What is a Corporation? Advantages and disadvantages of incorporation and the process of incorporation

• Update:2023/11/14

As you consider starting a business, some of you may wonder what a joint stock company is. This article provides an overview of a joint stock company, including its advantages and disadvantages, and the process of incorporation.

There are many types of companies in the world, such as joint stock companies, limited liability companies, partnership companies, and general partnership companies. The most commonly asked about is a joint stock company, but some people may not be familiar with the structure of a joint stock company.

This article explains the differences between a joint stock company and a limited liability company, as well as the advantages and disadvantages of establishing a joint stock company. The flow of establishing a joint stock company will also be introduced, so those who want to know more about joint stock companies as well as those who are considering starting a business should definitely refer to this article.

What is a Corporation?

A stock company is a corporation that is managed through the use of capital by issuing shares of stock and receiving capital contributions from shareholders. The shares are certificates issued by the company to the investors of the capital.

For example, if a sole proprietor wants to start a business and open a restaurant, there are two ways to raise funds: using his/her own capital or obtaining a loan. On the other hand, a key feature of a joint stock company is that it can also use the “capital injected” method.

There are two principles in a joint stock company. Details of each are as follows.

・Separation of ownership and management

The principle is to separate the ownership and management rights of the company. Shareholders who have invested capital can participate in the “shareholders’ meeting,” which is the highest decision-making body of the company. Shareholders can elect “directors” at the general shareholders’ meeting, and thus have a position of ownership of the company and can influence the management of the company.

・Principle of Shareholder Limited LiabilityThis principle states that shareholders are not liable for more than the amount of their investment in the event of bankruptcy of the company in which they have invested. The purpose of this principle is to clarify the scope of liability of investors and to receive more investments.

Differences from a limited liability company

A joint stock company and a limited liability company differ in various aspects, including the term of office of directors and the name of the representative. The main differences are as follows.

Compared to joint-stock companies, limited liability companies are still less well known.However, the total number of limited liability companies is increasing every year, with some adopting the limited liability company form due to its greater flexibility.

Source: e-Stat, General Contact for Government Statistics, “Number of registrations of limited liability companies by type https://www.e-stat.go.jp/dbview?sid=0003268322

Advantages and disadvantages of establishing a joint stock company

Since joint stock companies and limited liability companies have different advantages and disadvantages, neither is superior to the other. Whether one or the other should be established depends on the key factors that are important to the person considering starting a business.

Here we will explain three advantages and two disadvantages of establishing a joint stock company.

Advantage 1: High social credibility

A major advantage that a joint stock company has is its high level of social credibility. Since many companies are now joint stock companies, it is easier for clients to trust a joint stock company than a limited liability company or a limited liability company.
The high level of social credibility is also effective in the hiring process. When there are multiple job openings in the same industry with similar conditions and benefits, and both “joint-stock companies” and “non joint-stock companies” exist, some job seekers may give priority to joint-stock company jobs. Also, being a joint stock company is advantageous in many situations, such as being able to obtain loans from financial institutions more easily.

Advantage 2: Easier business succession

Another advantage of a joint stock company over a limited liability company is that it is easier to pass on the business. In a joint stock company, you hold ownership of the company based on the number of shares you own. Therefore, business succession can be accomplished simply by transferring or selling the shares held.

For example, it is not uncommon for a sole proprietor to want to take over a business, but be unable to do so due to a lack of successors or other reasons.If you want to keep your business going as long as possible, a joint stock company is the right choice.

Advantage 3: Easier to save taxes

Depending on the size of the business, corporations such as joint-stock companies are generally more tax-efficient than sole proprietorships.The main reasons are as follows.

The corporate tax rate is set at 15% for the portion of income less than 8 million yen and 23.2% for the portion of income greater than 8 million yen. The tax rate is not progressive like that of sole proprietorships, but is fixed, which is a major feature of this tax system, making it highly tax-efficient.

Source: National Tax Agency, “No. 5759 Tax Rates for Corporate Taxes.”
https://www.nta.go.jp/taxes/shiraberu/taxanswer/hojin/5759.htm

Demerit 1: Establishment costs tend to be high

The cost of establishing a joint stock company tends to be higher than that of a limited liability company, for example. The table below compares the costs incurred when establishing a joint stock company and a limited liability company.

*1 Source: e-Gov, “Notary Public Fee Order, Article 35.”
　https://elaws.e-gov.go.jp/document?lawid=405CO0000000224
*2 Source: National Tax Agency, “No. 7191 Tax Table for Registration and License Taxes.”
　https://www.nta.go.jp/taxes/shiraberu/taxanswer/inshi/7191.htm

The revenue stamp for the articles of incorporation is 40,000 yen for both (0 yen for electronic articles of incorporation), but the registration and license tax can vary greatly in amount. Due to the above differences, incorporation of a joint stock company is more expensive.

Demerit 2: Obligation to publish financial statements

The obligation to publish financial statements is another disadvantage of a stock company.The financial figures must be published each fiscal year, and the balance sheet must be published in the Official Gazette and on the website.

Basically, the publication is to be published in the Official Gazette, but there is a cost associated with the publication in the Official Gazette. Since the publication of financial statements must be done every year, the increased cost burden is a disadvantage.

What is the process for establishing a joint stock company?

The basic procedure for establishing a joint stock company is as follows.

Two points to keep in mind when establishing a joint stock company

When establishing a joint stock company, keep the following two points in mind.

・Be aware of “legality,” “profitability,” and “specificity” of business objectives.
It is essential to determine the business purpose of the company with three points in mind: legality, profitability, and concreteness. The following points should be taken into consideration when deciding on a business purpose.

・Do not name your company similar to other companies
If you name your company similarly to an already existing company, for example, searchers may not be able to find your company immediately when they search for your name in a search engine.Try to name the company name that is not yet in use so that it can be easily seen by more people.

Summary

In this article, we have explained the outline of a stock company, the advantages and disadvantages of its establishment, the flow of its establishment, and points to keep in mind.

Unlike a limited liability company, a shareholder company is characterized by the fact that shareholders have an influence on the management of the company. While there are advantages such as a high level of social credibility, there are also disadvantages such as the need to publish annual financial statements, so if you are considering starting a business, make sure you have a clear understanding of the advantages and disadvantages.

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