Delaware C-Corp with a Japanese subsidiary

[uoamerica]

Hi all,

I’m looking to launch my startup in the next 12 months or so and I was wondering if it’s possible to do so as a US based C-Corp with a local subsidiary. Over the long term I think I ultimately want the company officially based out of the US (and will move more in that direction over time) but for practical reasons I want the first office to be located here.

Apologies if the question doesn’t make sense.
Thanks

 

[jaeb]

@uoamerica Yes that is commonly done especially if you are raising money from non Japanese investors. Delaware is common as is more recently Wyoming depending on the business.

 

[uoamerica]

@jaeb Who would I talk to about getting something like this set up? Or is it trivial to do myself?

 

[dakuyz]

@uoamerica The Delaware one is easy enough with any of the corporation setup services like Stripe Atlas etc. If you intend to raise money from non-Japanese investors, it would be good to set this up, though you don't have to do it right away.

Instead of a lawyer, find a judicial scrivener (司法書士) for Japan that knows about corporation setup. I have one I used in Tokyo, otherwise you can find some using the various resources, such as the expat Facebook groups or maybe your local ward startup support center (indicate that it is supposed to eventually be a subsidiary of the US though).

You can determine whether a GK or a KK makes more sense. A GK would not be able to raise money from outside investors, though the US company of course could raise money instead.

 

[uoamerica]

@dakuyz Super useful thanks!

 

[jaeb]

@uoamerica I would engage a lawyer- one for the KK setup and another for the Delaware entity.

 

[uoamerica]

@jaeb Good to get double confirmation on this, thanks

 

[gankerberg]

@uoamerica jfyi if you use a gk rather than a kk for the japan sub, you can do a check-the-box election and have it disregarded for us tax purposes. talk to a lawyer.

 

[mellie]

@uoamerica Yes, you can do this. I was a c-suite exec for a multi-national fintech with this setup. Just realize that it may create some issues down the road which may or may not be advantageous. I’m thinking about things like licensing issues if you are selling software etc, transfer price issues, funding, etc.

If I had to do it again I would have only had the Japan and UK branches, dealing with the IRS and US accounting/reporting issues was a massive PITA, and a US branch was 100% not needed to attract non-Japanese investment. In fact a Japan head office would have been a benefit.

Especially if you will be generating most of your revenue from Japan, considering just having just a Japan branch if feasible.

 

[uoamerica]

@mellie Super appreciate the insights on this!

 

[leehop71]

@uoamerica Your startup is at what stage? Does it has revenue, product, product market fit, employees, partners and cofounders, raised funds from external investors? Unless you have answered the above questions in affirmative, I will suggest focus on the core aspects of what makes a startup success than worry about corporate/organizational structure.

I have seen too many first time entrepreneurs, with end result of never gaining any traction, focusing on making sure the startup is properly setup and legally sound structure and spent too much precious funds and time on lawyers and accountants than focusing on market research, gaging customer demand, building product, the things that make startup move forward.

Start with the most basic and simple structure that can be setup quickly, efficiently and inexpensively. Once you start to get some traction then worry about the structure as you find current structure insufficient or obstructive.

 

[uoamerica]

@leehop71 I mean, thank you. I understand the point you’re making but doesn’t actually help solve my problem.

I’m a retired fang engineer working out of Japan and bootstrapping my company. There’s no reason for me to rush and do this incorrectly so I’d like to just get this done correctly once so I don’t need to spend time on it again later.

I came with the intent of setting this up fully here but obviously with the economic climate / trajectory of the country it’s pretty clear that maintaining a presence is probably fine, but headquartering the legal entity here is probably not such a great long term idea.

With that in mind I’m trying to figure out my options for structuring the business. Of course I could just do a sole proprietorship or what have you, but I have the time to do this correctly so I might as well just get it done once.

 

[leehop71]

@uoamerica While I understand you wanting to do things right from the start, I will still advise you to rethink, how relevant the “economic trajectory” has to do with your startup. It is at best tenuous relationship. I am just an internet stranger so I will encourage you to talk to/ find a startup mentor.

You could easily do independent contractor route until you are large enough to need a formal Japanese entity and then US entity, it is easier to roll these up as you make progress. At this stage you are creating unnecessary burden, related to annual paperwork you will need to do to meet regulations in both countries.

If you are US citizen, it will be double whammy, you will also expose yourself to PFIC and other complications of US citizen majority owning US entity with foreign location. At this stage independent contractor is the best route, avoids all issues that come with your startup being classified as PFIC also.

 

[uoamerica]

@leehop71 This is useful information. Thanks.

So your recommendation would be to start as an independent contractor and roll that into a corporation as necessary is that correct?

Would that be less (ongoing) work than say creating a Japanese corporation and then eventually subsuming that under a US based entity? For a technical product where I expect most revenue to come from the US, this feels risky legally - but also I’m open to not knowing what I’m doing.

At the end of the day it feels strange to me given that I have the time and the resources to not just structure this properly out the gate, but that’s the point of the post.

 

[leehop71]

@uoamerica

Would that be less (ongoing) work than say creating a Japanese corporation and then eventually subsuming that under a US based entity?

Definitely much less ongoing work in the start. Also by the time you need to roll these up, you will have enough support and resources to advise and do it for you.

As in engineering, you don’t start out with Google scale infrastructure, same in business, you don’t start out with Microsoft/Alphabet scale corporate structure. You develop product, one feature at a time, same way you build organization, one unit at a time.

Why didn’t Google start out with Alphabet like corporate structure from its start?

There is a time and place in lifecycle when you do certain things.

 

[uoamerica]

@leehop71 Thanks for the feedback. I’ll do some digging into this.