Joining a Japanese LLC: A Comprehensive Guide to Procedures Based on the Companies Act

The Japanese LLC (Limited Liability Company), known as a “Godo Kaisha” in Japan, has been garnering attention in recent years for its ease of establishment and operational flexibility. This business structure is similar to the LLC in English-speaking countries and has become an attractive option for foreign investors and entrepreneurs. The flexibility in managing a Godo Kaisha is based on a clear legal framework established by the Japanese Companies Act. Understanding this law accurately is key to smooth business operations. One legal term related to Godo Kaisha that requires particular attention is “Shain,” which, unlike the general term for employees, refers to the owners who have invested in the company, essentially the managers themselves, under Japanese corporate law. Grasping this fundamental definition is crucial for comprehending the structure of a Godo Kaisha. This article focuses on the theme of “Admission of Members” which becomes important as a Godo Kaisha grows or changes its strategy. Specifically, we will provide a detailed and comprehensive explanation of the legal procedures for welcoming new members and for existing members to make additional investments, based on the provisions set by the Japanese Companies Act. The admission of members is not merely an internal management task; it is a significant act that fundamentally alters the company’s legal structure and capital composition, requiring strict adherence to the procedures mandated by law.

Basic Principles of Member Admission in a Japanese LLC (Godo Kaisha)

Under Japanese Corporate Law, a Japanese LLC (Godo Kaisha) is permitted to admit new members (Article 604, Paragraph 1 of the Japanese Companies Act^{[2005 (Heisei 17)]}). The admission of members is a crucial means to achieve various management objectives, such as company growth strategies, the introduction of new expertise, or fundraising. There are primarily two methods for a member to join: one is by making a new capital contribution to the company, and the other is by acquiring a portion or all of the existing member’s interest (rights equivalent to ownership of the company). This article will focus on the procedures for admitting members through new capital contributions, which increase the company’s total assets. The choice between these two methods can significantly impact the company’s financial situation and registration procedures. Accepting new capital contributions increases the company’s assets and capital, which may legally require specific registration procedures. On the other hand, the transfer of interests is a transaction between members, and since the total capital of the company does not change, the procedures may differ. Understanding this fundamental difference is the first step in selecting the appropriate procedures.

Onboarding New Employees in Japan

When welcoming new employees through fresh capital contributions, Japanese corporate law requires a series of step-by-step and stringent procedures. Adhering to these procedures is essential to ensure the validity of the onboarding and to avoid future legal disputes.

Consent of All Members and Amendment of Articles of Incorporation Under Japanese Law

Admitting new members is a critical decision that affects the very foundation of a company. Therefore, it is necessary to first amend the articles of incorporation, which are the basic rules of the company. According to Article 576, Paragraph 1 of the Japanese Companies Act, the articles of incorporation of a limited liability company must include the names or designations and addresses of all members, as well as the amount of capital contribution of each member. Consequently, when a new member joins, it is essential to undergo the amendment procedure to add this information to the articles of incorporation.

As a general rule, the consent of all existing members (consent of all members) is required for amending the articles of incorporation. This is stipulated in Article 637 of the Japanese Companies Act and reflects the fact that a limited liability company is an organization based on personal trust relationships. However, it is possible to relax this requirement by setting forth special provisions in the articles of incorporation. For instance, by incorporating a provision in advance that stipulates “the consent of the majority of all members,” decision-making can be expedited. However, unless such a provision exists, if even one member opposes, the admission of a new member will not be realized.

Capital Contribution and Its Effective Date Under Japanese Corporate Law

Merely amending the articles of incorporation with the consent of all partners does not complete the addition of a new member. Japanese Corporate Law sets forth extremely important provisions regarding when the effect of joining as a member occurs. Article 604, Paragraph 3 of the Japanese Companies Act stipulates that if a person who wishes to become a member has not completed the payment or provision related to the contribution at the time of the amendment of the articles, that person becomes a member when they have completed such payment or provision.

