4 major type of the business entity in Japan

1. Representative office

Allowable only for the preparatory or non-income generating liaison by one or two staffs doing market research, public relation, advertising, purchasing for the foreign parent organization, it is easy to establish and exempt from corporate income tax, but the activity is strictly limited.

2. Japan branch

A branch is an unit of the foreign parent organization as opposed to a separate legal entity. The advantage includes (1) the head office could aggregate with Japan branch’s tax loss in the head office’s corporate tax base and (2) the head office could collect Japan branch’s earnings free from Japanese withholding income tax, while the disadvantage includes (1) the disclosure of the head office’s information to the tax authority and the potentiality of the tax inquiry extending to the foreign head office, (2) unlimited liability from Japan business to the foreign head office due to absence of the corporate veil protection.

3. Subsidiary corporation (Kabushikikaisha, K.K.)

Joint-stock corporation (Kabushikaisha, K.K.) of a subsidiary is a separate legal entity from the foreign parent, the advantage includes (1) the limited liability of the parent company by the corporate veil protection and (2) the freedom of the corporate structure as a separate legal entity including the accounting year differently from of the foreign parent organization, while the disadvantage includes that the payout of the earnings to the foreign parent is recognized as dividends subject to Japanese withholding income tax at 20% unless the tax treaty with the country of the parent’s company exempts or reduces the withholding tax.

4. Godo Kaisha,(G.K.) – Japanese LLC

Godo Kaisha (G.K.) was introduced in 2006 with concept of the partnership governance of no separation between the shareholder (“member”) and the management with the limited liability. G.K. is a separate legal entity distinct from the member holding each member jointly and severally liable for the damages to the third party but limited to the contributed assets, except in the case of the managing member’s act of willful misconduct or gross negligence. Although it is modeled after US LLC, G.K. is a taxed at the corporate level instead of ‘pass-through’ to the member as a distinct taxable entity.
G.K.’s partnership governance provides broader freedom than K.K. on the corporate governance and its structure based on the articles of organization.
The set-up of G.K. costless and simpler than K.K. is another reason suitable especially for the small/medium size business. Also large companies are established are established in the form of G.K. including Apple Japan Godo Kaisha, ExxonMobil Japan Godo Kaisha. One background might be that US parent company can treat G.K. as a pass-through entity through “check-the-box” for US tax purposes.
Obviously it merits more attention for the foreigner to choose G.K. as the business entity in Japan. Further clarification of Godo Kaisha is described in
Godo Kaisha (Japanese LLC)

5. Yugen Sekinin Jigyokumiai (YSJK) - Japanese LLP

Yugen Sekinin Jigyokumiai (YSJK) is a limited liability association having no separate legal entity, as is modeled after US LLP.
Since there are similarities with GK, the character of YSJK would be explained by major differences from with G.K.as follows;
  • (1) YSJK is not a separate taxable entity distinct from the member. Profit and loss passes through to the member of YSJK and taxed on the member’s aggregated income with other sources.
  • (2) At least two members are required to form YSJK while G.K. can incorporate by the sole member.
  • (3) Each member of YSJK is expected to participate in management while G.K. can appoint the managing member and the non-managing member.
  • (4) YSJL cannot offer the interest to the public while G.K. can transform into K.K. and offer the stock to the public.
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