How to incorporate a GK godo kaisha
In the previous section on incorporating the yugen kaisha ‘YG’, I noted that those infamous Japanese business and market myths want you to believe that no Japanese customer will treat you seriously if you are “only a yugen gaisha”. The truth in 2004 (at least in the corporate Japanese markets) is that your customers will be far more interested in the quality of your product or service and the quality of your local team than in the form of corporate entity you use. There are of course certain industries, most likely the Japanese consumer financial markets, where competing as a yugen gaisha may not create the desired impression on your intended customers, but in general the “kabushiki kaisha is king” mentality is an artifact of the pre-1990s and if your intended consumer market is age 35 or younger, they will be less concerned with your corporate entity than your overall brand image.
Nevertheless, and despite the obvious fiscal benefits of a properly structured yugen kaisha, many foreign companies fall into the trap of establishing a kabushiki kaisha simply because of its supposedly more prestigious image – they then spend substantial amounts of cash and management resource to administrate it. Even for larger foreign companies with internal legal divisions, the administrative simplicity and efficiency of a yugen gaisha should not be ignored. The world’s largest oil company, Exxon Mobil, operates in Japan as a yugen gaisha and you can be sure they chose that structure for good business reasons.
Once again it is likely that the main opposition to incorporating a yugen kaisha, and the main proponent of using the administratively intensive kabushiki kaisha ‘..because of its prestige with customers..’, will be your Japanese subsidiary manager. Only you can decide whether he/she is worth the substantial administrative overhead and additional tax burden of doing business in Japan as a kabushiki kaisha – I will only comment that in England we have a saying that “A bad workman always blames his tools.”
To summarize, the key administrative and statutory requirements for a yugen gaisha ‘YG’ are:
- a yugen gaisha:
- must be registered with the Japanese Ministry of Justice,
- must have at least 1 registered Director and he/she must be resident in Japan,
- must have a registered office in Japan,
- must have Articles of Incorporation.
- a yugen gaisha can have a maximum of 50 partners (similar to ‘members’ in an LLC),
- on the day of initial registration a YK must issue a minimum of 60 ‘units’ and each ‘unit’ must be paid-for in cash or other valid contribution at a minimum price (par value) of ¥50,000 per unit (i.e. a total starting capital of ¥3,000,000),
- a YG is governed by Japan’s Limited Liability Company Law and must also adhere to the requirements of the Labor Standards Law and other relevant statutes,
- a yugen kaisha is a Japanese resident corporation and under normal circumstances (i.e. without piercing the corporate veil) any litigation will be local to the YK in Japan and will not extend to the parent,
- a YG must file annual financial statements stating its total revenues (including non-Japan revenues) and will be taxed on its profits,
- other than ‘leasing’ equipment and staff to the YG, the parent cannot assign any part of its G&A expense to the YK to offset the yugen gaisha’s Japanese corporate taxes,
- a yugen kaisha can ‘roll-up’ any year’s losses and carry them forward for a maximum of 5 years to offset against profits when calculating corporate taxes,
- a YK can elect to be treated as a flow-through ‘check the box entity’ by a US parent (see the section on yugen kaisha tax benefits) for more tax advantages of the yg,
- it costs $3,000 – $3,500 (excluding paid-in capital) to setup and register a yugen gaisha using a traditional Japanese paralegal office but can easily cost more than 3x that sum if you use a bilingual law firm or accounting firm.