#3 Choose the Legal Form of Your Business in Japan

When expanding a business in Japan, it is important to carefully consider and select the most suitable structure. This is one of the six key steps that we have identified in setting up a business in Japan (Step 2- Determine the Ideal Corporate Structure). The legal structure you choose will significantly impact the way you operate and grow the business in the country.

In this article, we will explore this topic in detail, elaborating the characteristics and differences between a representative office, a branch office, and a subsidiary to help you make an informed decision for your business expansion in Japan.

Seeking Professional Advice

When deciding the legal form of your business in Japan, it is advisable to consult with experts from various fields like certified public accountants (CPAs), certified tax accountants, labor and social security attorneys, and law attorneys. These professionals will be able to assist in the preparation of the various legal documents that are needed in the setting up of the business. These include documents relating to the establishment of a branch or subsidiary, the transferring of business location, the changing of directors or business purpose, capital contribution, reorganization, merger, and dissolution. In addition, judicial scriveners (Shihoshoshi: 司法書士) and attorneys (Bengoshi: 弁護士) specialize in the commercial registration application of the business with the Legal Affairs Bureau (Homukyoku: 法務局).

Common Legal Forms of Businesses in Japan

In Step 2- Determine the Ideal Corporate Structure, we introduced the common legal forms of businesses in Japan.

The common legal structures include:

• Representative offices (Chuzaiin jimusho: 駐在員事務所)

• Branch offices (Shiten: 支店)

• Subsidiaries (Kokaisha: 子会社): The two widely used types are a joint-stock company (Kabushiki Kaisha, or KK: 株式会社) and a limited liability company (Godo Kaisha, or GK: 合同会社)
  

1. Representative Office (Chuzaiin jimusho: 駐在員事務所) A representative office is suitable only for businesses engaged in preparatory or supplementary activities, such as market research and information gathering. Unlike a branch or subsidiary, it cannot conduct sales or generate income in Japan. This business structure is ideal for companies exploring the Japanese market before committing to a larger business structure.

Since a representative office is not allowed to engage in income generating activities, it has no corporate tax filing obligations and is not subject to corporate income tax (Hojinzei: 法人税) in Japan. Additionally, registration with the tax office (Zeimusho: 税務署) is not required. However, if the representative office is a financial institution (e.g., banks, insurance companies, securities firms), it must submit a prior notification to the Financial Services Agency (Kinyucho: 金融庁) when establishing a representative office. This requirement is stipulated in the Banking Act (Ginkoho: 銀行法) and the Financial Instruments and Exchange Act (Kinyu shohin torihikiho: 金融商品取引法).

Unlike a branch office, a representative office does not need to appoint a representative who resides in Japan with a registered address in Japan, leading to lower operational cost.

Lastly, a representative office cannot open a bank account nor lease real estate in its name. In such cases, it is necessary to open a bank account or lease the real estate under the name of an individual expatriate or a business partner in Japan. 2. Branch Office (Shiten: 支店)

A branch operates as an extension of its foreign headquarters and is not a separate legal entity under Japanese law. As a result, the foreign parent company remains fully responsible for all debts and liabilities incurred by the branch's activities.

Under Article 818 of the Companies Act, a foreign company must be registered in Japan if it conducts ongoing business transactions within the country. Therefore, setting up a branch office requires registration under the Companies Act.

Establishing a branch office is one of the most convenient ways for a foreign company to set up a business base in Japan. A branch office can commerce business operations once it has appointed at least one representative who resides in Japan with a registered address, and completed the necessary company registration.

A Japanese branch office may also open bank accounts and lease real estate in its name, providing it with operational flexibility. 3. Subsidiary (Kogaisha: 子会社)

A foreign company establishing a subsidiary in Japan can choose to establish as a joint-stock company (Kabushiki Kaisha, or KK: 株式会社), a limited liability company (Godo Kaisha, or GK: 合同会社) or other entity types recognised under Japan's Companies Act. Due to their limited liability structure, KK and GK are preferred as compared to other entity types such as general partnership (Gomei kaisha: 合名会社) and limited partnership company (Goshi kaisha: 合資会社) where equity participants have to bear unlimited liability.

Like a branch, a subsidiary can conduct full-scale sales activities, open bank accounts and lease real estate in its name. However, unlike a branch, a subsidiary is a separate legal entity in Japan. This means that it is independent from its foreign parent company in terms of liability and governance.

While both KK and GK offer limited liability to their shareholders or members, they differ in their voting rights, governance structure and U.S. tax reporting purposes (if they have a U.S. parent company).

Item	Subsidiary- KK	Subsidiary- GK
Voting Rights	Voting rights are proportionate to　the capital contribution of shareholders.	Voting rights are equal for all members, regardless of investment size.
Governance Structure	More formal. -         May require a supervisory body (e.g., board of directors or corporate auditors). -         Must prepare and publish annual financial statements -         Less flexible self-governance compared to a GK.	More simple and flexible. -         No requirement for a board of directors or corporate auditors. -         No obligation to publish annual financial statements. -         Offers greater flexibility in self-governance through its articles of association.
Able to Elect Pass-Through Taxation for U.S. Tax Purposes? [Read: #1 Check-the-Box Election for the Japanese LLC (Godo Kaisha)]	No. Unable to pass through profits and losses to the U.S. parent company.	Yes. May pass through profits and losses to the U.S. parent company (e.g., via check-the-box rules).

