In this page, we will introduce the 3 primary entity forms in which foreign companies do business in Japan: (a) a Representative Office, (b) a Branch Office, and (c) a Subsidiary Company.
(a) Representative Office (駐在員事務所 or "chu-zai-in-jimusho")
A Representative Office (駐在員事務所 or "chu-zai-in-jimusho" in Japanese) is not truly an entity form, but is one structure by which foreign companies do business in Japan.
Representative offices are not allowed to engage in sales activities, but are primarily used to test the waters in Japan prior to establishing a more permanent, stable presence.
Representative offices are unable to open bank accounts, so either the foreign company would need to do so in its name, or the representative individual in Japan will need to do so in his or her own individual capacity.
(b) Branch Office (支店 or "shiten")
To do business on a regular basis in Japan, a foreign company must first register.
Among the various registration choices, the simplest way to do so is to form a branch office in Japan (支店 or "shiten" in Japanese).
The only steps that are required for the branch office to begin conducting business in Japan are to: (i) secure an office location, (ii) choose a representative of the branch office, and (iii) register the necessary information.
The primary benefits of the branch office are the limited requirements to commence doing business in Japan.
A branch office can open a bank account and lease real estate.
The major disadvantage of this form of doing business in Japan is that the foreign company will be ultimately liable for any debts because the branch office is not a separate legal entity.
(c) Subsidiary Company (子会社 or "kogaisha")
Alternatively, a foreign company can incorporate a subsidiary in Japan (子会社 or "kogaisha" in Japanese).
The most popular limited liability entity choices for subsidiaries are (i) a stock corporation (株式会社 or "Kabushiki-Kaisha" in Japanese (oftentimes abbreviated as K.K. in English)), and (ii) a limited liability company (合同会社 or "Godo-Kaisha" (oftentimes abbreviated as G.K. in English)).
Although there are other entity forms, they are not as popular because of their unlimited liability status.
Note: what is "limited liability"?
Limited liability refers to a legal structure where, even if an entity suffers losses, the investor (the shareholder or member as the case may be) will not be at risk for such losses beyond their investment in the entity.
Limited liability is generally recommended when starting a new business, to protect your personal assets from any potential losses that may be incurred in relation to the business.
G.K.’s are more popular among foreign companies, because of
- the flexibility allowed in internal management,
- cheaper initial startup costs,
- no legal requirements to publish financial results, and
- if the parent company is a U.S. entity, the G.K. can elect (through the IRS’s check-the-box regulations) to be taxed as a pass-through entity for U.S. tax purposes.
Note: what is a "pass-through entity"?
A pass-through entity is a legal entity that is not taxed at the entity level (which results in the avoidance of double-taxation).
Please feel free to reach out to us if you are interested in doing business in Japan, and would like to learn more.