Types of Companies and Legal Entities
Once a decision has been made to incorporate, many people are not sure what type of entity is most suited for them. The following is a short description of the more common types of legal entities that can be incorporated.
1. Joint-Stock Company (Kabushiki Kaisha, “KK”)
The KK is the most common type of legal entity and is widely recognized due to its long history and tradition.
The key feature of the KK is that business operations are executed by its directors (separation between ownership and management) and since the shareholder is not required to be involved in management, an investor can just invest and not participate in day to day business operations.
Furthermore, since shareholders are not directly liable to company creditors (indirect limited liability), a shareholders’ wealth does not have any direct influence on the credit worthiness of the company.
As can be seen from the above, even if there are changes to the shareholding structure in a KK, stability of business operations can be maintained and as a result, this type of entity is most suitable when obtaining funding from outside sources.
2. Limited Liability Company (Godo Kaisha, “GK”)
The GK is an entity where all members (investors) have just limited liability (member liability is limited to the amount invested).
Compared to a KK, there is much more flexibility in the Articles of Incorporation and as such the GK is well suited to businesses operated by a small number of persons.
Additionally, since the Articles of Incorporation of a GK do not need to be notarized, incorporation costs are less and setup procedures simpler than a KK.
Lastly, as there are no obligations to disclose financial statements or any concept of a term of office of directors, relative to a KK there are fewer post-incorporation running costs and maintenance procedures required.
3. Goshi Kaisha/Gomei Kaisha
A Gomei Kaisha is an entity type where all its members (investors) have unlimited liability (members bear responsibility with their personal assets for liabilities of the company).
A goshi kaisha consists of members that have limited liability and unlimited liability.
Since the investors in a goshi kaisha or gomei kaisha bear relatively more liability than in a KK or GK entity, these types of entities are not commonly incorporated.
4. Incorporated Association and Foundations
An Incorporated Association (ISH) is an entity created for a group of people with a common goal, while an Incorporation Foundation (IZH) is an entity created for the contribution of funds to further a common goal.
Previously, incorporation of a public benefit corporation required that the business purposes be for the public benefit and that the corporation was not-for-profit; however new laws removed the necessity of public benefit business purposes.
However, as there still is a need to continue the non-profit aspect, it is not possible to distribute surpluses and residual assets to the founders. It is this aspect that represents the major difference between the KK and other entities whose purpose is to distribute profits to its shareholders.
5. Limited Liability Partnership (LLP)
The Limited Liability Partnership (LLP) is a partnership based on the Limited Liability Partnership Act and has been modelled after the Limited Liability Partnership found in other parts of the world.
The LLP has the following three features: (1) the liability of the partners is limited to the amount invested (limited liability), (2) profits/losses and rights may be freely distributed (self-government) and (3) the partnership is not taxed and the investors are each directly taxed.
6. Investment Limited Partnership (LPS)
The Investment Limited Partnership (LPS) is an investment partnership defined under the Limited Partnership Act for Investment.
The partners in an LPS are either unlimited liability partners or limited liability partners, where operations of the partnership are executed by the unlimited liability partners.
Since the limited liability partners are not involved in the execution of operations and have no risk beyond their investment, this vehicle is considered as being easier to attract investors.
Note that the objects of investment are limited to those prescribed by the LPS Laws.
7. NPO
An NPO is an entity that has been incorporated for the purpose of providing benefit to the general public by engaging in one of 20 areas as listed in the Act on Promotion of Specified Non-Profit Activities.
In order to incorporate an NPO, it is first necessary to apply to the governing administrative body and be authorized to incorporate. After receiving such authorization, the entity is formed through formal registration.
An NPO is permitted to engage in profit generating businesses, however the profits earned through such activities must be used to further social contribution activities.