- 1 Four Types of Companies
- 2 Treatment of Limited Liability Companies
- 3 Unlimited or Limited Liability
- 4 Institutional Design
- 5 Merits and Demerits of a Stock Company
- 6 Merits and demerits of a limited liability company
- 7 Merits and demerits of a limited partnership
- 8 Merits and Demerits of a unlimited partnership
- 9 Differences between a joint stock company and a limited liability company
Four Types of Companies
The Companies Act stipulates four types of companies: a joint stock company, a limited liability company, a limited partnership company, and a general partnership company (Gomei Kaisha). Three of these types, Godo Kaisha, Goshi Kaisha, and Gomei Kaisha, are referred to as equity companies. Under the Companies Act, investors in a stock company are called “shareholders,” while those in a partnership company are called “partners”. The term “shain” does not mean a person employed by the company, but rather a person who contributes funds to the company and owns a stake in the company (owner of the company).
Treatment of Limited Liability Companies
The Limited Company Act “Yugenkaisya Law”was repealed when the New Company Act came into effect in 2006. However, under the new law, a limited company established before the New Company Act came into effect can continue to use the name of a limited company after the New Company Act comes into effect. The provisions of the New Company Law regarding joint-stock companies will apply to Yugen Kaisha.
Unlimited or Limited Liability
When considering the type of company, it is important to consider whether the investors (shareholders or partners) are liable for the payment of the company’s debts to the company’s creditors. If an investor is not liable beyond the amount of his or her investment, the company has limited liability; if an investor is liable for the debts of the company without limit beyond the extent of his or her investment, the company has unlimited liability.
The types of companies differ depending on what kind of institutional design is allowed under the provisions of the Companies Act. In the case of a joint stock company, ownership and management are separated, and the shareholders, who are the investors, are required to hold a general shareholders meeting to check the management of the company. On the other hand, in a limited liability company (godo kaisha), limited partnership company (goshi kaisha), or general partnership company (gomei kaisha), the investors manage the company themselves, and since ownership and management are not separated, there is no general meeting of shareholders or board of auditors to check the management.
Merits and Demerits of a Stock Company
A joint stock company is a form of company that collects funds by issuing shares. In a stock company, investors (shareholders) are not liable for the company’s debts beyond the amount of money they have invested (Article 104 of the Companies Act). This is called shareholders’ limited liability. This is one of the greatest advantages of establishing a stock company, as it allows investors (shareholders) to determine the maximum limit of their liability.
A stock company can raise funds by issuing new shares or bonds to attract investors. It can also borrow from banks as a corporation (legal entity) based on the social creditworthiness that the corporation possesses. A stock company has a function as a vessel for fundraising.
The disadvantage of forming a joint stock company is that it involves a certain amount of expense. When establishing a joint stock company, the following fees are required: 150,000 yen for registration and license tax, 50,000 yen for certification of articles of incorporation, 40,000 yen for stamps to be affixed to the articles of incorporation (not required for electronic certification), and 40,000 yen to create a representative seal for the company. After the incorporation of a stock company, directors and auditors are subject to terms of office, and registration of a change of officers is required for each term of office 30,000 yen (10,000 yen for companies with capital of 100 million yen or less) is required for registration tax for each term of office. In addition, after the establishment of a joint stock company, a minimum annual corporate tax of 70,000 yen must be paid, even if the company does not make a profit.
Another disadvantage of a joint-stock company is the large procedural burden, as it is necessary to follow various procedures stipulated by law, such as holding a general shareholders meeting and disclosing financial statements.
In principle, a joint stock company, regardless of its size, is required to make a public notice of its balance sheet. However, if public notice is made in an official gazette or in a daily newspaper, an abstract of the balance sheet is sufficient (Article 440, Paragraphs 1 and 2 of the Companies Act). Many companies may fail to give public notice of the balance sheet summary (actually publishing it in an official gazette, etc.). On the other hand, if a company chooses the electronic public notice method as its public notice method and publishes its balance sheet on the Internet, it is not required to make a public notice in an official gazette or daily newspaper (Article 440, Paragraph 3 of the Companies Act). If public notice via the Internet (electronic public notice) is chosen, there are advantages such as not having to give individual notice to creditors in a reorganization.
Merits and demerits of a limited liability company
A limited liability company (Godo Kaisha) is a type of equity company in which all investors (members) have limited liability (Article 576, Paragraph 4 of the Companies Act), so in principle, investors (members) are not liable for debts beyond what they have contributed. This is an advantage when compared to a limited partnership company or a general partnership company, in which the investors may be liable for more than the amount of their investment.
In a limited liability company (Godo Kaisha), as a partnership company, the partners, who are investors, are responsible for the management of the company. Since ownership and management are not yet separated, a general meeting of shareholders as an organ to supervise management is not expected, as in a joint-stock company.
