How to incorporate in Japan, Part 2: specifics of setting up a company.

In Part 1 of this article, published in the Autumn 2006 issue, we took an overall glance at the new rules of incorporating in Japan. In part 2, we take a specific look at what it takes under these new rules to get down to business.

Nobody ever said that setting up a company in Japan was easy, and the new rules don't do much to improve that situation, unless you choose a Godo Kaisha (GK) or Joto Seigen Kabushiki Kaisha (JSKK), in which case you don't need to have a Board of Directors and all that that entails. Instead, the rules are designed to make it cheaper for more people to start their own business, while at the same time increasing accountability and compliance.

For the purpose of illustration for this article, we are going to show the steps involved in setting the most complicated company format, a Kokai Kabushiki Kaisha (KKK or just KK), since this serves as a superset of the tasks required to set up a company. If you decide to set up one of the less demanding vehicles, you can delete the unnecessary steps.

Overall procedure of setting up a KK company is as follows:

* Founder, otherwise known as a Promoter, gathers investors (if any)

* Make Articles of Incorporation and get them notarized

* Prepare application paperwork for the Legal Affairs Bureau ("Homukyoku")

* Prepare Company Seal, capital receiving bank account

* Payment of capital

* Registration of incorporation

* Follow-up registration of new company to various other government entities

How long does it take?

As of writing, in August 2006, thousands of companies a month are being established in Japan--testament to the improved accessibility that the new rules have created for average Japanese to make their own company. As a result, whereas setting up a company under the old system took about 4-5 weeks, it now takes 6-8 weeks, because of backlogs in each responsible agency. The new rules should eventually make setting up a business quicker than before, and paralegal agencies tell us that they expect things to settle down in 2007.

Of course, these estimates assume that you're fluent in Japanese, know what you are doing, or that you have help, such as a Judicial Scrivener ("Shiho Shoshi") or law firm. The fact is that if you're creating a company for the first time, there are a lot of details in the registration process that can trip you up and require further forms or evidence, thus blowing out the timeline.

Steps to incorporate

1. Promoter

One or more promoters are required to form a Japanese corporation. These promoter(s) may be natural persons or juridical persons and need not be residents of Japan, but as indicated above, it is easier if they are. If there is more than one promoter, then usually they will appoint a single representative to effect the establishment process. Each promoter must hold at least one share. The promoter(s) may subscribe for all the shares or may solicit subscriptions from third parties.

2. Articles of Incorporation

The promoter must prepare and submit the Articles of Incorporation ("Teikan") for attestation by a Japanese notary public ("Koshonin"). The Notary confirms that the Articles comply with Japanese laws and that they have been executed by all the promoters. In Japan, a Notary is an important legal officer and is harder to find than abroad, so ask your local Ward or City office for contact information.

3. Share subscription

If the promoter wants to have third-party investors invest in at the time of incorporation, he/she must designate a special bank account in Japan ("Betsudan Ryokin") to which the subscription proceeds will be paid. A bank employee will be responsible for transactions relating to this special, temporary account, and all questions and confirmation can be directed to them.

Besides the Promoter, other intending shareholders apply for shares to the Promoter, and pay their subscription funds directly to the bank account set up by the Promoter. The payment is made a few days before the prescribed date (i.e., the date on which the corporation is to be formally registered), and the funds are held by the bank in trust as capital for the new company.

In due course, a certificate is issued by the bank confirming its receipt of the paid-in capital funds. The promoter submits this certificate to the Legal Affairs Bureau together with other incorporation documents. The Legal Affairs Bureau then issues a certificate of incorporation to the promoter, which is then presented to the bank, and after this the funds are released into the new company's operating bank account, available for regular use.

4. Directors

For a KK the minimum Board number is 3 or more Directors and 1 Statutory Auditor. Once elected, of the directors, one person actually resident in Japan is made the Representative Director. This person does not have to be the CEO, although normally they are, and so a non-resident person could be the CEO if required. The responsibility of the Representative Director is to manage the business, represent the company, make decisions on a day-to-day basis, sign agreements/contracts and other legal documents on the behalf of the company, report to the shareholders, and so on.

The Statutory Auditor is an individual trusted by the company and must not be someone employed there. They are theoretically supposed to have an understanding of the ethics and responsibilities of submitting correct books, but the reality is that normally the role is perfunctory. With the recent change in rules, though, companies can elect to not have a Statutory Auditor and instead use a professional firm--which clearly is a step by the authorities to introduce transparency into newly established companies. This is a positive development for foreign firms, who often found it difficult to find a trusted party willing to take on the risk of being a Statutory Auditor.

5. Items to prepare for incorporation

A) Identify and document the purpose of the business

B) Create the corporate name (you need to hire someone to do a search at the Legal Affairs Bureau to ensure no other company in the same business sector is registered in the Ward or City with the same name).

C) Decide the location of the office. This does not have to be the final location of the company, so often people register the office to their place of abode, and make the final company location the "sales office". Corporate documents will of course be delivered to the original address unless a record of the company moving is lodged with the Legal Affairs people.

D) Decide the amount of capital to be invested.

E) Decide the total number of shares that can be issued (limit is 4 times the amount issued at incorporation).

F) Decide the number of shares to be issued at incorporation.

G) Provide the Promoter's name and address.

H) Decide the terms of appointment for Directors (2 years, can be extended by special mention in the Articles of Incorporation), Representative Director, and Statutory Auditors (4 years, can be extended through Articles of Incorporation).

