Whether you are an entrepreneur establishing your start-up in Japan or a foreign corporation establishing your subsidiary in Japan, AZX can assist you.

If you are an entrepreneur, you will need an entity that will allow you to expand your business, so that you can raise capital, hire employees and purchase assets. In general, in that case, a sole proprietorship (i.e., doing business without a legal entity) would have its limitations, so you would use a corporate structure. If are targeting an IPO and intend to raise significant capital, this means that you will need to establish a corporation (kabushiki kaisha). On the other hand, if your main goal is to establish a business with just a few business partners and to limit your liability, you may wish to consider an LLC or an LLP.

As for the incorporation procedure, there are entrepreneurs who prefer to handle this themselves, either for the satisfaction of doing it themselves or simply to save cost. However, if in the future you wish to raise outside financing or to sell your company, you may be required to have a Japanese lawyer issue a legal opinion on the validity of the incorporation procedure. Notwithstanding that the company is registered with the local legal affairs bureau, the registration process is simply a check of legal formalities, and does not necessarily mean that the company has been validly incorporated. So it would be safer to consult with a Japanese lawyer from the incorporation of your company.

If you are a foreign company establishing a Japanese subsidiary, the same choice of entity principles described above will apply. And even though you are not likely to take the subsidiary public or perhaps even to raise outside financing, you could decide to sell the subsidiary. Accordingly, you may wish to consider consulting with a Japanese lawyer to incorporate your company.

Q1 (Incorporator)

What’s an incorporator? And who becomes the incorporator?

The incorporator is the person who signs the articles of incorporation prepared at the time of incorporation. His substantive role is to prepare the initial articles of incorporation and to execute other acts related to the incorporation process. And the incorporator must purchase at least one share of the company’s stock (Companies Act, Article 25, Section 2), so he is also an investor. The incorporator can incur legal liability if he neglects his duties and the corporation suffers damage as a result, so the incorporator bears a heavy responsibility (Companies Act, Article 52, Section 53). In a typical start-up situation, one of the founders is usually the incorporator. In the case of a subsidiary, the incorporator is usually the parent company.

(Posted: January 27, 2012)

Q2 (Number of Directors and Corporate Auditors)

What’s the minimum number of directors? Do we need corporate auditors?

Under the Companies Act, at least one director is the minimal requirement, but there is some flexibility as to other corporate governance mechanisms. So, it is possible for a company to not have a formal board of directors (so long as there is at least one director) or corporate auditors. So the minimum number of directors is one (and the minimum number of corporate auditors is zero). However, if you want to have a board of directors, the minimum number of directors is three, and generally you must have one or more corporate auditors.

(Posted: January 27, 2012)

Q3 (No Board or Corporate Auditors)

We prefer to operate the company with minimal people. What are the disadvantages if we decide not to have a board of directors or corporate auditors?

If the company doesn’t have a board of directors, the authority of the shareholders will be stronger. In principle, the shareholders would be able to determine every matter. Each shareholder would have the right to propose agenda items and matters for resolution, regardless of the number of shares held by a shareholder. This would increase the level of involvement of the shareholders in the management of the company. This may not be the preferred structure if you are an entrepreneur with outside investors, but could be a viable option for a wholly-owned subsidiary.

Also, if there are no corporate auditors, a majority of the directors would not be able to exempt directors from certain liabilities (Companies Act, Article 426). And, without corporate auditors, the shareholders’ audit authority would increase. For example, a shareholder would have the ability to convene a board of directors meeting.

Accordingly, in choosing the appropriate corporate governance structure, in addition to considering whether or not you can find appropriate candidates as directors and corporate auditors, you should also consider the level of freedom you want from the shareholders in the day-to-day management of the company. Of course, you can always start with a simple structure, without a board of directors and corporate auditors, and change the structure later as you find qualified candidates for the directors and corporate auditors.

(Posted: January 27, 2012)

Q4 (Capital Structure)

We have heard that there are no restrictions on the amount of the company’s capital. If we invest a total amount of 1,000,000 JPY, how many shares should we have and what should be the price per share?

Under the Companies Act, there are no restrictions on the price per share issued at the time of incorporation, so you are free to choose the price. As for the number of shares, so long as it’s within the number of authorized shares in the articles of incorporation, there is no problem.

However, under the old Commercial Code, the number of shares outstanding could not be less than 1/4 of the authorized number. But under the Companies Act this restriction is limited to “public companies” (as defined in the Companies Act, which is not necessarily the same as a publicly listed company), so private companies are not so restricted.

Of course, if the price per share is too high at the outset, it could become an obstacle to future financings, in which case a stock split would be required to reduce the price per share. So make sure to choose an appropriate price per share at the time of incorporation. If you don’t have a specific desire, you could issue 100 shares at 10,000 JPY per share, or 1,000 shares at 1,000 JPY per share.

(Posted: January 27, 2012)

Q5 (Contributions in Kind)

Is it complicated to make contributions in kind instead of in cash for shares?

In cases of contributions in kind, there is an issue of whether or not the value of the shares equals the value of the contributed property. So, in principle, a third party valuation is required. The third party valuation requires selection by a court of the evaluator, which can be an expert, such as a public accountant, and the payment of the cost of the evaluation. And the process takes time. So, there is a significant cost, both in terms of time and money, especially for entrepreneurs. However, there are also certain exceptions from the valuation requirement, such as cases where the supposed value of the contributed property (the amount that the company deems to be the invested amount) is less than 5,000,000 JPY.

(Posted: January 27, 2012)

Q6 (Post-Incorporation Asset Purchases)

Since in-kind contributions are complicated, would it be a problem to have the company purchase the assets after incorporation?

If, within two years of its incorporation, a company purchases assets for its business that were existing from before its incorporation, at a price that is more than 20% of its net assets, a shareholders’ super-majority resolution (which in Japan is two-third) is required as a so-called post-incorporation establishment. So be careful. However, this is not a contribution in kind, so a third party valuation is not required.

(Posted: January 27, 2012)