MK @ Legal Biz Leaf Change in Partners’ Capital upon Transfer of Equity Interests
In order to transfer equity interests between partners of a Godo-Kaisha (limited liability company), it is necessary to obtain the consent of the partners (1) to approve the transfer, and (2) to amend the Articles of Incorporation (in principle).
Then, in practice, after such transfer of equity interest takes effect, it is necessary to (3) rewrite the management chart of the partners’ equity interest.
*If there is a change in the partners of the executive partner or representative partner as a result of the transfer, a separate procedure and application for registration to that effect is required.
Suppose that the current partners’ capital is as follows.
| Name | Capital | Capital Surplus |
Retained Earnings |
Total |
| A | 1,000,000 | 1,000,000 | 1,000,000 | 3,000,000 |
| B | 1,000,000 | 1,000,000 | 1,000,000 | 3,000,000 |
| Total | 2,000,000 | 2,000,000 | 2,000,000 | 6,000,000 |
Unit: Yen
If 50% of the equity of the current Partner A is transferred to a new Partner C, the management chart of the partners’ equity interest will change as follows.
| Name | Capital | Capital Surplus |
Retained Earnings |
Total |
| A | 500,000 | 500,000 | 500,000 | 1,500,000 |
| B | 1,000,000 | 1,000,000 | 1,000,000 | 3,000,000 |
| C | 500,000 | 500,000 | 500,000 | 1,500,000 |
| Total | 2,000,000 | 2,000,000 | 2,000,000 | 6,000,000 |
Unit: Yen
As a general rule, Partner A’s interest is divided in half and transferred as described above, but it is also possible to transfer it as follows.
| Name | Capital | Capital Surplus |
Retained Earnings |
Total |
| A | 0 | 1,000,000 | 500,000 | 1,500,000 |
| B | 1,000,000 | 1,000,000 | 1,000,000 | 3,000,000 |
| C | 1,000,000 | 0 | 500,000 | 1,500,000 |
| Total | 2,000,000 | 2,000,000 | 2,000,000 | 6,000,000 |
Unit: Yen
If 100% of the interest of current Partner A is to be transferred to new Partner C, the management chart of the partners’ equity interest will change as follows, and Partner A will resign from the company.
| Name | Capital | Capital Surplus |
Retained Earnings |
Total |
| C | 1,000,000 | 1,000,000 | 1,000,000 | 3,000,000 |
| B | 1,000,000 | 1,000,000 | 1,000,000 | 3,000,000 |
| Total | 2,000,000 | 2,000,000 | 2,000,000 | 6,000,000 |
Change in Partner’s equity when a Partner Leaves a Company
When a partner of a Godo-Kaisha leaves a company, a refund of his/her equity will be made to the said partner.
Suppose that the current partner’s capital is as follows.
| Name | Capital | Capital Surplus |
Retained Earnings |
Total |
| A | 500,000 | 500,000 | 1,000,000 | 2,000,000 |
| B | 1,000,000 | 1,000,000 | 1,000,000 | 3,000,000 |
| Total | 1,500,000 | 1,500,000 | 2,000,000 | 5,000,000 |
Partner A, who invested in real estate (book value of 1 million yen), decides to leave the company.
At this time, Partner A’s equity on the management chart is 2 million yen, but the refund of the equity at the time of leaving the company is based on the “status of the assets of the company as at the time of the withdrawal” (corporate value = market value of assets, liabilities, etc. on the assumption that the company will continue to operate). Thus, for example, if the market value of the property increases and the enterprise value changes, 40% of such increased enterprise value will be returned to Partner A.
*For the specific calculation of this point, the consultation of a tax accountant or other specialist is required.
Even if a real estate or other physical property has been contributed, the refund can be made in cash. Thus, it is possible to reimburse Partner A with cash instead of the real estate.
If the calculation based on the enterprise value results in a refund to Partner A of 2.5 million yen, even if all of his/her equity is refunded, it will still be insufficient. In such case, Partner B’s retained earnings would be reduced.
Also, if the amount of capital is reduced as a result of the refund, creditor protection procedures and registration procedures are required.
MK @ 09/29/2022
