Among the available corporate entity choices in Japan, only two offer limited liability; the LLC (godo kaisha) and the joint stock company (kabushiki kaisha).
When consulted about setting up a company in Japan, our clients often ask whether they should set up a limited liability company (“LLC”) or a joint stock company.
This article explains the major differences between Japanese joint stock companies and Japanese LLCs.
|Limited Liability Company
|License tax for registration||150,000 Japanese yen||60,000 Japanese yen|
|Certification of Articles of Incorporation||Certification by notary public is required||Certification by notary public is not required (Only electronic signature of a shihoshoshi-lawyer is sufficient)|
|Investors and managers||Managers and investors can be the same person, or can be different person||Investor=manager|
|What investors are called||Shareholder||Member|
|What a representative is called||Representative director||Representative member|
|Term of directors||2 years as a general rule; Companies with restrictions on share transfer can decide freely within 10 years||No term|
|Public notice of settlement of accounts||Required||Not required|
|Decision-making body for important decisions||General meeting of shareholders||General meeting of members|
|Public confidence||High||Lower than stock company|
|Selection criteria based on scale of company||A stock company is optimal for growing the company and attracting many investors||Limited liability companies are optimal for management by a family or a limited number of people|
Required certification of the Articles of Incorporation
When setting up a joint stock company, the Articles of Incorporation have no legal effect unless they are certified by a notary (公証人). The fees for certification of the Articles of Incorporation by a notary are generally about 50,000 Japanese yen.
In contrast, when setting up an LLC, certification of the Articles of Incorporation is not required. This means that there is a comparative time and cost savings for setting up an LLC.
It may be helpful to understand the difference between Japanese and U.S. notaries. Japanese notaries are (usually) former judges or other licensed professionals who do a scrupulous legal review of the contents of the document to verify its legality (i.e., that it meets legal requirements). On the other hand, U.S. notaries do not verify the legality of the contents of a document, but generally only verify the signer's identity.
Fees for registration of incorporation of a company
When applying for registration of a company, an amount equal to 7/1000 of the capital is paid as a registration and license tax. However, the minimum payment amount for a joint stock company is 150,000 Japanese yen and 60,000 Japanese yen for an LLC. For example, for the establishment of a “company” with initial capital of 5 million Japanese yen, the registration and license tax would be 150,000 Japanese yen for a joint stock company and 60,000 Japanese yen for an LLC.
The amount paid for the registration and license tax for a joint stock company is in addition to the required notary fees discussed above.
Therefore, one advantage of the LLC over a joint stock company is that it is less expensive to incorporate.
Public disclosure of financial statements?
At the conclusion of the annual shareholders’ meeting, a joint stock company must make its balance sheets for that particular fiscal year publicly available. This is usually done by official gazettes. On the other hand, an LLC is not subject to this obligation.
Once the balance sheets have been made public, any third party can have access to them. For that reason, an LLC is in a better position to maintain the confidentiality of the company’s financial situation.
Restrictions on provision of capital and capital reserves
Although a joint stock company has to keep more than 1/2 of the investment funds it receives as capital, an LLC is not subject to this restriction. Therefore, an LLC can decide freely how much of the investment funds it receives should be allocated to capital, and all funds not allocated to capital are treated as capital surplus.
For example, when investment funds of 100,000,000 Japanese yen are received, a joint stock company must allocate at least 50,000,000 of that to capital, whereas an LLC can allocate zero of that sum to capital, with the remainder being recognized as capital surplus.
Since the amount of taxes vary depending on the amount of a company’s capital, an LLC will be able to handle them more flexibly.
Separation of Ownership and Management
In a joint stock company, the ownership and management functions of the company are separated; while in an LLC, there is no separation of ownership and management.
In a joint stock company, the owner-shareholders elect directors to manage the company. In contrast, in an LLC the investors and the managers are one and the same. If additional “managers” are to be added, it is accomplished at a joint stock company by the election of additional directors at a shareholders meeting. However, an individual may not become a manager without becoming an investor (i.e., member) of the LLC.
An LLC can not flexibly choose an employee to elevate to a manager position or invite someone from the outside.
The individuals who manage a joint stock company are known as directors and the individuals who manage an LLC are known as managing members.
The director of a joint stock company must be a natural person (i.e. a human); however, a corporate entity can be an officer of an LLC. When a corporate entity invests in an LLC, the corporate entity becomes a managing member. However, even if a corporate entity invests in a company, only a natural person (i.e., a living, breathing person!) can be elected as a director. In addition, although a director of a joint stock company serves for a fixed term, the managing member of an LLC is not subject to a fixed term.