#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 Corporate Structure
Once you decide to expand in Japan, the next step is to determine the form of business in which you will operate.
The form you choose will depend on your purpose of expansion, business plan, and other factors. Typical business forms when expanding in Japan include representative offices, branch offices, and subsidiaries.
A representative office fits in the preparatory stage of market research
A representative office is suitable if the purpose is to conduct preparatory or supplementary activities (market research, information gathering, etc.). However, sales activities that generate income are not possible. In addition, as a representative office cannot open a bank account or lease real estate, it is necessary to open a bank account or lease real estate in the name of the 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, it is necessary to establish a branch office or a subsidiary. A branch office is a form in which the U.S. headquarters is the primary business operator, while a subsidiary acts as an independent business operator in Japan.
A branch office must have a representative who resides and has an address in Japan. In contrast, a subsidiary (corporation) has no such requirement, so the ability to prepare such personnel resources is also a factor in determining the form of business. In addition, subsidiaries (corporations) can be further divided into two types: a joint stock company (Kabushiki Kaisha, aka KK: 株式会社) or a limited liability company (Godo Kaisha, aka GK: 合同会社).
The following explains the nature and difference between a KK and GK.
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Types of entities in Japan
The recommended entity form for the subsidiary is a KK or GK. In Japan, there are also general partnership companies (GomeiKaisha:合名会社) and limited partnership companies (GoshiKaisha:合資会社) as other types of entities. Nevertheless, we don’t recommend either of these primarily because both entities require members with unlimited liability.
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Limited liability of a KK and GK
A KK and GK share the same principle: the liability of the shareholders is limited to the amount of investment. Thus, even if the business fails, the shareholders of KK or members of GK are not liable for more than the amount of their investment. In this sense, a KK or GK is a suitable entity for your subsidiary.
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Differences between a KK and GK - ownership and management
In principle, a KK has voting rights in proportion to the ratio of capital contribution, while in the case of a GK, each member generally has one vote. For this reason, we can say that a KK is a form that emphasizes the amount of investment, while a GK is a form that emphasizes the investors.
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Differences between a KK and GK - governance structure
A GK is less subject to legal restrictions than a KK of governance structure and organizational operation rules. Specifically, GK is not required to establish a supervisory body such as a board of directors or corporate auditors, which is necessary for a KK. The establishment of a general meeting of members is also optional. Such characteristics allow a GK to be flexible and quick in organizational changes and business activities.
Therefore, for example, when you establish a wholly-owned subsidiary, you don’t need to negotiate interests or management policies with other parties. Thus, the subsidiary is often established in the form of a GK, with an emphasis on management mobility.
On the other hand, if there are multiple investors whose interests do not necessarily coincide and whose management decisions require agreement among parties, a cohesive governance structure must be in place to prevent problems. Therefore, in such cases, the subsidiary is often established in the form of a KK.
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Pass-through election of the GK for U.S. parent
If the parent company is a U.S. entity, based on a check-the-box election under U.S. tax law, the Japanese subsidiary GK can report its income as part of the U.S. parent company's income on a pass-through basis for U.S. tax purposes.
For more details, please refer to this article.
6STEPS
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銀行口座開設
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. For further information, please contact from CONTACT US.
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