Change in Partners’ Equity due to the addition of a New Partners

When new partners join a Godo-Kaisha (limited liability company) by making an investment, there is a change in partners’ capital.

Sample Case

In the case where the only current partner is A who invested 1 million yen, the partners’ equity is as follows.

Name	Capital	Capital Surplus	Retained Earnings	Total
A	1,000,000	0	1,000,000	2,000,000
Total	1,000,000	0	1,000,000	2,000,000

Unit: Yen

From here, B makes a new investment of 1 million yen (in cash) and joins the company as a partner.

In such a case, the company is free to allocate the paid-in amount of 1 million yen to Capital, Capital surplus, or both. (C.f., In the case of a Kabushiki-Kaisha (joint-stock company), at least one-half of the paid-in amount shall be allocated to stated capital, but this regulation does not apply to a Godo-Kaisha.)

Therefore, it is possible to allocate 0 yen to capital and 1 million yen to capital surplus.

Suppose that in this example, all of B’s capital contribution of 1 million yen is recorded in capital. Partner’s capital would result in the following. At this time, A’s retained earnings that accrued before B joined the company are considered to have already been distributed to A, so B’s retained earnings will not increase.(i.e., There is no need to divide the profits earned by A into the profits of B)

Points to note when allocating to capital

If the paid-in capital is allocated to capital, an application for registration changes is required. In addition, once the amount of capital contribution has been recorded as capital, the conditions for refund are limited, and such procedures are complexed. Therefore, in practice, unless there is a special need to increase the amount of capital, it is often recorded in capital surplus.

Distribution of Profit and Loss

The profit to be generated in the future will be “determined according to the value of each partner’s investment” unless otherwise stipulated in the Articles of Incorporation. Therefore, the profit will be distributed in the ratio of (A) 1: (B) 1.

Name	Capital	Capital Surplus	Retained Earnings	Total
A	1,000,000	0	1,000,000	2,000,000
B	1,000,000	0	0	1,000,000
Total	2,000,000	0	1,000,000	3,000,000

Unit: Yen

In this regard, there may be cases where it would be unfair if profits and losses are distributed in equal proportions among the companies, even though the corporate valuation is different between the time of A’s subscription and that of B’s subscription. In such cases, it is possible to stipulate a specific profit/loss sharing ratio in the Articles of Incorporation.

Sample Clause:
Article X The ratio of profit or loss distribution shall be 2/3 for Partner A and 1/3 for Partner B.

However, since tax issues may arise, prior consultation with a tax accountant is highly recommended.

Application for registration

The required documents for a “change in capital” due to a new partner joining the company are as follows.

*If the new member becomes an executive partner and/ or a representative partner, registration to that effect is also required. In this sample case, the new partner B will remain an ordinary partner.

(i) Document certifying the fact of subscription

　As a general rule, the subscription of a partner requires: 1. an application for subscription; 2. the consent of all members to the subscription; and 3. the consent of all members to the amendment of the Articles of Incorporation. In practice, all of there should be included in the contents of a “Written Consent of All Partners”, and the applicant (new partner) should be required to affix his/her/its name and seal to it in place of the application.

(ii) Document certifying that payment or delivery has been made

In the case of a monetary contribution, a copy of the bankbook of the savings account or a copy of an online bank statement, together with a document prepared by the representative partner, should be submitted. A receipt prepared by the representative partner is also acceptable. In the case of contribution in kind, a transfer of property form, etc. shall be prepared by the representative partner.

(iii) A document certifying that a majority of the executive partners unanimously agree on the amount of capital

When additional capital is contributed, it is the executive partners who determine the specific amount of capital to be increased, and a document certifying that the majority of the executive partners are in agreement shall be attached.

(iv) Certificate of appropriation of capital

This certificate shall be prepared with the prescribed form. However, it is not necessary to submit this form in the case of only monetary investment.