This provision means that the legal status as a member arises in conjunction with the full performance of the promised contribution (performance of the contribution). Even if there is consent from all partners and a contract has been signed, the individual is not legally treated as a member until the contribution is paid into the company. This mechanism is established to protect the company and its creditors. Members of a limited liability company are liable only within the scope of their contribution to the company’s debts. Therefore, the capital the company possesses is the only security for creditors. If rights as a member (for example, voting rights related to business execution) are granted before the contribution is completed, a person who has not yet provided assets to the company could influence the management and endanger the company’s financial foundation. The law strictly ties the emergence of membership qualifications to the performance of contributions to prevent such situations.

Responsibilities of Newly Joined Members in a Japanese LLC

One of the most critical considerations when contemplating becoming a member of a Japanese Limited Liability Company (LLC) is understanding the scope of responsibilities after joining. Article 605 of the Japanese Companies Act stipulates that members who join an LLC after its establishment are also responsible for the company’s debts incurred before their membership. However, the liability of LLC members is limited (Article 580, Paragraph 2) to the amount of their capital contribution, with the company’s assets being the primary source of debt repayment, and the members’ responsibility being supplementary (Article 580).

This means that new members are liable for all the company’s debts incurred before their involvement, just like the other members. This ‘retroactive responsibility’ can be an unexpected and significant risk, especially for investors accustomed to corporate laws in other jurisdictions. As a result, joining as a member is not merely an investment in the future but also an acceptance of the company’s entire past. Therefore, conducting thorough due diligence before deciding to join is of utmost importance. It is essential to meticulously investigate the target company’s financial statements, contractual relationships, litigation risks, and the presence of any contingent liabilities not reflected in the books to fully understand potential risks before making an informed decision.

The Limits of Articles of Incorporation Autonomy as Seen Through Japanese Case Law

While a Japanese Limited Liability Company (LLC) is known for its broad scope of ‘articles of incorporation autonomy,’ allowing for flexible internal rule design, there are legal limits to this autonomy. An important case that suggests this point is the Tokyo District Court decision on October 13, 1996 (Heisei 8). This case involved a partnership and centered around the issue of a partner’s ‘withdrawal,’ but the underlying legal principles also apply to the admission of members in a Japanese LLC.

In this case, the validity of an articles of incorporation provision stating that “a member may withdraw from the company by a resolution of the majority of the other members” was contested. The court ruled this provision invalid, as it circumvented the strict procedures for the expulsion of members (which require court involvement) set by law. The court indicated that the provisions of the law are imperative rules intended to balance the autonomy of the company with the protection of members’ rights, and simplifying such procedures in a way that contravenes the spirit of the law is not permitted.

The principle demonstrated by this case, namely that “articles of incorporation autonomy cannot override the imperative provisions of the law,” also applies to the procedures for admitting members. For example, even if the articles of incorporation stipulate that “the admission of new members can be decided solely by the executive members,” ignoring the provision of the Japanese Companies Act (Article 637) that requires the consent of all members for a change in the articles, the validity of such a provision is likely to be denied. When it comes to altering the foundation of the company, such as the admission of members, adhering to the procedures set by law takes precedence over the provisions of the articles of incorporation.

Additional Capital Contributions by Existing Members

Another method to strengthen a company’s capital is through additional contributions made by those who are already members. This procedure, too, must follow the steps outlined in the Japanese Companies Act.

Overview of the Procedure

Even when existing members make additional contributions, the core part of the procedure is common to the process of admitting new members. Additional contributions imply a change in the contributing amount of the member, necessitating an update to the “amount of capital contributed by members,” which is an article of incorporation. Therefore, in this case, amending the articles of incorporation is essential, and, in principle, the consent of all members is required. After consent is obtained, the procedure is completed by creating the amended articles of incorporation and having the member fulfill the additional contribution.

Choosing Between Capital Stock and Capital Surplus

When making additional contributions, a company faces a critically strategic decision: whether to account for the contributed funds as “capital stock” or as “capital surplus.” Under Japanese law, it is permissible to not account for the entire contribution amount as capital stock, but to treat part or all of it as capital surplus. This choice directly affects registration procedures, costs, and future financial strategies.

