GK or KK? How to Choose Between Japan's Two Company Types

The answer

For a subsidiary of an overseas company, or a business run by its founders without outside investors, a godo kaisha (合同会社, GK) is usually enough. A kabushiki kaisha (株式会社, KK) is the better fit if you plan to bring in equity investors or grant stock options. Depending on the industry, a KK can also be better received by customers and business partners in Japan. If the owner is a US company or a US person, the two forms may be classified differently for US tax, so that is worth checking with a US tax adviser before you choose.

In both forms, the owners' liability is limited to what they contribute. A KK's shareholders are liable only up to the price of their shares, and every member of a GK is a limited-liability member (Companies Act, 会社法 Kaisha-hō, Arts. 104, 576(4) and 580(2)).

Setting up

The registration tax is 0.7% of the capital, with a minimum of JPY 60,000 for a GK and JPY 150,000 for a KK.

A KK's articles of incorporation take effect only once a notary certifies them (Companies Act, Art. 30(1)). The notary's fee is JPY 30,000 if the capital is under JPY 1 million, JPY 40,000 if it is at least JPY 1 million but under JPY 3 million, and JPY 50,000 otherwise. Where the capital is under JPY 1 million, the fee drops to JPY 15,000 if the founders are no more than three individuals who take all the initial shares and the company has no board of directors (Notary Fees Order, 公証人手数料令 Kōshōnin Tesūryō-rei, Art. 35).

A GK's articles are drawn up and signed by its members (Art. 575(1)) and need no notary.

Running the company

Once a year, a KK must publish its balance sheet after the annual shareholders' meeting, unless it files annual securities reports (Companies Act, Art. 440(1) and (4)). If its method of public notice is the Official Gazette or a newspaper, it can instead keep the balance sheet available online for five years (Art. 440(2) and (3)). A GK has no such duty, because Art. 440 applies only to a KK.

Directors' names are registered (Art. 911(3)(xiii)), and any change to them must be registered within two weeks (Art. 915(1)). Their term is up to two years. Where all the company's shares need its approval to transfer, and it has no audit and supervisory committee or nominating committee, its articles can extend the term to up to ten years (Art. 332(1) and (2)). The registration tax on a change of directors is JPY 10,000 for a company with capital of JPY 100 million or less.

For profits, a GK can set its own ratio for sharing profits and losses in its articles, and only falls back to the ratio of contributions if the articles say nothing (Art. 622(1)). In a KK, dividends follow the number of shares, subject to classes of shares and to special rules a private company can put in its articles (Arts. 454(3) and 109(2)).

If the owner of a GK is a company, that company can itself be the member who runs the GK. It appoints a person to carry out that role and notifies the other members of that person's name and address (Art. 598(1)).

Raising money

A KK issues shares, and the Companies Act provides for share options (新株予約権 shinkabu yoyakuken), the form Japanese stock options take (Arts. 105 and 236). The members of a GK hold interests (持分 mochibun) in it. Transferring an interest needs the consent of all the other members or, for a member who does not run the business, of all the members who do, unless the articles provide otherwise (Art. 585).

A US owner

For a US owner, the choice can also matter for US tax. Under the US entity classification rules, the kabushiki kaisha is on the list of foreign entities that are always treated as corporations (Treas. Reg. § 301.7701-2(b)(8)(i)). The godo kaisha is not on that list, so a GK may be able to choose how it is classified (Treas. Reg. § 301.7701-3(a)). Whether this matters, and what to choose, depends on the owner's own US tax position, and needs to be checked with a US tax adviser.

Changing your mind later

A GK can become a KK later through an organisational change (組織変更 soshiki henkō) (Companies Act, Art. 743). It needs the consent of all the members, unless the articles provide otherwise (Art. 781(1)). The company must also publish a notice in the Official Gazette and give creditors at least one month to object. It must notify known creditors individually, unless it also publishes the notice by the newspaper or electronic method set in its articles (Arts. 781(2) and 779(2) and (3)). After the change, the company registers the dissolution of the GK and the formation of the KK (Art. 920). The registration tax on the formation of the KK is generally 0.15% of the capital, with a minimum of JPY 30,000, and a higher rate of 0.7% can apply to part of the capital.

The change takes effect only once the creditor procedure is complete (Art. 747(5)), so converting later adds at least a month and a further round of registrations.

References

• Companies Act (Act No. 86 of 2005), Arts. 30, 104, 105, 109, 236, 332, 440, 454, 575, 576, 580, 585, 598, 622, 743, 779, 781, 911, 915 and 920 (e-Gov, Japanese).
• Notary Fees Order (Cabinet Order No. 224 of 1993), Art. 35 (e-Gov, Japanese).
• National Tax Agency, Tax Answer No. 7191, 登録免許税の税額表 (Japanese).
• Treas. Reg. § 301.7701-2, Business entities; definitions (govinfo).
• Treas. Reg. § 301.7701-3, Classification of certain business entities (govinfo).

This article is for general information only and is not legal or tax advice.

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