#3 Choose the legal form of your Japanese subsidiary
Typical business forms in Japan include representative offices (Chuzaiin jimusho: 駐在員事務所), branch offices (Shiten :支店), and subsidiaries...
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Determine the Ideal Corporate Structure
After creating a business plan in setting up your business in Japan, the next step is to determine the most suitable business structure for its operation. The choice of structure will depend on your purpose of expansion, business plan, operational needs and other key factors. Common business structures in Japan include representative offices, branch offices, and subsidiaries.
A Representative Office Fits in the Preparatory Stage of Market Research
A representative office (駐在員事務所) is suitable for purposes like conducting preparatory or supplementary activities (market research, information gathering, etc.). However, the business is not allowed to engage in sales or income generating activities. In addition, 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 in the name of an individual expatriate or a business partner in Japan.
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Establishing a Branch or Subsidiary in Japan for Full-Scale Operations
To engage in full-scale sales activities in Japan, establishing either a branch office (支店) or a subsidiary (corporation) (子会社) is necessary. A branch office operates as an extension of the foreign headquarters, which remains the primary business operator. It is not an independent business entity in Japan. In contrast, a subsidiary (corporation) functions as an independent legal entity under Japanese law.
A branch office must appoint at least one representative who resides in Japan and has a registered address. This representative serves as the legal point of contact under the Japanese laws. On the contrary, a subsidiary (corporation) does not require a representative to reside in Japan as it operates independently of the foreign headquarters. As such, the ability to appoint a representative in Japan is an important factor when deciding between these two business structures.
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Two Recommended Entity Types for Subsidiaries
When establishing a subsidiary (corporation) in Japan, the two primary and most commonly used types are:
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Joint-stock company (Kabushiki Kaisha, or KK: 株式会社)
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Limited liability company (Godo Kaisha, or GK: 合同会社)
Both KK and GK operate on the same principle: the liability of the shareholders of KK or members of GK is limited to the amount of their investment. This means that even if the business fails, the shareholders or members are not personally liable beyond their invested amount. This limited liability makes KK and GK the recommended entity types for subsidiaries.
In contrast, other entity types such as general partnership companies (Gomei Kaisha:合名会社) and limited partnership companies (Goshi Kaisha:合資会社) require members with unlimited liability, which significantly increases personal financial risk. As a result, these entity types are generally not recommended for subsidiaries.
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Differences between KK and GK
Ownership and management
A KK has voting rights in proportion to the ratio of capital contribution. This means a KK emphasizes the amount of investment, making it a suitable structure for businesses where the influence of investors is determined by their financial input.
While in the case of a GK, each member generally has one vote, regardless of their investment size. This structure emphasizes the individual investors themselves rather than the amount of capital contributed.
Governance Structure
A GK is not required to establish a supervisory body, such as a board of directors or corporate auditors, which are typically associated with the governance structure of a KK. However, it is important to note that for a KK, these bodies are not always mandatory, particularly for privately held companies or non-public entities. This makes both GK and KK viable options for subsidiaries of foreign parent companies that are not considering IPOs or public capital markets.
In practice, a GK offers simplicity and flexibility in governance and operational decision-making, which can be advantageous when the parent company seeks streamlined management without the need for formal structures. On the other hand, a KK allows for a more formalized governance framework that can provide clarity and assurance to stakeholders, even in a private company setting. The choice between a GK and a KK often depends on the parent company's priorities, such as the desired level of governance structure and operational mobility.
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Pass-Through Election of a GK for U.S. Parent Company
If the parent company is a U.S. entity, the Japanese subsidiary structured as a GK can benefit from a check-the-box election under U.S. tax law. This allows the GK to be treated as a pass-through entity, enabling it to report its income as part of the U.S. parent company’s income for U.S. tax purposes.
For more details, please refer to this article.
6STEPS
Here we explain each task divided into six steps
銀行口座開設
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We are confident that we can help you. For further information, please contact from CONTACT US.
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