Setting up with a GK godo kaisha

Setting up with a GK godo kaisha

The godo kaisha or goudou kaisha Japanese company, abbreviated to “GK”, is sometimes called the Japanese LLC because its Japan’s version of the US LLC (limited liability company). That’s not a good analogy though: the Japanese GK godo kaisha company differs from the US LLC in many ways, most notably that Japanese GK godo kaisha companies must pay income tax at the corporate level and cannot pass losses through to members, whereas a US LLC can pass pretax income or losses through to its members who then include such income or losses in their personal tax-returns. A GK godo kaisha is a good company for US companies to use though, as the IRS considers the Japanese GK company a “check the box” disregarded entity further to US Treasury regulations §301.7701-2(b)(8).

Japan introduced the GK godo kaisha Japanese company in 2006 to replace the former YG yugen gaisha. Originally intended for joint-venture technology startups, the GK godo kaisha:

  • is less expensive to set up than a KK kabushiki kaisha.
  • is easier to maintain than a KK kabushiki kaisha (but only if all members; members are the equivalent of shareholders in the GK world; are residents of Japan).
  • is the only Japanese corporate entity whose ownership is not dependent solely on capital contribution, meaning a GK godo kaisha’s members can decide ownership percentages and profit distribution based on both capital contributions and non-capital (usually know-how or intellectual property) contributions.

The Japanese government expected entrepreneurs and investors to flock to set up GKs and thus reproduce in Japan the high-tech startup boom seen in the US in the 1990’s and early 2000’s. Sadly, what governments hope and what business does, are often very different, so maybe it’s not surprising that more than a decade after incorporating the first GK godo kaishas, many Japanese are still unaware of them and many accountants and businesses still tend to feel more comfortable dealing with KK kabushiki kaishas, which they traditionally view as most prestigious. It’s notable that many large foreign companies do use GK godo kaishas for their Japanese subsidiaries, including Apple Japan GK, Amazon Japan GK, Caterpillar Japan GK, Cisco Systems GK, Coach Japan GK, Exxon Mobil GK, P&G Max Factor GK, Skechers Japan GK, Universal Music GK, Warner Bros. Japan GK, etc. Those US companies use GK godo kaishas not because of any operating cost advantage or because they want to set up joint-ventures with Japanese entrepreneurs: they use them for the same reason they previously used YK yugen kaishas, namely that the IRS allows a GK godo kaisha as a ‘check the box’ pass-through entity for US tax purposes.

Let’s summarize the key points of the GK godo kaisha:

  • A Japanese GK godo kaisha company is similar to a US LLC.
  • A Japanese GK godo kaisha company issues ‘units’.
  • ‘Members’ own a Japanese GK godo kaisha company’s units.
  • A member can own more units than the value of its capital contribution, which for example allows an inventor to assign his or her invention in return for units.
  • The members collectively manage the GK godo kaisha company, unless they choose one among themselves as the Managing Member.
  • A single member (who by default becomes the Managing Member), including a non-resident single member, can own 100% of a Japanese GK godo kaisha company’s units (except in certain regulated industries such as energy, banking and transportation).
  • If the Managing Member is not a Japanese resident, it must appoint an Executive Manager who is resident in Japan.
  • A GK godo kaisha company must have a registered office address in Japan.
  • A GK godo kaisha can register its name in English, but must include the Japanese characters 合同会社 at the end (such as Apple Japan合同会社).
  • A Japanese GK godo kaisha only needs JPY1 paid-in capital, but we recommend JPY1,000,000 or more as the GK will spend that much on incorporation and in the first few months of business.
  • To sponsor any working visa, whether an employee’s Engineer/Specialist or Intra-Company Transferee visa, or its owner’s Business Manager visa, a GK godo kaisha must have paid-in capital of JPY5,000,000 or more.
  • A GK godo kaisha can register for “Blue Form” tax status, which allows it to carry forward losses to offset against income taxes for up to 9 years after the year in which it incurred the loss (up to 10 years for losses incurred in financial years starting on or after April 1, 2017).

