Saturday, November 27, 2010

So you want to do business in Japan

I have a client that wants to start a new company in Japan.  I was asked to set up a new business entity for him that could operate in both the United States and Japan.  In researching this issue, we came across the Japanese LLP.  Below is an excerpt from an article I found at Venture Japan.  I hope you find it informative.

The Japanese LLP; Japan's first hybrid entity

Japan's government is very conservative and the need for fundamental change to Japan's education policies is difficult for the government to accept. It is far easier to point at something tangible (pun intended) which can be emulated, and so the Japanese government, specifically the policy makers at the Ministry of Economy, Trade & Industry "METI", proposed two new corporate entities (the Japanese LLC and the Japanese LLP) to encourage Japanese university professors and other academics to 'get into industry'. The concept of reducing taxes to promote investment is not part of the Ministry of Finance's "MoF" mandate though, and doubtless the prospect of creating a true US LLC equivalent corporation, with total flexibility of ownership and tax treatment, was more than the MoF could bear. The net result is the yugen sekinin jigyou kumiai or Japanese LLP which supports the government's intent while not leaving the stable door open.

The Japanese LLP limited liability partnership is Japan's first hybrid corporate entity and combines the limited liability characteristics of a corporation with the pass-through income tax characteristics of a partnership. The tokumei kumiai 'silent partnership' or Japanese LP has pass-through tax characteristics but does not have true limited liability (although the silent partners in effect benefit from limited liability). The nin-i kumiai 'unlimited partnership' also has pass-through tax characteristics but does not provide any limitation of liability.

The Japanese LLP gives its partners limited liability and because it is a pass-through entity, its profits or losses are allocated to the partners and not subjected to Japanese business income tax at the LLP level. Put another way, the Japanese LLP does not pay Japanese business income tax but instead distributes its profits (or losses) directly to its partners and then the partners declare their portion of the profits or losses on their income tax returns. This is identical to the tax treatment of a US LLP, or of a US LLC that elects through its Articles of Incorporation to be treated as a pass-through entity for income tax purposes.

The Japanese LLP for doing business in Japan

Many foreign companies doing business in Japan have low costs in Japan relative to the revenues they earn here. Sometimes it is because the Japanese market value of a product is much higher than elsewhere even though the costs of marketing and sales are comparable, and sometimes it is because their Japanese business costs are pure sales and marketing while their entire product development and production costs are overseas (as happens with software and other intellectual property). For years such foreign companies have searched for a way to get their Japanese profits out of Japan without paying excessive Japanese business income taxes. For US companies, a tokurei yugen kaisha allows them to get pass-through treatment on the US side but of course the tokurei yugen kaisha still has to physically pay the taxes in Japan (so the effect is at a group level and is diluted).

So, is the Japanese limited liability partnership 'yugen sekinin jigyou kumiai' the new entity of choice for foreign companies to do tax-efficient business in Japan?

If you are looking to do business in Japan, please feel free to contact Daniel J. Alexander II at (951) 737-4040 x1 or The Out-House General Counsel.


  1. The biggest mistake made when setting up in Japan is not systemically thinking through what type of company structure, KK, LLC, LLP... or whether to do it via partnership, licensing or M&A. There is also the option of having a "Virtual Presence" in the Japanse market. Too often companies select a structure for their entities in Japan then have to change it a year or so our. The pros and cons of different methods are set out on