Main Features, Merits and Demerits of a Godo-Kaisha (LLC)

　When a foreign corporation establishes a subsidiary in Japan, it is common for them to choose between two corporate forms: a “Kabushiki-Kaisha, or joint stock company” and a “Godo-Kaisha, or limited liability company”.

(Other options include establishing a branch in Japan; however, it is often said that there are more tax disadvantages than establishing a subsidiary. If you are considering setting up a branch, be sure to ask a Japanese tax accountant for a consultation)

Characteristics of a company/ person suitable for establishing a Godo-Kaisha

An entity/person which has themselves as sole investor
An entity/person which does not consider third-party investment or the issuance of share options.
An entity/person who wants to reduce an establishment/ running management cost.

Main Features of a Godo-Kaisha

The biggest characteristic of a Godo-Kaisha compared with Kabushiki-Kaisha is the principle of “unification of management and ownership”.

In the case of a Kabushiki-Kaisha, it is the “directors, etc.” elected by the company’s owners (= the shareholders), who manage the company, and the shareholders do not necessarily have to manage the company themselves.

Example: If you obtain shares of Sony Japan Corporation, then you are a shareholder of Sony Corporation, but that does not mean that you are required to manage the company.

On the other hand, in the case of a Godo-Kaisha, in principle, the “partners, shain” who are investors in the company, will be involved in the management of the company. In other words, anyone who wishes to be involved in the management of a company must invest in a Godo-Kaisha.

Recognition in Japan

In Japan, Kabushiki-Kaisha are by far the most common type of company, accounting for more than 80% of the total number of companies. In comparison, Godo-Kaisha is still not well known in Japan, and sometime people are suspicious of a company simply because it has the trade name “Godo-Kaisha”. On the other hand, Godo Kaisha have been gradually gaining recognition in recent years, with companies such as Apple, Google, and Amazon, etc. in Japan are all Godo-Kaisha. Therefore, there is little reason to avoid setting up Godo-Kaisha simply because of the less recognition it may have, but if you are thinking of developing a B to C (who has less knowledge about Godo-Kaisha) business, then you may want to consider establishing a Kabushiki-Kaisha.

Differences in Officers and Organizational Design

Officers

In the case of a Kabushiki-Kaisha, Directors and Auditors must be persons, and corporations cannot take its’ position. On the other hand, in the case of a Godo Kaisha, a corporation can be elected as an Executive Partner or a Representative Partner. (However, if a corporation becomes a Representative Partner, it is necessary to appoint one or more Executive Manager, a person who specifically execute business for such corporation.)

In the case of a Kabushiki-Kaisha, there is a rule in terms of organizational design that “at least three directors and at least one auditor” must be appointed to establish a Board of Directors. On the other hand, there is no such rule in the case of a Godo-Kaisha.

Term of office

For example, the maximum term of office for directors of a privately held company is 10 years. When the term of office expires, the directors must be re-elected at a general shareholders’ meeting and the registration shall be renewed. However, since the expiration of the terms comes once every few years, there is so many Kabushiki-Kaisha which forget to pass a resolution for the election. As a result, a fine may be imposed for failure to register, and or in worse case, it may be forcibly deemed to be dissolved, if the company forgets to register for more than 12 years.

While for a Godo-Kaisha, in principle, there is no term of office for an officer. Therefore, once an officer (Executive Partner/Representative Partner) is appointed, he/she/it can remain as an officer for as long as the company does not apply for registration of a change. In addition, there is no deemed dissolution system for a Godo-Kaisha.

Profit distribution to shareholders

In the case of a Kabushiki-Kaisha, the dividend ratio is in principle determined according to the number of shares. On the other hand, in the case of a Godo-Kaisha, such ratio can be freely set up without being restricted by such investment ratio. However, tax issues (e.g., taxation issues may arise if a person with a low capital contribution ratio receives a large amount of dividends) must be cleared, so prior consultation with a tax accountant is always required.

Relaxation of restrictions under the Companies Act

Public Notice of Settlement of Accounts

While Kabushiki-Kaisha are required to publicly announce the financial statements approved at the annual shareholders’ meeting, Godo-Kaisha are not required to do so. This will lead to cost reduction.

Restriction on capital incorporation

In the case of a Kabushiki-Kaisha, at the time of incorporation or in the case of a capital increase through new investments, at least one-half of the amount paid in must be included in the stated capital. In this regard, an increase in the amount of stated capital has various tax disadvantages (increase in corporate tax due to size-based standard taxation, and increase in registration tax (0.7% of the amount of stated capital)) and under the Companies Act (obligation to install accounting auditors and corporate auditors due to the amount of stated capital exceeding 500 million yen), etc.

On the other hand, in the case of a Godo-Kaisha, there is no such restriction, so the entire amount paid in for a capital increase can be posted to capital surplus. This will not cause any change in the registered matters, and thus there will be no need to apply for registration of changes.

Reduction of operating costs

In general, the incorporation procedure for a Godo-Kaisha is simpler than that for a Kabushiki Kaisha, and the incorporation costs are approximately half the amount. In addition, as mentioned above, a Godo-Kaisha requires fewer applications for registration and is less subject to legal restrictions than a Kabushiki-Kaisha, making it possible to reduce the costs paid to legal specialists.

Disadvantages unique to limited liability companies

Even with the above advantages, there are some unique disadvantages of a Godo-Kaisha.

No shares can be issued

There is no such thing as “shares” in a Godo-Kaisha (Partner holds “equity”, instead). Therefore, a Godo-Kaisha cannot issue share Options, which are used as an incentive system for employees.

Difficult to be invested

As mentioned above, in a Godo-Kaisha, in principle, the investors participate in the management of the company. This can be a factor that makes investors who are not interested in company management hesitant to invest in a Godo-Kaisha.

Not suitable for multi-person management

The number of voting rights of each shareholder in a Kabushiki-Kaisha is, in principle, based on the number of shares held. On the other hand, in the case of a Godo-Kaisha, each partner has one voting right in principle, regardless of the percentage of ownership of the partners. Therefore, for example, if two friends manage a Godo-Kaisha, each of them has one voting right, regardless of their investment ratio. Thus, if one of the partners cannot be reached at a meeting where a majority of votes are required, the management of the company will suddenly cease to operate (a “deadlock” situation). In order to avoid such a situation, it is also useful to specify the specific ratio of voting rights of each partner in the Articles of Incorporation.

MK@ 08/27/2022