When the Japanese government introduced GK godo kaishas on May 1, 2006, it also eliminated the three main complaints about the KK kabushiki kaisha by: (1) eliminating the KK’s need for JPY10,000,000 paid-in capital, (2) allowing sole director KKs, and (3) removing the need for a bonded bank-account to hold a KK’s paid-in capital. Considering those changes, a sole-director sole-shareholder KK kabushiki kaisha literally overnight became much simpler to incorporate and maintain. Added to the improved simplicity, when considering that (4) Japanese legal and accounting professionals have understood for decades how to deal with KKs, and (5) GKs have no domestic tax advantages over KKs, maybe it’s not surprising relatively few GKs exist. Some younger Japanese entrepreneurs do seem to consider GK godo kaishas as a trendy business option (maybe because Apple uses one), but after more than a decade, and despite occasional government pushes to promote GK godo kaishas as the best entity for Japanese entrepreneurs, far more entrepreneurs start KK kabushiki kaishas each year than GK godo kaishas. The Ministry of Justice estimates there are less than 20% as many GKs as KKs in existence.

There are situations when a GK godo kaisha is the best option and it’s paradoxical that a GK goudo kaisha is often the best choice for very small domestic businesses with limited capital at one end of the corporate spectrum, and cash-rich US corporations and sophisticated GK-TK investment structures at the other end. Let’s take a look at the main attractions of a Japanese GK godo kaisha for companies setting up business in Japan:

  1. A GK godo kaisha is an independent Japanese legal entity, so its liabilities are local and personal to it and do not automatically become the liabilities of its parent.
  2. A GK godo kaisha costs about JPY190,000 less to set up than a KK kabushiki kaisha because it has no notarization fee and no stamp duty.
  3. A GK godo kaisha can distribute post-tax profits to its members, independent of their percentage capital contribution, by including distribution rules in its Articles of Incorporation.
  4. A GK does not need to hold annual general meetings or other meetings of its members to approve its annual financial statements.
  5. A sole-member GK godo kaisha is simple to manage because other than filing annual tax-returns, labor-related filings, and any occasional changes of address, it has few legal reporting requirements (assuming it doesn’t hold any regulatory licenses).
  6. For a US entity, a GK godo kaisha is eligible as a disregarded “check the box” entity under US Treasury regulations §301.7701-2(b)(8).

I’m often asked for a KK – GK comparison. Based on my experience, having been the President of several KK kabushiki kaishas and involved in Japanese business for over two decades, the main disadvantages of a GK godo kaisha for a foreign company doing business in Japan are:

  1. The Executive Manager of a sole-member GK godo kaisha, has unrestricted authority to bind the company to loans and other commitments. As noted in the section about KK kabushiki kaishar representative directors, there are true horror stories of irrevocable agreements with distributors in which representatives or their family members held controlling interests, used the company to guarantor personal loans, used its cash for personal gain, and so on.
  2. A GK godo kaisha’s Executive Manager’s term is not limited. This could result in needing to pay a large severance payment to end an Executive Manager’s term, even with cause, because in principle a KK kabushiki kaisha must pay each director’s fees until his or her director’s term expires.
  3. Structuring performance-linked compensation for an Executive Manager can have expensive tax consequences, because even if the GK goudo kaisha operates as a cost-center, bonuses or commissions paid to the Executive Manager can create notional pretax profits for corporate income tax calculation purposes.
  4. The only way for a GK godo kaisha to get profits back to its foreign parent is to pay post-tax distributions, which are then subject to 20% withholding tax less any tax treaty relief (this is probably not an issue for US companies holding 50% or more of a GK godo kaisha’s shares for six-months or longer). This means a GK must carefully structure its transfer fees, inter-company management fees, etc.
  5. All members of a GK godo kaisha must agree unanimously, unless otherwise stated in its Articles of Incorporation, before the company can make major business decisions such as disposing of all, or substantially all, of its assets, approving transfers or sales of units, etc. This means that a disgruntled member with an insignificant ownership interest can very easily obstruct a GK’s business.
  6. When a GK godo kaisha does need to file amended corporate details, the Managing Member, not just the Executive Manager, must notarize documents, which can add cost and delay the filings.

We noted in the section on KK kabushiki kaishas that careful planning can overcome all of a KK kabushiki kaisha’s disadvantages. For this reason, unless: (1) capital is extremely limited (and if it is then sadly the chances are that the GK will fail for cash flow reasons within months of formation), (2) the sole-member is a US corporation needing the disregarded “check the box” entity classification under US Treasury regulations §301.7701-2(b)(8), or (3) it’s part of a GK-TK invesatment structure, the KK kabushiki kaisha remains the recommended entity for most companies considering company formation in Japan.

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