Key Decisions for Establishing a Subsidiary in Japan

When establishing a company, there are various important decisions that need to be made. Below, we will explain the key considerations for each of the following points:

• Company name
• Type of company (whether a corporation or a limited liability company)
• Fiscal year-end
• Capital amount
• Corporate structure
• Head office address
• Whether to impose restrictions on stock transfers
• Company seal
• Amount and timing of executive compensation
• Method of financial statement disclosure

Company Name

You are generally free to choose your company’s name. However, you cannot register a company with the same name at the same registered address, as the registration will be denied (Article 27 of the Commercial Registration Act).

Your company name must include either "Kabushiki Kaisha" (KK) or "Godo Kaisha" (GK) at the beginning or end. It is also a good idea to decide on the English version of your company name for use in emails, on your website, and other communications.

A quick internet search shows that "Godo Kaisha" is often translated as "LLC" (Limited Liability Company) and "Kabushiki Kaisha" as "Co., Ltd." (Company Limited).

Both KK and GK offer limited liability to their investors, meaning that shareholders are only liable for the amount of their investment in the company. While translating KK as "Co., Ltd." and GK as "LLC" is not technically incorrect (both imply limited liability), these translations don’t reflect the actual differences between the two company types.

In the United States, an LLC (Limited Liability Company) is a legal structure that uses pass-through taxation, where income is taxed at the individual level rather than at the corporate level. In contrast, a Japanese Godo Kaisha is subject to corporate tax on its income, which makes "LLC" an inaccurate translation.

Personally, I believe that using the romanized terms "Kabushiki Kaisha" (KK) and "Godo Kaisha" (GK) would be more appropriate and avoid any potential misunderstandings.

KK or GK: Which to Choose?

Under Japan’s Companies Act, four types of companies are defined, but in practice, the choice usually comes down to either a KK or a GK. For an explanation of the differences, advantages, and disadvantages between a KK and a GK, please refer to a separate article on the topic.

As a general rule, if you plan to expand your business and foresee multiple stakeholders (such as investors and creditors), a KK, which emphasizes governance, is more suitable. On the other hand, if the investors and management are expected to remain the same in the future, and there is a desire to disclose as little information as possible, a GK may be the better option.

To learn more, please see my article, Japanese Company Types Explained: KK vs. GK.

Fiscal Year-End

The fiscal year-end refers to the last day of the business year. In some countries, laws mandate that the fiscal year-end must be December 31, but in Japan, companies are free to choose their own fiscal year-end (*). Once a fiscal year-end is decided, it can be changed later if needed. For more information on how to determine your fiscal year-end, please refer to this article: How to Set Your Fiscal Period.

(*) Note: For individual income tax, the tax period is fixed from January 1 to December 31.

Capital Amount

When establishing a company, it is necessary to invest an amount equivalent to the capital. Since the capital amount is recorded in the company’s registry, it is publicly accessible to anyone.

While you are free to decide the capital amount, certain legal requirements may vary depending on the size of the capital. The other page will explain how to determine the capital amount, considering factors such as taxes, dividend regulations, business management visas, and permits or licenses.

To learn more, please see my article, Capital Amount Decisions for New Japanese Corporations.

Company Structure

The organizational structure differs between a KK and a GK.

In the case of a GK, where the investors are also the managers and there are fewer stakeholders, the organizational structure is simple.

On the other hand, in a KK, where it is necessary to protect and balance the interests of multiple stakeholders, a robust governance system is essential. Therefore, a KK typically includes entities such as the general shareholders' meeting, board of directors, representative directors, auditors, audit committee, and accounting auditors, as well as various committees.

The design of the organizational structure is generally determined by whether the company is large or small, and whether it is a publicly traded company or a privately held company(*).

(*) A privately held company is one that has restrictions on the transfer of shares, requiring approval from the board of directors for any share transfers.

Head Office Address

The head office address is essential for a company’s registration. While there are no specific legal restrictions, it is important to carefully consider the location of the address in relation to government agencies, banks, and business partners.

