This article provides a brief comparison of KK and GK, from the perspective of an Indian Company investing in Japan
Until recently, when speaking about the economic relationship between India and Japan, conversation would likely focus on investment by Japanese entities (e.g. manufacturers, trading companies, or private equity) into India. In recent years, however, investments by India-based companies in Japan, such as establishment of subsidiaries or joint ventures with Japanese counterparties, have increased. For example, Softbank, a large shareholder of OYO (India's largest hospitality company), published a press release on 4 April, 2019 stating that they had established a joint venture with OYO Hotels & Homes in order to conduct hotel business in Japan.
A number of different structures are available for incorporating a new company in order to start a business in Japan. The most common structures are the Kabushiki Kaisha, commonly referred to as a "KK," and the Godo Kaisha, commonly referred to as a "GK." Both KK and GK are governed by the Japanese Companies Act. This article provides a brief comparison of KK and GK, from the perspective of an Indian Company investing into Japan.
2 Comparison of Kabushiki Kaisha and Godo Kaisha
1) Basic Concept A KK, sometimes referred to as a "joint stock corporation," is regarded as the most authentic form of corporation under Japanese law. If an Indian company wants to make a new
investment in an existing Japanese company, the target company is likely to be a KK. This is because most of the
larger, more established companies in Japan utilize the KK structure for carrying out their business. On the other hand, a GK, sometimes referred to as a "limited liability company," is modeled on the limited liability company provided for under U.S. law, and has only been available in Japan since 2006. In both KK and GK, liability is limited to the assets contributed by participants (i.e. shareholders or members).
Both KK and GK are convertible into one-another (KK to GK and GK to KK). The time associated with a conversion from a KK to a GK (and vice-versa) is usually about 1.5 to 2 months (in practice) and the filing cost for the process is typically from 100,000 to 200,000 JPY (with at least 60,000 JPY of the amount going toward registration tax). It should be noted that the cost is affected by the stated capital and other matters.
2) Structure and Operation
A KK must have at least one shareholder to whom at least one share must be issued, and at least one director. The requirement that at least one director be a Japanese resident was abolished in 2015. A shareholder of a KK
is generally not liable for the debts and other obligations of the company. Generally, the KK structure is chosen based on the assumption that the company has (or will have) several members (shareholders) and, as such, key matters can be decided by one or more directors (individually or collectively as a board, if the KK decides to have
a board) without shareholder approval. If a company expects to make an IPO, or that the number of members will increase in the near future, a KK is more advisable than a GK. If (a) the stated capital of a KK is JPY 500 million or more, or (b) the amount of debt of a KK is JPY 20 billion or more, the KK is required to have an accounting auditor (which is practically an accounting firm).
A GK must have at least one member or equity holder but does not appoint directors. If there are two or more members, members can appoint executive members by providing for such in the Articles of Incorporation. If an executive member is a company, it must appoint a "manager" (shokumu shikkousha). The members of a GK are responsible for the management of its business but are generally not liable for its debts and other obligations. The GK structure does not require a Japan resident: member, executive member, or manager. In a GK, unanimous approval of members is required for transfers of equity. If you expect that the number of members will increase in future, operation of a GK may be difficult, but if not, a GK will be easier to operate than a KK. On a related note, generally speaking, a GK is more flexible in terms of the corporate governance structure than a KK, as shown in the following table.
When forming a joint venture, a Japanese counterparty may prefer the KK structure because the governance thereof, comprising a board of directors and a statutory auditor, is firmly established. Though a board of directors is optional under the Companies Act, most Japanese counterparties require a KK to have one. You can, however, build a similar governance structure in a GK by providing for such in the Articles of Incorporation. For example, GK can have a "Board" or a steering committee, which resembles the board of directors in a KK, though its establishment would not be based on a requirement of the Companies Act (rather, it would just be the result of internal decisionmaking).
3) Tax Perspective
Income earned by a KK or a GK is subject to corporate tax (national and local), currently at a marginal rate of 33% to 35%. Because both KK and GK are taxed at a corporate level, there is not much difference between them from the perspective of tax treatment. A GK, however, is regarded as a pass-through entity in some jurisdictions, including the US.
In addition, a GK has the advantage of being able to minimize the registration and licensing taxes payable at the time of incorporation (the "incorporation registration tax"). This is because the amount of incorporation registration tax is equal to 0.7% of stated capital, and a GK has the discretion to count whatever percentage of its equity it wishes as its stated capital. However, if such amount is less than 60,000 JPY, the GK must pay 60,000 JPY. Under the Companies Act, a KK must account for at least 50% of the equity paid by the shareholders as its stated capital. While the percentage of registration tax remains the same for KK (0.7%), if such amount is less than 150,000 JPY, the KK needs to pay 150,000 JPY.
1 If a company is going to act as a managing member, such company must appoint an executive manager ("Executive Manager") (who should be a natural person) who is to perform the duties of the managing member. A Board of directors (a "Board")Under Japanese Companies Act, a KK may or may not have a Board of directors (a "Board") basically, but if one does have a Board, it must be comprised of at least three (3) directors, and such KK has to elect at least one (1) statutory auditor. Of these requirements, the requirement to have at least one (1) corporate auditor is particularly cumbersome, as the statutory auditor's duties include monitoring the directors' compliance with laws and ordinances applicable to a corporation, and this is not particularly easy to accomplish for ordinary people. If a corporation does not have a Board, on the other hand, it can be managed by one (1) or more directors elected by the shareholders of a corporation, and when more than one (1) director is elected, it is possible for them to set forth internal rules to allocate the authorities and duties of the directors among them.
Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.