Terrie's Job Tips -- Starting Your Own Company – Part Three: Rep Office or Branch?

Both the Godo Kaisha and Kabushiki Kaisha entities I mentioned last week are independent companies and are the most common forms of incorporation in Japan. But what if you are helping a foreign firm get set up here? Well, there are other choices, but before I go into them, I'll just say that I prefer establishing an independent company like a KK because it provides you with "firewalling" of the Japan operation, by limiting the liability of management to the laws and actions made here to the Japanese market. It is for this reason that most foreign firms like to use the KK instead of other options.

That said, though, these other forms of establishment are indeed easier to set up and manage, so let's look at them more closely. They are the Representative Office and the Branch Office. You may have heard these terms already and I know that many people use them interchangeably, but they are not interchangeable. Here, then are the differences.

* Representative office
Actually, a representative office is not an incorporated company at all. It is simply the accommodation by the tax office and justice ministry (i.e., visas for your foreign employees) to let foreign firms set up an administration and marketing office here in Japan. A representative office comes with many limitations and is not allowed to conduct sales, receive income within Japan, nor establish a bank account. Instead, its purpose is to help foreign firms liaise with their distributors and resellers, and to facilitate communication. If that's all you want to do, then a rep office is adequate.

Money is remitted each month from the head office for salaries and office operating expenses, and dispersements made for local purchases of things like marketing materials, trade shows, etc. Since the rep office is not a company, obviously it is very easy to run. However, I would say that most companies soon grow out of this phase as they realize that much of Japanese business starts to flow after people get to know you. Thus sales opportunities can be lost when each and every contract and payment has to flow through the head office in a foreign jurisdiction.

Another problem with the Rep office is that the operation is unable to offer the Shakai Hoken social insurance program to employees, thus requiring each employee to go to the public Kokumin Hoken program, which is individually time-consuming and results in a lower pension at the end of one's working life. In fact, I am often told by rep office managers wanting to upgrade the entity that this is the biggest factor hindering their ability to hire local staff.

Lastly on the rep office, if you can't open a bank account, then how is the money brought in? Basically either the head office has to open the account in its own name, a tiresome process, or the local manager does it privately.

*Branch office
A better compromise entity to the rep office is the branch office. This is the simplest incorporated entity in Japan, and lets the company do business just as if it was incorporated locally. You can hire and pay people locally, they can get social insurance, you can open a bank account, take out leases, earn income, sign contracts, etc. As a result, many foreign firms use the branch office construct to run their operations here. What, then, is the biggest negative? Quite simply, it's the factor I mentioned at the beginning of this column. The head office has full liability for any legal, financial, and commercial code issues that may come up in Japan. I usually tell my foreign clients that for the modest increase in costs to incorporate a fully independent company in Japan, the exposure-cost trade-off is probably not worth it.

Separately, a question that is often asked of me is whether a foreigner can run a company in Japan while not being resident. The answer is that you do need to have at least one Managing Director resident in Japan - and resident means either a Japanese or a foreigner with an Alien Registration card (you can get one after being in Japan for 3 months). An alternative for some is to hire a company which provides MD nominees, or appoint an employee in Japan to be the nominal MD while reserving certain contracted rights for a second MD to be filled by someone from your head office.

Next week we look at the procedures necessary when you hire staff.