionally, issuing shares allows for substantial capital raising from numerous investors. Looking ahead, companies can consider going public, which provides flexibility for business expansion. By inviting management experts to serve as directors, an efficient management structure can be established, allowing for optimal personnel placement according to the business growth stage.

On the downside, the articles of incorporation require notarization, and the establishment costs tend to be higher compared to a limited liability company (Godo Kaisha). There are also strict legal requirements and operational costs associated with holding shareholder meetings and board meetings, as well as the obligation to publish financial statements. Directors typically have a fixed term, necessitating registration changes upon term completion, which incurs additional costs and effort.

Limited Liability Company (LLC): A Flexible and Efficient Business Structure in Japan

The Limited Liability Company (LLC), a relatively new business structure in Japan, was introduced following the revision of the Japanese Companies Act in 2006 (Heisei 18). It has garnered attention from small businesses and startups due to its flexible operation and simple establishment procedures.

Definition and Legal Characteristics

The LLC in Japan, modeled after the American LLC, is often referred to as the “Japanese version of the LLC.”

Members (investors) of a Japanese LLC are only liable up to the amount they have invested if the company goes bankrupt, as stipulated by Articles 578 and 580-2 of the Japanese Companies Act. This limits the risk for investors, similar to shareholders in a stock corporation.

As a principle, all members who have invested in the company execute its business operations (Japanese Companies Act, Article 590-1), which accelerates the decision-making process. By specifying in the articles of incorporation, it is also possible to designate certain members as executive members.

One of the significant features of an LLC is the ability to freely set internal rules, such as profit distribution, voting rights, and the selection of executive members, as stipulated in the articles of incorporation. This flexibility allows for unique arrangements among a small number of co-venturers, not bound by investment ratios.

LLCs in Japan do not have shares. Therefore, they cannot raise funds through the issuance of shares or plan for a future public listing. Fundraising methods are primarily limited to contributions from members, bank loans, and subsidies.

While there is no representative body in principle, a representative member can be appointed through the articles of incorporation or by mutual election among the members (Japanese Companies Act, Article 599-1 proviso and 3).

A Japanese LLC must include “LLC” in its trade name (Japanese Companies Act, Article 6-2).

Advantages and Disadvantages

Choosing an LLC as a business structure comes with the following advantages and disadvantages.

Advantages include lower initial costs compared to a stock corporation, as there is no need for notarization fees for the articles of incorporation. There are no term limits for officers, eliminating the need for registration procedures and costs associated with officer changes, thus reducing long-term operational costs. Strong autonomy in the articles of incorporation allows for flexible internal rule setting. Especially in profit distribution and decision-making, free arrangements are possible without being tied to investment ratios. Since ownership and management coincide, important decisions can be made swiftly. Unlike stock corporations, there is no obligation to announce financial statements, saving on official gazette publication costs and keeping the company’s financial situation private.

Disadvantages include the inability to issue shares, which means large-scale fundraising through public listing is not possible. Fundraising is mainly limited to contributions from members, bank loans, and subsidies. Being a relatively new structure and commonly used by small businesses, it may be perceived as having lower credibility in B2B transactions compared to stock corporations. However, well-known companies such as Apple Japan LLC, Google LLC, and Amazon Japan LLC have chosen this structure, significantly increasing its recognition. If the articles of incorporation lack clear provisions, the consent of all members is required, which can make decision-making difficult in the event of disagreements.

Partnership Company: A Form of Personal Union with Unlimited Liability

A Partnership Company is one of the oldest types of corporate entities under Japanese Corporate Law, personalityized by the unlimited liability of all its investors for the company’s debts.

Definition and Legal Characteristics

A Partnership Company is a corporate form where all investors bear unlimited liability for the company’s debts (Article 576, Paragraph 2 of the Japanese Corporate Law).

In a Partnership Company, if the company cannot fully pay off its debts, the partners are obligated to settle the company’s debts with their personal assets (Article 580, Paragraph 1 of the Japanese Corporate Law). This responsibility is quite heavy, as the failure of the business can directly affect the personal assets of the partners.

As a principle, all partners, who are investors, execute the company’s operations and represent the company (Articles 590, Paragraph 1 and 599, Paragraph 1 of the Japanese Corporate Law). This necessitates a strong personal union and trust among the partners.

Similar to a Limited Liability Company, the company’s internal rules can be set relatively freely by the articles of incorporation (Articles 575, Paragraph 1 and 637 of the Japanese Corporate Law).

