KK vs GK - which type of corporation is best for you?

When starting a business, people often wonder whether they should set up a corporation and, if so, which type of corporation to choose. Given the number of new entries into the Japanese market, it seems likely that many multinational corporations are facing the same decision. Setting the issue of tax aside, the following is our list of key considerations to help you decide which type of corporation suits you best and to explain the procedures involved in setting up different types of corporations in Japan.

Branch vs. Subsidiary 

Some foreign corporations prefer branches to subsidiaries. In Japan, as in many international jurisdictions, a branch is not a distinct legal entity. A foreign corporation is responsible for all of the liabilities and obligations its branch incurs through local business transactions. To operate continuously in Japan, a foreign corporation must appoint and register a Japan-based representative with the Legal Affairs Bureau. Because of this requirement, opting for a branch instead of a subsidiary will not help foreign corporations avoid registration filings.

A representative office, which usually refers to a physical business presence without a formal registration filing, is often used for market research and presales activities in the local market. However, it is not suitable for actually launching sales because it typically indicates a continuation of trading in the Japanese market and thus triggers the requirement to appoint a representative in Japan.

KK vs. GK

When setting up a subsidiary, it is important to consider the available options and their associated costs. The Kabushiki Kaisha, often called KK, has been the standard choice for some time and has traditionally been the most popular type of corporation. Recently, the Godo Kaisha, often abbreviated to GK, has also become a popular choice, particularly among US-based corporations. In 2019, for example, 87,871 new KKs were established, in comparison to 30,566 GKs.

What is the difference between these two types of corporations?

A KK is a standard form of Japanese corporations. In KK, directors are responsible for corporate management with fiduciary duties to shareholders. A GK is the Japanese equivalent of a limited liability company in common law jurisdictions; its members directly manage the company.

Minimum capital requirements

Neither a KK nor a GK has a minimum capital requirement; in theory, you can set up a corporation with one yen as its stated capital.

Basic governance structure

While KKs have a wide variety of options when it comes to corporate governance structure, many small and mid-sized corporations choose to adopt a board of directors and a statutory auditor as their governance structure. To keep this structure in place, the shareholders’ meeting needs to elect at least three directors and one statutory auditor. The board of directors, consisting of elected directors, then appoints a representative director who acts on behalf of the company. However, it is not mandatory to create a board of directors. A single director is sufficient to establish a KK.

Why do corporations appoint boards of directors when they are not required to do so?

The board of directors takes the lead in corporate management and makes most of the corporation’s important decisions. Although the shareholders’ meeting is the supreme body, responsible for mergers, dissolutions, and other fundamental decisions, its role tends to be rather limited in a company that has a board of directors. If a company does not have a board of directors, the shareholders’ meeting can make all decisions.

Thus, a board of directors provides essential support to shareholders who do not wish to be involved in management, but is less useful to shareholders who want direct involvement and full control. While most joint ventures have a board of directors, many wholly-owned subsidiaries of multinational corporations do not.*

What is a statutory auditor?

A statutory auditor is responsible for monitoring the management decisions taken by the directors. Although not an accounts auditor per se, the statutory auditor is also responsible for auditing and verifying company accounts. A company that has a board of directors needs to have at least one statutory auditor.**

So, what’s the bottom line?

A KK requires annual corporate maintenance. Among other responsibilities, a KK must approve its accounts at an annual shareholders’ meeting, elect its directors every few years, and publish an audited balance sheet annually. By contrast, a GK is free of such requirements; it has the advantage of being able to minimize corporate maintenance administration.

Over the last few years, many U.S. companies, including Amazon, Apple, and Cisco, have chosen the GK form of corporation for their Japanese subsidiaries. As a GK is eligible to be a disregarded entity for U.S. tax purposes, it seems to attract certain U.S. companies.

In Japanese business culture, the KK structure continues to be more popular with better financial credibility. In recent years, however, GKs have become increasingly accepted. If you need only a simple Japanese subsidiary that will be run by a foreign parent company, the GK form is an option worth considering.

*A board of directors is mandatory for certain types of companies (e.g., a company that allows shares to be transferred without company approval). Any company that plans to list stocks or adopt governance features for large corporations (such as auditing or compensation committees) in the near future is advised to have a board of directors.

** In a closed company, the statutory auditor can be replaced with a qualified accountant under certain conditions.

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