Starting up a Company in Tokyo
Posted by Eswar Mani July 29, 2020
Having been born and raised in Tokyo, it was always my dream to run my own business in Tokyo.
When I explained this ambition in the past, my Japanese business counterparts would often frown and say that in Japan a big company brand is required to be successful in business here.
I was convinced of embarking on the entrepreneurial path in my city for the following reasons:
- Developed strong relationships with financial institutions, governments and relevant energy players/multinationals over the last 15 years
- Unique, diversified career and track record gave me confidence that I could add value to my clients/partners — clean technology investor and operator background over last ten years
- Timing was appropriate: We had just sold SunEdison Japan to a Thai conglomerate and after a year with the acquirer, I was looking for a new challenge — it was the only platform divestiture successfully executed from SunEdison prior to their Chapter 11 filing in April 2016
- Inbound Request: A former investor in our cleantech fund in Masdar, Abu Dhabi had requested my help on assessing a clean energy investment opportunity in North America. I was humbled to hear that they did not know anyone else who was both a clean energy investor and operator that was bilingual in English and Japanese
- Therefore, time to build my own platform and brand to capitalize on my unique track record.
Practical Matters in Company Registration
You can register the company by yourself, yet the process requires a strong command of Japanese and diligence in filling forms. There are local and bilingual companies that can assist in company creation — the one-time fee agent varies from JPY30,000 to JPY 250,000 depending on your Japanese capability and how much of the administrative responsibility you want to undertake. This is on top of the corporate application fee that is greater than JPY200,000.
I tasked the company registration with a local lawyer that my family has known for two decades. I was prepared to set up a GK (合同会社/LLC), but in the last minute decided to set up a KK (カブシキカイシャ/Private Limited Company) given my lawyer’s advice on how GKs are deemed as inferior to KKs from a reputational and first impressional perspective.
I handed all the documentation for the filing by March first week of this year and was informed that by April first week the company would be registered. The registration process itself is digital through my lawyer’s network, however it seems that the registration process takes week due to manual checking. I was provided with an approximate date for the registration and pinned it down for a day that the stars were aligning for. In a nutshell, company set up was easy, as long as you budget JPY300,000.
Ensure that the creation and registration of your corporate seal is included. This seal is important to validate local documents including for bank account opening and office registration.
If you do not have permanent residency, a good local lawyer can guide you to applying for a visa but this requires additional steps of seeding share capital >JPY5,000,000 at company registration and/or hiring two local staff.
Note that the Articles of Incorporation disclose your residential and corporate office addresses, as a Representative Director.
It is clear that in discussions with potential clients, government officials and other counterparts having a separate office address lends credibility to your business. As policy, all client-related documents and data are stored in a secure location. Yet, the costs of renting, fitting and maintaining an office can add up quite quickly. Upfront deposits (1–3 months) and guarantor costs add up. Shared offices located in several places around Tokyo cost anywhere from JPY70,000 — JPY250,000 per month depending on size and location. Being able to use virtual office services range from JPY15,000-JPY30,000 per month depending on your requirement for bilingual support.
Note that unlike residential lease agreements, commercial lease agreements in Japan require that upon termination of contract, the tenant compensates for any depreciation of the property,which can add up. All wear and tear are tenant costs.
As soon as possible, hire a 司法書士(shihoushoshi, judicial scrivenor) that is a tax accountant who can help you with accounting and tax filings. The prices of the annual services of these accountants vary, but JPY250,000 per year was the ballpark for local tax accountants who require their clients to have native Japanese fluency. If you want to hand over your receipts every month, communicate in English and outsource the data entry entirely, costs can go up to JPY500,000 per year.
There are a variety of administrative tax filings required for both the national and local tax offices that a good tax account can help you with. My experience of the tax offices in Minato-ku, Tokyo are that they are extremely helpful and are familiar with supporting foreigners.
The higher tax rates in Tokyo shift the paradigm of business ownership, in comparison to simple, low, flat tax rate policy provided to corporations in Singapore and Hong Kong. Your tax accountant can help you with supplementary filings that can help simplify ongoing administration (frequency of future filings).
The difficult part was the opening of the bank account. Banks will want to interview as part of their Know Your Client (KYC) procedure to safeguard their institution from money-laundering activities. In addition, it is relatively rare to find a small business banker in a local bank who can speak English. The language barrier does become a hurdle here. However, if your career track record and academic experience are credible, your business story is sound and you have a client in hand, the account opening process can be accelerated to three weeks.
The name of the bank and branch location command status in Japan. For my own credibility and convenience, I opened a bank account at a megabank that was opposite the road from my office.
The account opening interview experience seemed like a normal Japanese company corporate interview, which took 90 minutes of filling documentation and waiting in the branch. Ensure you have at least one hour for every branch visit. I had the experience of filling in multiple forms requiring the same information.
Japan has a employee-friendly labor policy. In general, once you hire a full-time employee in Japan, it is hard to lay off said employee unless you are able to obtain signature of resignation.
The government charges a social tax （社会保険) as a percentage (20–25%) of the salary to the corporation. This is separates from the income and social taxes additionally charged by the government to the employee. Be aware of these amounts when setting salaries.
Given the tax rates and the ability to carry forward losses for three years, many people advise on creating a loss in the first year. I disagree — if you are starting a company, give it your best shot and make a profit.Banks will offer you low-cost credit if you show that your company is profitable, sustainable and able to meet its payment obligations.
Credibility and perception are extremely important in Japan. This can influence how you create a company, your philosophy in operating a sustainable business and the everyday decisions you make.
Following are my recommendations when establishing a corporation in Japan:
- Incorporate as a kabushiki kaisya (KK) rather than a godo kaisya (GK), while the latter is cheaper the KK carries further weight. Outsource your corporate registration to a local lawyer who can help on other matters.
- As is clear from the above, Japanese fluency is a clear competitive advantage. Attaining native fluency should be a target for anyone who sets up a company in Japan.
- Hire a tax accountant that you have a good chemistry with and shares a similar philosophy to you.
- When setting up a business, solve for profitability. Incurring expenses to create a high loss to carry forward for tax optimization does not help your business’s sustainability.
- Having said that, upfront establishment costs can easily add up. Monthly operating expense was also easily 3x higher than what I initially predicted.
- Pursue the entrepreneurial path in Japan! It enhances your local profile, builds credibility and enables you to build a portable track record while institutionalizing relationships.
Japan is a beautiful country with lots of opportunity. While there are significant obstacles, the timing is ripe to pursue your unique entrepreneurial path.