Virtual Office

A virtual office is a service that provides certain office functions, such as an address and phone number, without the need for physical occupancy. It is possible to register a virtual office as the head office address for a company. However, it is important to note that virtual offices may not be acceptable when applying for government subsidies, licenses, or a Business Manager Visa.

Home Address

It is also possible to register a home address as the company’s head office. However, if the home is a rental property, special attention must be paid to the lease agreement. Clauses such as “residential use only” or “no offices allowed” can pose problems. Additionally, in cases where a physical office is required for obtaining government subsidies, permits, or membership in certain organizations, a home address may be deemed insufficient to meet the office requirement.

Transfer Restrictions on Shares

In the case of a KK, shareholders are generally free to transfer shares. However, it is possible to impose restrictions, such as requiring approval from the board of directors before changes in shareholders can be officially recognized by the company.

The purpose of this restriction is to prevent the dispersion of ownership (shareholders) in small KKs, thereby ensuring stable management of the company. If such restrictions are in place, they must be stated in the company’s articles of incorporation and registered in the corporate registry. Many small businesses in Japan adopt these transfer restrictions.

Preparing a Company Seal

In recent years, the use of seals (hanko) has been gradually phased out in various areas. However, as of 2024, relying solely on electronic signatures, without holding an official company seal, may still cause some concern. Therefore, it is generally considered safer for companies to maintain a registered company seal.

When registering the establishment of a company, the company seal must be filed with the Legal Affairs Bureau. At this time, the personal seal registered to the company representative is also required.

If the company representative is a foreign national, a certified signature document from their home country may be submitted in place of a personal seal. As of February 2021, for companies filing registration applications online, it is possible to use an electronic certificate issued by the Legal Affairs Bureau instead of submitting a company seal.

Director Compensation (Salary and Bonus)

Under Japan's Corporate Tax Act, (1) if director salaries are not the same fixed amount each month (fixed monthly salary), or (2) if the bonus amount is not reported in advance to the tax office, these expenses cannot be deducted as business expenses.

For the first fiscal year of a newly established company, the amount of fixed monthly salary for directors must be determined within three months of the company’s establishment, and this decision should be recorded in the minutes of the shareholders' meeting or similar documents.

Additionally, for bonuses in the year of establishment, the bonus amount and the payment schedule must be reported to the tax office within two months after the establishment.

To learn more, please see my article, Navigating Tax Deductions for Director Salaries in Japan.

Financial Statement Disclosure

In the case of a KK (Kabushiki Kaisha), if it qualifies as a large company, both the balance sheet and income statement must be disclosed (made publicly accessible). For companies that do not qualify as large companies, only the balance sheet or a summary thereof needs to be disclosed (Companies Act, Article 440, Paragraphs 1 and 2).

When establishing a company, the method of disclosure must be decided and specified in the articles of incorporation. Disclosure methods include publication in the Official Gazette, newspapers, or the company’s website.

For a GK (Godo Kaisha), disclosure is not required. Failure to comply with disclosure requirements may result in a fine of up to 1 million yen (Companies Act, Article 976).

In practice, however, it appears that the majority of KKs do not comply with disclosure requirements, and penalties are rarely enforced.

Permits and Licenses

Permits and licenses refer to the approvals required to conduct certain types of business activities, which are obtained by completing specific procedures with relevant administrative agencies, such as police stations, health departments, or prefectural offices.

Certain permits and licenses have specific requirements, such as a minimum net asset amount, defining business purposes in the Articles of Incorporation, or office structural compliance. Therefore, it is essential to understand what permits and licenses are necessary before establishing the company.

Conclusion

When establishing a company, there are many initial decisions to make. Some of these decisions are based on regulations unique to Japan, which may be difficult for foreign individuals and companies to fully understand.

Regarding executive compensation, it is important to set the amount and payment schedule early in the first year to avoid non-deductible expenses.

For the company address, it may be necessary to stay updated on the latest trends, as it can be influenced by Japan's commercial and real estate customs and practices.