There are no shares, and the transfer of interests requires the consent of all other partners (Article 585, Paragraph 1 of the Japanese Corporate Law).

A Partnership Company must use the term “Partnership Company” in its trade name (Article 6, Paragraph 2 of the Japanese Corporate Law).

Advantages and Disadvantages

Choosing a Partnership Company comes with the following advantages and disadvantages.

As an advantage, the mutual trust among all partners who bear unlimited liability can be very high, potentially leading to swift decision-making. The establishment procedures and operations are relatively simple since no certification of the articles of incorporation is required, and the organizational design is straightforward. This makes it suitable for small-scale joint ventures as the internal rules can be set flexibly.

The disadvantage is that all partners bear unlimited liability, so in the event of business failure, there is a risk of losing all personal assets. This risk can be a particularly high barrier for foreign entrepreneurs. Due to the nature of unlimited liability, it is extremely difficult to raise large-scale external funding. In the modern business environment, it is a corporate form that is rarely chosen, and it tends to have low social recognition and credibility.

Partnership Company in Japan: A Hybrid of Unlimited and Limited Liability

A Partnership Company in Japan is a corporate form that features a mix of unlimited and limited liability partners, each bearing different scopes of responsibility.

Definition and Legal Characteristics

Under Japanese Corporate Law (Article 576, Paragraph 3), a Partnership Company is a corporate form that includes both unlimited and limited liability partners.

Unlimited liability partners are responsible for the company’s debts with their personal assets (Japanese Corporate Law, Article 580, Paragraph 1), while limited liability partners are responsible only up to the amount they have invested (Japanese Corporate Law, Article 580, Paragraph 2).

It is common for unlimited liability partners to execute the company’s business and represent the company (Japanese Corporate Law, Articles 590, Paragraph 1, and 599, Paragraph 1). Limited liability partners, in principle, do not have the right to execute business.

Like general partnerships and limited liability companies, the articles of incorporation can flexibly set internal rules (Japanese Corporate Law, Articles 575, Paragraph 1, and 637).

There are no shares, and the transfer of interests requires the consent of all other partners (Japanese Corporate Law, Article 585, Paragraph 1).

A Partnership Company must include the words “Partnership Company” in its trade name (Japanese Corporate Law, Article 6, Paragraph 2).

Advantages and Disadvantages

Choosing a Partnership Company comes with the following advantages and disadvantages.

As an advantage, unlimited liability partners can lead the management while raising funds from limited liability partners. This expands the funding options compared to a general partnership composed only of unlimited liability partners. The establishment procedures and operations are relatively simple since no articles of incorporation certification is required, and the institutional design is straightforward. Flexible internal rules can be set, making it suitable for specific partnerships.

As a disadvantage, unlimited liability partners, like in a general partnership, risk losing their personal assets. Limited liability partners, while making investments, are generally restricted from direct management involvement. Similar to a general partnership, this corporate form is seldom chosen in today’s business environment and tends to have lower social recognition and credibility.

Summary

For foreign entrepreneurs establishing a company in Japan, stock companies (kabushiki gaisha), limited liability companies (godo kaisha), general partnerships (gomei kaisha), and limited partnerships (goshi kaisha) each offer different personalityistics as options. It is crucial to make the optimal choice based on the nature of the business, future prospects, risk tolerance, and the scale of initial investment.

Stock companies provide high social credibility and a variety of financing methods, making them suitable for enterprises aiming for large-scale business development and future public offerings. Their strict legal requirements and operational costs are important aspects for protecting investors and maintaining market integrity, serving as a foundation for companies to grow and attract more capital from the market.

On the other hand, limited liability companies feature lower initial costs and operational expenses, simplified procedures, and a high degree of management freedom. They are particularly suitable for small teams, family businesses, startups, and small-scale businesses that require quick decision-making. Although they have less social credibility than stock companies, in recent years, even major corporations have been choosing limited liability companies, and their recognition and reliability are increasing.

General partnerships and limited partnerships, which impose unlimited liability on investors, are extremely rare choices for foreigners in today’s business environment. These forms are limitedly suitable for very small-scale businesses or specific joint ventures that do not require external funding and are based on strong personal connections and trust among partners. However, the risk of business failure affecting an individual’s entire personal assets can be a significant burden for foreign entrepreneurs.

Monolith Law Office provides comprehensive legal support to help our foreign clients smoothly establish companies and succeed in their businesses in Japan. From choosing the company form to providing detailed support tailored to our clients’ needs, we are here to assist. If you are considering business expansion in Japan, please consult with Monolith Law Office. Our experts will strongly support your venture.