I. Types of Business Organizations Recognized in
Japan
Contents
A. Sole Proprietorships
B. Partnerships
1. Go-mei Gaisha (commercial partnerships)
2. Go-shi Gaisha (limited partnerships)
C. Corporations
1. Kabushiki Kaisha (general corporation)
2. Yugen Gaisha (limited liability corporation)
D Current Developments
E Why Incorporate into a Corporation as Opposed to a Partnership?
(Partnership v. Corporation)
1. Advantages
2. Disadvantages
F Which Type of Corporation to Incorporate into? (K.K. v. Y.K.)
1 Liability
2 Limitation on the number of partners in Y.K.
3 Limitation of transfer of ownership in a Y.K.
4 No public solicitation for capital contribution to a Y.K.
5 Difference in incorporation costs for Y.K. and K.K.
6 Prestige and Status
'Company' as used in the Commercial Code of Japan shall mean a legal entity
incorporated for the purpose of engaging in commercial transactions as a
business. There are three types of companies recognized under the Commercial
Code of Japan, and in addition, the Yugen Gaisha form (limited liability
corporation) is recognized under the Yugen Gaisha Law which came into effect
in 1940. Thus, there are a total of four different forms that a company
can organize into:
1) Go-mei Gaisha (commercial partnership),
2) Go-shi Gaisha (limited partnership),
3) Kabushiki Kaisha (general corporation), and
4) Yugen Gaisha (limited liability corporation).
All forms come into effect after incorporation which requires registration
with the appropriate public office.
A. Sole Proprietorships
A sole proprietorship is essentially a one person partnership. A sole proprietorship
is a business owned by a single person who has the sole right to manage,
is solely entitled to the profits, and has unlimited liability to creditors
of the business. Therefore, the sole proprietor is directly and personally
liable to all obligations of the business.
B. Partnerships
In Japan, two types of partnerships are recognized under the Commercial
Code of Japan. They are 1) Go-mei Gaisha (commercial partnership) and 2)
Go-shi Gaisha (limited partnership):
1. Go-mei Gaisha (commercial partnership)
In a Go-mei Gaisha, all partners are jointly and severally liable for any
liability incurred by the partnership. The partnersı liability is unlimited,
and creditors can go after each partnerıs personal assets if the assets
of the partnership are insufficient to meet the obligations. The law divides
legal relations of the Go-mei Gaisha into two categories: internal relations
specified in Section 2 of the Go-mei Gaisha Law and external relations specified
in Section 3 of the Go-mei Gaisha Law. Internal relations refers to relations
between the partnership and the partners as well as relations among partners.
The Commercial Code specifies that both the articles of incorporation and
the Commercial Code govern these internal relations, but it has been commonly
interpreted that the articles of incorporation overrides the Commercial
Code when determining these rights. External relationship refers to relations
between the partnership and third parties as well as between a partner and
third parties. External relations are governed by law to protect third parties
by providing a fair, stable, and foreseeable legal relations.
2. Go-shi Gaisha (limited partnership)
In a Go-shi Gaisha, partners are divided into two categories: 1) general
partners who have unlimited liability similar to a partner in a general
partnership and 2) limited partners who have limited liability only up to
the amount he invested in the partnership (limited partner). But all partners
are still directly liable to creditors of the partnership, and thus, partners
can still be sued individually (direct liability).
C. Corporation
Two types of corporations are recognized under the laws of Japan: Kabushiki
Kaisha (K.K.) and Yugen Gaisha (Y.K.).
1. Kabushiki Kaisha (K.K.)
(general corporation)
As opposed to liability of partners of partnerships, limited partnerships,
and limited liability corporations, liability of a shareholder of a Kabushiki
Kaisha is limited to the amount he invested in that corporation. Further,
creditors of the corporation can never directly go after a shareholder individually,
thus creating only an ³indirect² limited liability against shareholders.
2. Yugen Gaisha (Y.K.)
(limited liability corporation)
The Yugen Gaisha form was created to meet the demands of small and medium
sized companies. It is better suited for small operations, easier to adopt,
less costly to incorporate and register, and requires less observance of
corporate formalities. It differs from a K.K. in that it has limitations
on the number of ²shareholders² it can have and limitations on transfer
of shares. Liability characteristics are very similar to a K.K.
A more in depth look at the differences between Y.Y. and Y.K. follows in
Section V.
D Current Developments
Until the recent reform, capital requirements for Yugen Gaisha (Y.K.) and
Kabushiki Kaisha (K.K.) were lower, so it was easier to meet. This fact,
along with the image that Y.K. and K.K.ıs are more prestigious and stable
than partnerships, have resulted in most companies being incorporated into
a Y.K. or a K.K. Hence, most companies in Japan today are either Y.K. or
K.K. However, the recent reform of the Commercial Code of Japan includes
increase in capital requirements for both Y.K. and K.K. to Yen 3,000,000
and 10,000,000, respectively. Because it was thought that a substantial
portion of all Y.K. and K.K.ıs existing at that time did not meet the increased
capital requirement, a delay in its effective date was devised to allow
companies to either increase its capital or reorganize into a different
business form. Hence, although the new capital requirement reform had been
tentatively approved 3 to 4 years earlier, it did not come into effect until
recently in 1990.
E Why Incorporate into a Corporation as Opposed to a Partnership?