I) If you're setting up a GK or JSKK, you can also decide whether you even want to have a Board of Directors and Statutory Auditor.

J) Decide the fiscal year start and finish dates.

K) Choose a method of public notice of establishment of the company (usually the government's official gazette the "Kampo" is used).

L) Apply for certificates for the personal seals of Promoter and Representative Director.

M) Create a set of official seals for the company.

6. Capital payment

Since May 2006, companies can be capitalized with any amount over one yen. Practically speaking, though, unless you're really bootstrapping, it is a good idea to have at least as much capital as is needed to run the business for a few months until revenues start to flow. Most people typically capitalize at around JPY5m to JPY10m for a small start up.

Although most capital is paid in as cash, it is also possible to use other assets, such as IP. There are certain requirements that kick in on large injections of value of non-cash assets, so be sure to check with a law firm first.

7. After incorporation

As a formally acknowledged juridical person, a KK must report its existence to various government agencies and complete its establishment process. While the nature of the reports required to be filed by the corporation will vary with the business to be conducted, the following is a basic guide to post-formation procedures following the company's establishment.

A) Preparation of accounts

Books of accounts must be opened and maintained in accordance with Japanese GAAP.

B) Employees

If one or more persons are employed by the new corporation, the corporation must lodge the following reports with government agencies indicated:

* Health and welfare insurance: the Social Insurance Agency;

* Pension insurance: the Social Insurance Agency;

* Employment security insurance: the Employment Security Bureau; and

* Labor accident insurance: the Labor Standards Inspection Office.

C) Work rules

If ten or more persons are employed, the corporation must prepare work rules (normally including severance rules in an appended document) describing the working conditions and regulations governing employees. This document must be filed promptly with the local Labor Standards Inspection Office, part of the Ministry of Labor.

D) Taxes

* The establishment of a new taxable entity, its business year and its method of depreciation must be reported to the National Tax Administration Agency for purposes of the national juridical persons' tax (Corporation Tax) within two months of incorporation.

* Reports of the company's establishment must also be filed with local government agencies for the purpose of local taxation. In Tokyo, such reports must be filed with relevant authorities within the Tokyo Metropolitan Government and your local ward office within fifteen days of registration.

* If the corporation wishes to be eligible for the considerable tax benefits available to a "blue return" taxpayer (including the right to carry losses forward), it must file before the start of the year an application for an authorization to use a blue tax return.

* With respect to the business year in which the corporation is established, such application must be filed no later than (i) three months after the date of establishment or (ii) the last of day of that business year, whichever is earlier.

Getting professional assistance

As will be apparent from the list of tasks involved in establishing a business, setting up a company in Japan is somewhat complicated, especially since the systems, language, and procedures are quite different to those used in other countries. Thus it helps tremendously to have an expert assist in putting a corporate entity together. There are sources of such experts:

* Get a foreign law firm or accounting firm to create the company. The advantages with this option are that it allows for precision and often fast turn-around establishment. Further, the professional looking after your account will tell you what best practice is, how Japan is different from your home country, how the taxes should work, and how they impact the structure and type of company vehicle you choose. The main negative of foreign law firms is that such professional personal attention doesn't come cheap, often running in excess of JPY3m, not including the actual stamp duties, registration fees, and other incidental government agency and documentation preparation costs. Also, law firms like to stay neutral and reduce risk, so are unlikely to give you strategic advice in the same way an experienced businessperson can.

* Have a bilingual Judicial Scrivener ("Shiho Shoshi") execute the paperwork. The advantages here are that such people are very reasonably priced, and do all the same legal procedures that a law firm will do. Indeed, often law firms will outsource their general company establishment paperwork to just such a firm. The disadvantage is that Judicial Scriveners need to have the correct paperwork from you to get their job done. There is very little preprocessing done, so you need to have a staff member who has language skills and who can anticipate the types of questions that need to be asked. Pricing is typically around JPY250,000-JPY350,000 for a company founding, plus of course the government stamp duties and other documentation costs. Using a Judicial Scrivener, you can figure setting up a company costing about JPY550,000-JPY750,000.

* Get a Back Office outsourcing firm to assist. There are a number of companies that fit this profile and which provide pricing One such company is this magazine's sister company, LINC Media, which offers bilingual services to incorporate and provide on-going back office operations for foreign companies setting up a subsidiary in Japan. Pricing is generally an all-in package price, and currently LINC Media charges around JPY850,000 (depending on initial capitalization) to set up a company and to support the foreign head office with a reasonable level of tutoring on establishment basics and also a reasonable level of Japanese-English translation of company documents.

LINC Media, Inc.

Tel: [phone]

[e-mail]

www.lincmedia.co.jp

RELATED ARTICLE: IMPORTANT TIP FOR SETTING UP A SUBSIDIARY:

If you are trying to set up the subsidiary for a foreign firm in Japan, a major contributing factor to delays in establishment of the business is the fact that the Japanese authorities want to know about the founder (Promoter) of the business. Thus if you're a foreign entity you will be required to provide reams of translated corporate documents proving your existence. There is a workaround, however, and one which is frequently recommended by multinational law firms.

The idea is to have just one share established by a locally domiciled Promoter, then following that, but within the same period, issue additional shares to the foreign parent company. Being locally domiciled, proof of existence is with Japanese-language, commonly used documents (e.g., your family register or company register) and thus is a straightforward process. After the local company is effectively established, you can have the parent then buy the one remaining share off the promoter. To do this, clearly the promoter has to be a trusted person or your law firm.