If the contribution is accounted for as “capital stock,” the amount of capital stock becomes public information recorded in the company’s commercial registry (registry certificate), and legally, a change registration is required to reflect the increase. This registration application incurs a tax called the registration and license tax, which amounts to 1/1000 of the increased capital stock (if this calculated amount is less than 30,000 yen, then it is 30,000 yen).

On the other hand, if the entire contribution is accounted for as “capital surplus,” the amount of capital stock does not change. Since capital surplus is not a registered item, no change registration of the capital stock amount is required if this option is chosen. As a result, no registration and license tax is incurred.

This mechanism serves as an important financial strategy tool for companies. Increasing the amount of capital stock can enhance the company’s external creditworthiness, but the process is complicated and costly. Conversely, accounting for it as capital surplus simplifies procedures and reduces costs, while also increasing flexibility for future use of the funds, such as for distribution.

Commercial Registration Due to New Member Joining in Japan

After completing the internal procedures related to the joining of new members or additional capital contributions, commercial registration may be required to legally publicize these changes. However, in the case of a Japanese Limited Liability Company (LLC), not all member admissions necessitate registration.

Cases Requiring Registration

Commercial registration is legally mandated only when there are changes to the information listed on the Certificate of Registered Matters. Under Japanese Corporate Law, if there are changes to the registered items, an application for registration of the changes must be filed with the Legal Affairs Bureau that has jurisdiction over the company’s head office, generally within two weeks from the date of the change (Article 915, Paragraph 1 for stock companies, and Article 919, Paragraph 1 for LLCs and other partnership companies).

The main cases where registration is required in relation to the admission of new members are as follows:

1. When the amount of capital increases: If the newly contributed funds are accounted for as “capital” and there is a change in the “amount of capital,” which is a registered item, registration of the change is necessary.
2. When there is a change in the executive members or representative members: The names and addresses of the “executive members” who have the authority to execute business and the “representative members” who have the authority to represent the company are included in the registered items of an LLC. If a newly joined member takes up these positions, registration of the change to include their names and other details in the registry is required.

An important point derived from this rule is that under certain conditions, no registration procedures are necessary even when a member joins. Specifically, this applies when (1) the new member does not become an executive or representative member and remains a general member without executive authority, and (2) the entire amount of their contribution is accounted for as “capital surplus” without any change in the amount of capital. In this scenario, since there is no change to the registered items, there is no obligation to apply for registration. Understanding this can significantly simplify procedures and reduce costs.

Overview of Registration Procedures

If registration is required, an application must be filed with the Legal Affairs Bureau that has jurisdiction over the company’s head office within two weeks from the date of the change. Failure to comply with this deadline may result in an administrative fine of up to one million yen against the individual representative member (an administrative penalty, not a criminal sanction).

When applying, typically, documents such as the application for registration of changes, the consent form of all members approving the amendment to the articles of incorporation, and a document proving the payment of the contribution (payment certificate) are required. The formats and examples of these documents are available on the Legal Affairs Bureau’s website. As the procedures can be complex, consulting with a specialist is also a viable option.

Summary

In this article, we have provided a detailed explanation of the procedures for admitting new members into a Japanese LLC (Godo Kaisha), based on the Japanese Companies Act. The process of welcoming new members requires strict legal procedures, including an amendment to the articles of incorporation with the consent of all members, the complete fulfillment of contributions by the incoming member, and, if necessary, commercial registration. In particular, the provision that new members assume responsibility for the company’s existing debts, and the strategic choice of whether to account for contributions as capital or additional paid-in capital, are critical factors that can significantly impact the future of the company. Understanding these legal requirements and strategic options accurately and proceeding with the procedures in a planned manner is key to achieving healthy growth and stable operations for an LLC in Japan.

Monolith Law Office has a wealth of experience in providing legal services related to the admission of members into LLCs, as discussed in this article, and serves a multitude of clients within Japan. Our firm boasts a team of experts, including English-speaking professionals with foreign legal qualifications, capable of providing comprehensive support for the diverse needs of our clients in the Japanese business environment. If you require specialized advice tailored to your situation, please do not hesitate to consult with our firm.