(Partnership v. Corporation)
There are both advantages and disadvantages to incorporating oneıs business
into a Y.K. or a K.K. Although other advantages and disadvantages may be
present depending on the kind of business and economic conditions, here
is a typical list of the advantages and disadvantages of incorporating a
business into a corporation.
1 Advantages
(1) Limited and indirect liability to shareholders
One of the major differences between partnerships and corporations is that
a shareholder of a corporation has limited liability from creditors of the
corporation, whereas a partner in a partnership may be liable for more than
his contribution to the partnership. This is true because partners in a
partnership are directly liable to the creditors, whereas shareholders of
a corporation are not directly liable to creditors. If assets of the partnership
are insufficient to satisfy its obligations, all partners are jointly and
severally liable for those obligations. Hence, a partner of a partnership
may be sued personally under his own name, but since a claimant to a corporation
does not have any rights as against the shareholders personally, a shareholder
of a corporation can never be sued personally. Further, partners may be
forced to contribute other personal assets to meet obligations, shareholders
are never going to lose more than their investment in the corporation, and
their remaining personal assets will be safe from creditors of the corporation.
This distinction of limited liability is perhaps the most important advantage
of incorporating a business into a corporation.
(2) Transferability of interest
A corporate shareholder can usually transfer his interest in the corporation
without limitations (except in cases where articles of incorporation has
a clause restricting share transfers). In a partnership, however, a partner
needs the consent of all the partners in order to transfer his share in
the partnership. The liquidity that a corporate stock provides is very valuable
to people who have to sell their portion of ownership.
(3) Centralization of management
Partnership law treats all partners as if they are both investors and managers.
The Commercial Code has a presumption that all partners have equal rights
to manage the partnership. This may create problems since acts of every
partner binds the partnership. For this reason, a business may want to incorporate
in order to vest responsibility to one or just a few people. A corporation
can also hire ³experts² to run the corporation, and thus, by centralizing
its management, a corporation can effectively and efficiently manage the
corporation.
(4) Access to capital through issuing new shares
A corporation may issue new shares to the general public, whereas a partnership
may not. A partnership can only increase its capital by finding more partners,
and in this sense, a partnership is more limited.
(5) Bank financing and other business advantages
In Japan, companies have been more reluctant to conduct business with non-Y.K.
or non-K.K. companies. This discrimination stems from the idea that Y.K.
and Y.K.ıs are more prestigious, reliable, and stable than their partnership
counterparts. Hence, one can expect to conduct business more smoothly if
the company is incorporated into a Y.K. or a K.K.
2 Disadvantages
(1) More expensive to incorporate
Costs are more expensive when incorporating a corporation as opposed to
a partnership. These include:
a) Notary public fee for articles of incorporation: Yen 55,000 required
for K.K. but not for Go-mei or Go-shi Gaisha.
b) Articles of incorporation stamp tax of Yen 40,000: required for K.K.
but not for Go-mei or Go- shi Gaisha.
c) Attorneyıs fee: due to its complexity, incorporation of a K.K. will require
much more in terms of attorneyıs fees.
d) Registration fee: Although both partnership forms require a Yen 60,000
registration fee, registration fees for Y.K. and K.K. may be greater depending
on the amount of capital.
(2) Tax treatment
The fundamental difference in the tax treatment of partnerships and corporations
is that a corporation is taxed as a separate entity with its own tax rate
whereas a partnership is taxed as an extension of the individual. Therefore,
corporate shareholders must pay tax twice to realize the corporationıs profits:
once at the corporate level on the corporate earnings, and once again at
the personal level when the dividends are distributed to the shareholders.
This is the ³double taxation² that a corporate shareholder must incur. Partners
in a partnership do not pay a partnership tax, so earnings are taxed only
once at the personal level.
F Which Type of Corporation to Incorporate into (K.K. v. Y.K.)?
1. Liability
Shareholders of a K.K. are not liable for anything more than the amount
he invested in the company. Shareholders of a Y.K. generally have the same
limitation of liability, but shareholders of a Y.K. may be liable for more
than his investment under certain situations.
2. Limitation on the number of partners in a Y.K.
The number of partners in a Y.K. is limited to fifty (50) by statutory provision.
On the contrary, there is no such limitation on the number of shareholders
of a corporation.
3. Limitation of transfer of ownership in a Y.K.
Statute expressly provides that transfer of ownership in a Y.K. to a non-partner
must be approved by all of the current partners. In a K.K., there is no
such limitation on transfer of interest unless provided for in the articles
of incorporation (law on restrictions on transfer of interest is very strict).
Once again, this limitation exemplifies the close characteristic of the
Yugen-Gaisha.
4. No public solicitation for capital contribution to a Y.K.
When incorporating a Y.K., public solicitation for capital contribution
is not allowed.
5. Difference in incorporation costs for Y.K. and K.K.
a) registration costs: Yen 60,000 minimum for Y.K., but Yen 150,000 minimum
for K.K.
b) attorneyıs fees: due to its complexities, K.K. will require more attorneyıs
fee than Y.K.
6. Prestige and status
In Japan, K.K.ıs are a sign of prominence and stability, so people tend
to trust K.K.ıs over Y.Kıs. The prestige factor becomes more important for
companies with mainly Japanese clients. Because of this, many small companies
have decided to adopt the Kabushiki Kaisha form, even though the Yugen Gaisha
form is actually be better suited for small business operations.