Establishment and Operation of a Limited Liability Company

What is a limited liability company?

A limited liability company (Godo Gaisha) is a form of corporate organization recognized under the Companies Act, in which all of its members (investors) have limited liability (Article 576, Paragraph 4 of the Companies Act). The term “employee” here does not refer to an employee of the company, but rather to an investor in the company. As an investor in a limited liability company, a partner is liable only to the creditors of the company to the extent of his/her contribution, since he/she has only limited liability. On the part of creditors, this means that, unlike a general partnership or limited liability company, the partners of a limited liability company are not personally liable for the company’s debts, and only the company’s assets can provide for their claims, except in cases where the company’s partners have individually jointly and severally guaranteed the company’s debts.

Difference from a general partnership company and a limited partnership company

A limited liability company, like a general partnership company and a limited partnership company, falls under the category of a partnership company, and its members, who are investors in the company, are expected to manage the company directly. In this respect, a Godo Kaisha differs from a stock company, where the principle is separation of ownership and management. On the other hand, a limited liability company differs from a general partnership company or a limited partnership company, which are also equity companies, in that the limited liability of the members is the principle. In other words, creditors of the company cannot demand payment of debts from the members of a limited liability company unless there is a special reason, such as a joint guarantee by the company’s members to the creditors. The limited liability of the investors is the same as that of a stock company, in that the investors are liable to the creditors of the company only to the extent of their own investment.

Suitable Companies for a Godo Gaisha

A limited liability company (Godo Gaisha) is a company in which ownership and management are undivided, and the members, who are the investors, are expected to manage the company themselves. In addition, since the incorporation procedure is simple and the company has a high degree of freedom in terms of operation, a Godo Gaisha is suitable for companies that are considering doing business in the form of a family or companies established by wealthy individuals for the purpose of managing their personal assets. According to statistics from the Ministry of Internal Affairs and Communications, of the companies established in FY2020, 85,688 were joint stock companies, while 33,236 were limited liability companies, making limited liability companies a little more than a quarter of all limited liability companies. It can be said that the number and percentage of limited liability companies being formed is increasing every year. The Godo Gaisha system is modeled after the limited liability company (LLC) system in the U.S., and may be familiar to foreign investors. In fact, Apple Japan and Amazon Japan have been established in the form of Godo Gaisha.

No Term of Office for Directors and Auditors

In the case of a stock company, the term of office of directors and corporate auditors is fixed, and when the term of office of directors or corporate auditors expires, it is necessary to hold a general meeting of shareholders to pass a resolution for their re-election or reappointment. In addition, the election of directors and corporate auditors is a registered matter, so when a resolution is passed to re-elect or reappoint directors or corporate auditors, it is necessary to apply to the Legal Affairs Bureau for registration. In contrast, in the case of a limited liability company, there are no fixed terms of office for members or executive members, so there is no need to re-elect officers. As a result, the procedural burden is greatly reduced.

No public notice of financial statements is required

A joint-stock company is required to make a public notice of its financial results every year, and must choose whether to publish the notice in the Official Gazette, in a daily newspaper, or electronically. If a public notice of financial results is published in the Official Gazette, approximately 60,000 yen is required, and if it is published in a daily newspaper, the cost is expected to be more than that. Disclosure of financial statements by way of electronic public notice saves money, but has the disadvantage of making the company’s financial position readily available to the outside world through Internet searches. On the other hand, in the case of a limited liability company, public notice of financial results itself is not required, which saves the cost of public notice of financial results and at the same time prevents the financial details of the company from being known to the outside world.

Distribution of surplus can be freely made

In the case of a stock company, a resolution regarding distribution of surplus must be passed at a general meeting of shareholders in order to make a distribution of surplus. In addition, distribution of surplus is made in proportion to the investment ratio of each shareholder. In contrast, in the case of a limited liability company, if the articles of incorporation stipulate such a distribution, the distribution of surplus can be made in accordance with the provisions of the articles of incorporation, and thus does not require a resolution like a general meeting of shareholders. Also, unlike the case of a joint stock company, the method of distribution of surplus can be determined regardless of the investment ratio of the members. For example, if a limited liability company with capital of 10 million yen has A contributing 6 million yen, B contributing 3 million yen, and C contributing 1 million yen, it is possible to distribute the same amount to A, B, and C, regardless of the amount of their contributions, if the articles of incorporation so stipulate. However, under the Companies Act, if there is no provision in the articles of incorporation regarding the ratio of profit/loss distribution, the ratio shall be determined based on the value of each member’s investment (Article 622, Paragraph 1 of the Companies Act), and if there is no provision in the articles of incorporation, dividends shall be distributed based on the ratio of investment.