The advantage of a limited liability company is that its establishment cost is lower than that of a stock company. Since certification of articles of incorporation is not required for a limited liability company, the 50,000 yen paid to a notary public for certification of articles of incorporation can be saved. Also, the registration and license tax is only 60,000 yen, compared to 150,000 yen for a joint stock company.
Other advantages of a limited liability company are (1) the freedom to decide the distribution of profits, (2) greater freedom in organizational management than a stock company, and (3) fewer legal restrictions, such as no obligation to publish financial statements. Since a limited liability company is intended to be small in size and has a relatively small number of employees and creditors, it can be said that the freedom of management is prioritized over the protection of employees and creditors.
The disadvantages of a limited liability company are that it is a relatively new form of company and is not well known in society, and that it has fewer fund-raising methods than a joint-stock company, such as not being able to issue new shares or list its stock on a stock exchange.
Merits and demerits of a limited partnership
A limited partnership company is a type of partnership company, consisting of general partners and limited partners (Article 576, Paragraph 3 of the Companies Act). A limited liability company is suitable when the general partners collect funds from other investors and conduct the business. General partners who conduct business on their own responsibility are unlimitedly liable for the results of their business. On the other hand, limited partners, who are solicited by the general partners to invest in the company, are only interested in the distribution of profits from their investment, and are not directly involved in the management of the company. A limited liability company has an unlimited liability partner and a limited liability partner, which means that at least two investors are required. The existence of a business and investors is similar to that of a silent partnership under the Commercial Code (Article 535 of the Commercial Code) or an investment limited partnership under the Limited Liability Partnership Act, but unlike silent partnerships and investment limited partnerships, a limited partnership has the status of a corporation.
The registration tax for establishing a limited liability company is 60,000 yen, but unlike the case of a stock company, there is no need to pay for certification of the articles of incorporation.
A limited partnership company is suitable for entrepreneurs who intend to carry out their business with unlimited liability, and who wish to raise funds for their business from their acquaintances and others. As an entrepreneur with unlimited liability, the limited liability of investors other than himself makes it easier for him to raise funds by limiting the risk to the investors. As an investor providing funds, you can expect to receive a share of the profits from your investment while limiting the amount of your own liability.
Other advantages of a limited liability company are (1) the freedom to decide the distribution of profits, (2) greater freedom in organizational management than a stock company, and (3) fewer legal restrictions, such as no obligation to publish financial statements.
One of the disadvantages of a limited liability company is that the general partners bear unlimited liability for the company’s debts. Also, the company is overly dependent on the personal credit of the general partners, and there are fewer ways to raise funds than a joint-stock company, such as not being able to issue new shares or list its shares on the stock exchange.
Merits and Demerits of a unlimited partnership
A general partnership company is a type of partnership company in which all of its investors (members) are unlimited liability partners (Article 576, Paragraph 2 of the Companies Act). Since all investors are involved in the management of the company, ownership and management are not separated. The unlimited liability of all investors makes it similar to a partnership under the Civil Code, but unlike a partnership under the Civil Code, a Gomei Kaisha itself has juridical personality.
The registration tax for establishing a Gomei Kaisha is 60,000 yen, but no certification of the articles of incorporation is required, so unlike the case of a stock company, there is no need to pay for the certification of the articles of incorporation.
Other advantages of a Gomei Kaisha include: (1) the freedom to decide the distribution of profits, (2) more freedom in organizational management than a stock company, and (3) fewer legal restrictions such as no obligation to publish financial statements.
The demerit of a general partnership is that all members are unlimitedly liable for the company’s debts as unlimited liability partners. Also, there are fewer ways to raise funds than a joint-stock company, such as not being able to issue new shares or list shares on the stock exchange.
Differences between a joint stock company and a limited liability company
The most common form of company is a joint stock company, followed by a limited liability company. Here is a summary of the differences between a joint stock company and a limited liability company.
|Joint Stock Company
|Limited Liability Company
|Liability of investors
|General meeting of shareholders
|General meeting of members
|Director Business executor
|Member of the board
|Each director (may also elect a representative director)
|Shain（Partner）(may also elect a representative employee)
|Term of office
|Director: 1 to 10 years
Corporate auditor: 1 to 10 years
|No term of office
|Ratio of voting rights in proportion to shareholdings
|In principle, one voting right per employee
|Public notice of financial statements
|Required for each fiscal year
|Distribution of profit to investors
|Allocation in proportion to the share ratio
|Allocation freely by agreement of Shain（Partner）regardless of the share ratio
|Transfer of shares (equity)
|Free (Restrictions on transfer are also possible)
|Consent of all employees is required
|Easy to raise funds
|Listing of shares