Fall Seven Times, Stand Up Eight.
— Old Japanese Proverb
Remember Japan? Well, Michael Shuman of Time magazine does. He’s written a compelling article appearing in next week’s issue. While the focus of the article, Turning Japanese, is on Japan’s recent economic and political paralysis, Michael correctly points out that, given the current state of the global economy, Japan’s economic stability is enviable:
While much of [Asia] is still hurtling along the path of development — a blinding whirl of frenetic construction and perpetual change — Japan is a vision of stability, a nation that has everything others in Asia want, and has already had it all for decades. Money. Technology. Global brands. A seat at the table with the powerful countries of the industrialized world.
Japan Offers Better Investment Climate Than in Years Past
Despite the fiscal bumps and bruises it has suffered in the past several decades, Japan is on the brink of a renaissance. The historic victory of Prime Minister Yukio Hatoyama in last year’s election ushered in a renewed sense of optimism in the hopes of hanging on to Japan’s standing as the world’s third largest economy (behind the U.S. and China).
Under the slogan "Invest Japan," Japan is now working to establish a better and more effective investment environment for foreign investors. The Japan External Trade Organization (JETRO) published a comprehensive ebook to help foreigners understand the Laws & Regulations On Setting Up a Business in Japan.
The ebook provides information on laws, regulations and procedures on registration of incorporation, visas, taxes, human resource management, and trademark and design protection systems.
For business owners looking to expand abroad, there’s never been a better time in the last two decades to set up shop in Japan.
Business Entities: Four Options
There are four primary types of legal entities for a business. Tax matters aside, operation of the four different types of business entities is fairly similar. You can open a bank account, hire, rent office space, lease equipment, enter into contracts, and potentially sponsor a visa with any of these four primary legal entities.
When starting a new business in Japan your four options are:
- Branch office for your pre-existing (i.e. foreign) corporate entity. Opening one means that corporate headquarters will still be responsible (i.e. have unlimited liability) for the branch office.
- Corporate subsidiary. This is known in Japan as a kabushiki kaisha or KK. A KK is analogous to Delaware-incorporated subsidiary (a “C-corporation”) one might set up, if doing business in the U.S. With a KK, a shareholder’s liability is generally limited to the extent of his or her capital contribution. In some cases, the shareholder may be personally liable for certain actions taken, through the subsidiary.
- Japanese Limited Liability Corporation (LLC), or what is known as a godo kaisha or GK.
- Liaison office. While it has limited liability, the activities the business is permitted to engage in are also limited. These are restricted to primarily nonprofit activities, such as market research, information gathering or preliminary advertising.
If you already have an established connection or business relationship with someone in Japan whom you are coming to work for specifically, a branch office is often adequate.
Setting up a liaison office might be beneficial in the early stages of developing your business. It will allow you to get more information about opportunities and your potential customer base as well as what legal structure will best serve your needs.
Representation in Japan
In the initial setup stages you need to know whether or not your business will have representation in Japan, in the form of a director. In some cases you will want one. In others, you will be required to. For example, pre-incorporation, you might not need one with a branch office. On the other hand, you will definitely need one for a KK corporation. Your director must be a resident of Japan, though not necessarily a national.
One thing to keep in mind is how much trust you place in this person. As a director, he or she will be able to enter into contracts and create potential legal obligations for your new entity. Depending on how you feel about this, your level of comfort with potential liability may dictate which direction you want to go with your business entity. For example, you may want limited liability as a KK instead of a branch office.
Be sure to check additional resources such as the Doing Business Japan website, Doing Business 2010 Data. With Japan generating unprecedented international interest, you won’t want to miss out on all the opportunities.
Trend to Watch: Look for Japan to Offer an Increasing Amount of Incentives to Attract Foreign Direct Investment