Fund raising

In the case of a stock company, it is possible to raise funds by borrowing funds from financial institutions as indirect financing or by issuing shares as direct financing. In contrast, a limited liability company cannot issue new shares, so it cannot directly finance itself, and its fund-raising methods are restricted. In addition, unlike the case of a joint stock company, it is not possible to raise funds by listing shares. As a result, fundraising in a limited liability company is limited to borrowing from the members, investment by the members, or borrowing from financial institutions or other third parties.

Refund of capital contribution

In a stock company, it is not possible to request a refund of capital contribution except in the case of dissolution of the company (it is possible for a company to refund a portion of its capital through a capital reduction procedure). Therefore, shareholders of a stock company have no choice but to sell their shares to other parties to recover their funds. In contrast, in a limited liability company, shareholders can receive a refund of their capital contribution in a manner stipulated in the company’s articles of incorporation.

Advantages of incorporating a limited liability company (Godo Gaisha) for sole proprietors

When a sole proprietor establishes a company and incorporates it, a Godo Gaisha is considered to be an effective option. As mentioned above, the incorporation cost is lower than that of a stock company, and there is no need to go through complicated procedures such as general shareholders meetings and board of directors’ meetings. In addition, a sole proprietorship can benefit from various tax advantages by incorporating. For example, the scope of expenses that can be recognized as expenses is wider when a company is incorporated than when it is a sole proprietorship. In addition, the sole proprietor’s business income is subject to progressive taxation, and for proprietors with high income, there is no need to pay tax on their business income.

Procedures for establishing a limited liability company

A limited liability company (Godo Gaisha) can be established by preparing articles of incorporation, paying in capital, and applying for registration at the Legal Affairs Bureau. The following is an explanation of the procedures for establishing a limited liability company.

Preparation of Articles of Incorporation

The articles of incorporation of a limited liability company (Godo Gaisha) shall state the purpose, trade name (name of the company), address of head office, names and addresses of members, the fact that all members are limited liability partners, and the value of each member’s investment. (Since January 1, 2022, the fee charged by a notary public for certification of the articles of incorporation has ranged from 30,000 yen to 50,000 yen, depending on the amount of capital.) (Since a limited liability company does not need to have its articles of incorporation authenticated, it does not need to pay a fee to the notary public.

Payment of capital

Once the articles of incorporation are prepared, each member of the company is required to pay in the capital as specified in the articles of incorporation. Since the company has not yet been incorporated, it is not possible to open a bank account for the company at this stage. Therefore, the payment of the capital must be made into the account of the individual investors. The bank account normally used by the employees as investors can be used as the payee, but it is necessary to keep a record of the actual transfer of the amount equivalent to the capital to that account. When applying for registration, a document proving payment of the capital must be attached, but a copy of the bank passbook showing that payment has been made is sufficient. However, in the case of a limited liability company, the capital may be received in cash, so the representative partner may receive cash equivalent to the amount paid in for the capital and attach the receipt.

Application for registration at the Legal Affairs Bureau

After the payment of the capital is completed, an application for registration is filed with the Legal Affairs Bureau. The application for registration is to be submitted to the Legal Affairs Bureau by filling in the necessary items on the application form for registration and submitting it to the Legal Affairs Bureau by document or electromagnetic recording medium (CD or DVD). The seal registration certificates of all representative members must be attached to the application for registration. Items to be registered include “trade name,” “location of head office,” “method of public notice,” “purpose,” “amount of capital,” “names of managing partners,” and “names and addresses of representative partners. The representative partner can also be a corporation. In this case, it is necessary to appoint an executive member and register his/her name and address. In the case of a joint stock company, the application for registration must be accompanied by revenue stamps in the amount of 7/1000 of the capital as registration and license tax (however, the minimum amount is 150,000 yen). In contrast, the minimum registration tax for a limited liability company is 60,000 yen, which means that a company can be established for 90,000 yen less than a joint stock company. The registration will be completed within one week to 10 days after the application for registration is filed with the Legal Affairs Bureau.

Operation of a limited liability company

A limited liability company (Godo Gaisha) does not have the same system of directors, board of directors, or general meeting of shareholders as a stock company. Therefore, in principle, the members, who are the investors, manage the company’s business by themselves. If there is only one member, he or she is responsible for managing the company’s business. On the other hand, if there are two or more members, the decision is made by a majority of the members, except as otherwise provided in the articles of incorporation. For example, if there are two members, one member does not constitute a majority, and the business of the company is to be executed with the consent of the two members. In the case of a three-member board, business is executed with the consent of two or three members; even if one member disagrees, if the remaining two members agree, it means that a majority of the members have agreed, and the business may be executed. However, each member may execute day-to-day executive duties alone, unless the other member’s object.