Differences in Legal Nature Between a Branch and a Subsidiary

The following table summarizes the differences in the legal nature between a branch office or a subsidiary:

Item	Branch Office	KK (Kabushiki Kaisha)	GK (Godo Kaisha)
1. Separate Legal Personality (Does it form a distinct entity?)	- No Functions as an extension of the foreign (parent) company - The parent company bears all liabilities of the branch	- Yes A separate Japanese corporation under the Companies Act - Shareholders’ liability is limited to their capital contribution	- Yes A separate Japanese corporation (akin to a limited liability company) - Members’ liability is limited to their capital contribution
2. Minimum Capital (Capital Stock)	- None	- 1 yen or more required by law	- 1 yen or more required by law
3. Number of Investors (Shareholders or Members)	- Not applicable Operates as part of the parent company	- 1 or more Even a single individual/entity can establish a KK	- 1 or more Even a single individual/entity can establish a GK
4. Liability (Toward Creditors)	- Unlimited The parent company is directly liable for any debts of the branch	- Limited Shareholders are liable only up to the amount of their contribution	- Limited Members are liable only up to the amount of their contribution
5. Transfer of Equity (Shares or Ownership Interests)	- No equity to transfer	- Generally free However, many KKs (especially non-public/closely held ones) require board or shareholder approval in their Articles of Incorporation	- Unanimous consent (by default) All existing members must approve transfers of ownership interests unless otherwise specified in the Articles of Incorporation
6. Number of Executives Required (Directors/ Managers)	- Must appoint at least 1 representative in Japan (e.g., branch manager	- Varies by structure • A small, non-public KK can have a single director (who also serves as the representative) • A publicly listed KK or “public company” under Japanese law must have a board of directors (3+ directors) and (in most cases) a corporate auditor or similar body	- No statutory minimum By default, all members are executive managers, but the Articles of Incorporation can designate specific managing members or officers
7. Term of Office for Executives (Statutory Term Limits)	- No fixed term	- Depends on KK type • In a “public company,” directors typically have up to 2-year terms (auditors up to 4) • In a non-public (closely held) KK, terms can be extended up to 10 years	- No fixed term The GK’s Articles of Incorporation may set a term or leave it indefinite
8. Annual (Regular) General Meeting (Shareholders/ Members)	- Not required	- Required In principle, must be held every year to approve financial statements, elect directors, etc.	- Not required GKs are not obliged by law to hold regular members’ meetings, though they may do so for governance
9. Public Offering (Possibility to Offer Shares Publicly)	- Not applicable No shares exist for a branch	- Possible A KK can issue shares publicly and even list on a stock exchange if it meets the requirements	- Not possible By law, GKs cannot be publicly listed; they are considered “closed” companies
10. Reorganization (Conversion into KK or GK)	- Cannot directly convert You must close the branch and establish a KK or GK as a new entity (deregister the branch representative, etc.)	- Can reorganize into a GK under Japanese Companies Act procedures	- Can reorganize into a KK using statutory conversion procedures
11. Distribution of Profits/ Losses	- No separate distribution Profits or losses accrue directly to the parent company	- Pro rata according to shares Dividends are typically declared in proportion to shareholdings	- Flexible allocations Can allocate profits and losses in ratios differing from capital contributions, if it is stipulated in the Articles of Incorporation
12. Taxation (Corporate Income Tax Basis)	- Taxed in Japan on Japan-sourced income The branch files corporate tax returns for income effectively connected with Japan	- Taxed as a separate Japanese corporation Profits are subject to corporate tax at the KK level; shareholders are taxed on dividends (subject to withholding or treaty rules)	- Taxed as a separate Japanese corporation Same corporate tax treatment as KKs under Japanese law. However, some foreign jurisdictions may treat GKs as flow-through entities (e.g., U.S. “check-the-box” rules) for their own tax purposes. In Japan, though, GKs pay corporate tax just like KKs.

Source: Japan External Trade Organization (JETRO), Section 1.2 Comparison of types of business operation

Summary

There are three typical business forms in Japan: representative offices, branch offices, and subsidiaries.

A representative office is solely for businesses engaged in preparatory or supplementary activities; it is not allowed to engage in any sales activities. To engage in full sales activities, businesses must set up either a branch office or a subsidiary. A branch office operates as an extension of its foreign head office and is not an independent legal entity. On the other hand, a subsidiary functions as a separate legal entity in Japan, providing greater independence as compared to a branch.

For subsidiaries, the common and preferred entity types are joint-stock company (Kabushiki Kaisha, or KK: 株式会社) and limited liability company (Godo Kaisha, or GK: 合同会社). Both offer limited liability to their shareholders and members. In general, KKs are typically chosen by larger businesses due to its more structured corporate governance and ability to raise capital through shares. GKs, on the other hand, are better for smaller businesses and startups, as they offer a simpler governance structure and greater flexibility.

Ultimately, the most suitable legal structure of your business depends on your business objectives, operational flexibility, taxation matters and regulatory requirements. The choice will determine how you can operate and grow your business in Japan.

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If you are considering expanding your business to Japan, please contact Quantum Accounting Inc. for a free consultation during the planning phase or general consultation (available in both English and Japanese). Quantum Accounting's professionals are experts in accounting, tax, legal, and labor issues. Our goal is to provide you with a one-stop professional firm for all the services you need to expand your business into Japan. We are confident that we can help you.

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