Incorporation vs Employer of Record (EoR) in Japan: How to Choose the Right Option for Your Expansion

Introduction

Expanding into Japan presents two key options: incorporation or an Employer of Record (EoR). This guide helps you explore both strategies and make the right decision for your business.

Overview of Incorporation in Japan

Requirements, Process, and Timeline

Incorporating a business in Japan is a multi-step process that establishes your company as a legal entity in the country. This approach is ideal for businesses that want full control over their operations and aim to establish a long-term presence. The incorporation process typically involves the following steps:

1. Choose a Business Structure: Most foreign companies in Japan choose between setting up a Kabushiki Kaisha (KK, similar to a corporation) or a Godo Kaisha (GK, similar to a limited liability company).

2. Register the Company Name: Your company name must be approved by the Japanese authorities, ensuring that it is unique and complies with local naming rules.

3. Prepare Articles of Incorporation: This document outlines the company’s purpose, share structure, and governance policies, and it must be submitted to the Legal Affairs Bureau.

4. Capital: For a KK, a minimum of 1 yen is required to incorporate, although the actual amount depends on your business goals. The capital must be deposited into a bank account in Japan.

4. Register the Company: Once the required documents are filed, your company is officially registered, and you will receive a company seal.

5. Obtain Necessary Licenses: Depending on the industry, you may need to acquire additional permits and licenses to operate in Japan.

The incorporation process in Japan can take several months, particularly if you are unfamiliar with the local bureaucracy and regulations.

Advantages of Incorporating in Japan

• Full Operational Control: Incorporation grants you complete control over your business operations, including hiring, decision-making, and strategy. This level of autonomy is crucial for companies looking to establish a strong local presence.
• Strong Local Presence: Incorporating in Japan shows commitment to the market, which can foster trust with local customers, partners, and government agencies. It also gives your business a competitive edge, as locally incorporated companies are often seen as more credible.
• Access to Government Incentives: Japan offers various subsidies, grants, and tax incentives for foreign businesses that incorporate locally, particularly in specific industries such as technology and manufacturing.

Disadvantages of Incorporating in Japan

• Complex and Lengthy Setup: The incorporation process in Japan is time-consuming and requires adherence to strict legal procedures. Navigating the bureaucracy can be challenging without local expertise.
• High Compliance Costs: Incorporating a business in Japan entails ongoing compliance with local regulations, including tax filings, employment laws, and financial reporting. These obligations can add to the operational costs, especially for small businesses.
• Financial Commitments: Once incorporated, your business must allocate resources for office space, employee benefits, and other operational expenses, which can be substantial in Japan’s high-cost economy.

Overview of Employer of Record (EoR) in Japan

What is an Employer of Record (EoR)?

An Employer of Record (EoR) is a third-party service provider that legally employs workers on behalf of a company. The EoR handles all employment-related responsibilities, such as payroll, taxes, benefits, and compliance with Japanese labor laws. While the EoR is the legal employer, your business retains control over day-to-day management and performance oversight.

Advantages of Using an EoR in Japan

• Fast Market Entry: One of the biggest benefits of using an EoR in Japan is the ability to quickly establish a presence without having to go through the complex incorporation process. An EoR allows you to hire employees in Japan and start operations almost immediately.
• Reduced Compliance Risks: The EoR assumes responsibility for all legal compliance, including labor laws, taxes, and employee benefits. This significantly reduces the risk of non-compliance and the associated penalties.
• Cost-Efficient Expansion: Using an EoR eliminates the need for significant upfront investment in infrastructure and compliance. You can focus on growing your business while the EoR handles the administrative and legal complexities of employment in Japan.

Disadvantages of Using an EoR in Japan

• Limited Control Over HR Policies: Since the EoR is the legal employer, they manage HR functions such as payroll and employee benefits. While you can still manage your employees’ daily activities, you have less control over HR policies and procedures.
• Perceived Lack of Local Presence: Businesses that use an EoR may be perceived as having a limited commitment to the local market. This could impact relationships with clients and partners who prefer to work with locally established companies.