Relationship between investment ratio and business execution

As stated above, in principle, the business of a limited liability company is decided by a majority of the members. The ratio of capital contribution is irrelevant. For example, suppose there is a limited liability company with capital of 10 million yen, and A contributes 6 million yen, B contributes 3 million yen, and C contributes 1 million yen. In this case, if the company is a stock company, A is entitled to exercise a majority of voting rights at the shareholders’ meeting, and the ordinary resolutions at the shareholders’ meeting are decided by the approval or disapproval of A. In contrast, the business operations of a limited liability company are determined by the number of members. Therefore, even if A is against the resolution, if B and C are in favor of the resolution, it means that a majority of the members are in favor of the resolution and the business can be executed.

In the case of appointing managing partners

If the articles of incorporation of a limited liability company stipulate an executive partner, that executive partner will conduct the business of the limited liability company. If there is only one managing partner, that managing partner alone decides and executes the business of the limited liability company. If the articles of incorporation of a limited liability company stipulate two or more partners who execute the business, the decision shall be made by a majority of the partners who execute the business, unless otherwise stipulated in the articles of incorporation. For example, if there are two managing partners of a limited liability company, they cannot execute the business unless both managing partners agree. If the limited liability company has three executive partners, the business can only be executed with the consent of the two executive partners. For example, in a limited liability company with three managing partners, if two of the managing partners agree to the transfer of the business, the business can be transferred with the consent of the two managing partners even if the remaining one managing partner disagrees with the business transfer. As mentioned above, the majority is determined by the number of executive partners, so the amount of capital contribution is irrelevant. For example, even if the managing partner who has invested 60% of the capital is against the transfer, if the remaining two managing partners are in favor of the transfer, the transfer of the business can be executed. However, if the Articles of Incorporation stipulate otherwise, such as “the consent of all the managing partners is required for the transfer of the business,” then the articles of incorporation must be complied with. If there is a possibility that the majority of the members who have contributed the majority of the capital will lose the majority vote, the articles of incorporation can prevent other members from executing the business without their consent by stipulating matters that cannot be done without the consent of all the members. When drafting the articles of incorporation, it is important to fully consider the possibility that such a situation may arise.

Dismissal of Managing Partner

When the articles of incorporation stipulate the members who will execute business, they may be dismissed by the unanimous consent of the other members for justifiable reasons, unless otherwise stipulated in the articles of incorporation (Article 591, Paragraph 5 of the Companies Act). Therefore, if one of the three managing partners is to be dismissed from the position of managing partner, the remaining two managing partners must vote in favor of the dismissal. Again, the amount of capital contribution is irrelevant. For example, if a limited liability company with capital of 10 million yen has A contributing 6 million yen, B contributing 3 million yen, and C contributing 1 million yen, A can be removed as an operating partner if B and C agree. A is not a member of the managing partner. Of course, since just cause is required for the dismissal of an operating partner, if B and C dismiss A, A is expected to file a lawsuit against the court seeking confirmation of the invalidity of the dismissal resolution and confirmation of A’s status as an operating partner, so the final decision as to whether A can be dismissed or not will be made by the court.

Liability of Managing Partner

An operating partner has the same responsibilities to the company as a director of a stock company, including the duty of care and duty of loyalty to the company, prohibition of competition, prohibition of conflict-of-interest transactions, and liability for damages due to negligence of duties. As mentioned above, the dismissal of an executive member can only be done with the unanimous approval of all other members. Therefore, if even one of the other members objects to the dismissal, it will not be possible to dismiss the managing partner. In this case, the method of pursuing the liability of the managing partner will have to be the method of pursuing the liability for damages. If an operating partner commits a wrongful act in executing business or participates in the execution of business without the right to do so, it is grounds for dismissal of a partner of the equity company (Article 859 of the Companies Act). In such a case, a majority of the members other than the member in question may, by resolution of the majority of the members, demand the expulsion of the member in question by filing a suit.

Dissolution of a limited liability company

Under the Companies Act, a limited liability company may be dissolved for the following reasons (Companies Act, Article 641).

1. Expiration of the duration of the limited liability company as stipulated in the articles of incorporation.
2. Occurrence of an event of dissolution stipulated in the articles of incorporation.
3. Consent of all members.
4. Lack of members.
5. Merger.
6. Decision to initiate bankruptcy proceedings.
7. Judicial decisions ordering the dissolution of the company.

Filing for bankruptcy of a limited liability company

A petition for bankruptcy can be filed by any managing partner (Article 19, Paragraph 1, Item 3 of the Bankruptcy Law), and in principle, the consent of all managing partners is required. However, it is considered possible to file a petition for bankruptcy without the consent of all members by making prima facie showing of the facts that would cause the commencement of bankruptcy proceedings (Article 19, Paragraph 3 of the Bankruptcy Law).