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Tuesday, May 2, 2006

Legal change seen giving entrepreneurs flexibility


Staff writer

When Keiji Okayasu founded his game software company, Studiofake, in 2000 he wanted it to be a limited liability company, a form of business popular with software developers in the West.

News photo
Employees at Studiofake, which was registered as a new limited liability company, lay their hands on CEO Keiji Okayasu at the firm's office last month.

But because LLCs did not exist in Japan back then, Okayasu, formerly of game giant Sega Corp., registered his company as a limited partnership, or "goshi gaisha."

Limited partnerships are similar to LLCs but make the owner, in this case Okayasu, personally liable for all the debt his company takes on.

Okayasu wasn't comfortable with the choices available to him: to keep his firm as an LP or to become a joint-stock company -- a corporate structure that would subject him to shareholder pressure.

"I wanted to run a company focusing on my clients and employees, instead of shareholders and investors," said Okayasu, Studiofake's CEO.

On Monday, thanks to a change in the law, Okayasu got his wish. Studiofake became the first company in Japan to register as an LLC, a hybrid structure that combines the liability protection of a joint-stock company with the flexibility of a partnership.

To encourage entrepreneurs like Okayasu to start new businesses, the Corporate Law creates a category of limited liability company, a type of business structure popular in Europe and the United States during the technology boom of the 1990s.

LLCs offer several advantages. For instance, with joint-stock companies, key policies must be approved by the board of directors, and in some cases by a general shareholders' meeting.

Although these rules help keep management in line, they are time-consuming and can be burdensome for small businesses, where quick decisions are often the difference between life and death.

LLCs are not burdened with such procedures and can vest one board member with decision-making authority, or make decisions by unanimous vote, depending on how the company sets up its rules.

"The new (LLC) category is for business organizations whose main business resource is the expertise of its personnel," said Junichiro Yamada, of the LLP/LLC Promotion & Utilization Center for Start-Up Business. "Business consultants, fashion designers, producers of animated films and game software are among those who may be interested."

The new system also gives management the freedom to decide how profits should be divided among investors, Yamada said.

In a joint-stock company, investors receive dividends according to how much they invest.

The government enacted a law last August that allows businesses to set up limited liability partnerships. LLPs are similar to LLCs but do not have corporate status.

This means they are taxed differently. LLCs must pay corporate taxes, but in the case of LLPs, taxes are imposed on the partners instead of the business itself. Under this "pass-through" taxation, profits made by an LLP are split among the members, who are taxed based on their income from the business.

The arrival of limited liability firms, both companies and partnerships, is likely to benefit researchers in high-tech industries who hope to enjoy more of the fruits of their efforts.

In September, six researchers at the National Institute of Advanced Industrial Science and Technology and the Central Research Institute of Electric Power Industry established ESICAT Japan, LLP, together with Showa Denko K.K.

ESICAT is working to develop membrane technologies used to make energy-saving silicon-carbide semiconductors as a prelude to mass production.

The partnership structure allows the researchers to receive a greater share of the firm's profits without having to invest a huge amount of their own money for the research.

Of the roughly 10 million yen used to set up ESICAT, Showa Denko provided nearly 90 percent, while the six researchers contributed the rest. Although the firm did not reveal how the profits are to be shared, the researchers are getting a larger slice.

"The ordinary way of dividing the profit in accordance with the amount of investment is not suitable for this entity. (The) LLP will allow those who actually contributed to the research to benefit," said Junichi Watanabe, head of ESICAT Japan.



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