Converting a Japanese Sole Proprietorship to a Company

As I talk about in my article on creating a company in Japan, I initially ran TokyoDev as a sole proprietorship, but in late 2022 converted it to a company. This involved three steps:

1. Incorporate TokyoDev Inc, a Japanese Kabushiki Kaisha
2. Transfer the contracts with TokyoDev’s clients from myself to TokyoDev Inc
3. Transfer the intellectual property around the TokyoDev service from myself to TokyoDev Inc

The first step was pretty straightforward. As the TokyoDev service was doing pretty well financially at that point, it was an easy call to hire professionals to help, and I used a judicial scrivener to handle all the paperwork for the incorporation itself, and an accountant to handle tax related stuff.

I had to do some research to understand how to approach the other two steps though, and so I thought I’d share the results in case it’s of use to someone else.

Transferring Contracts From a Sole Proprietorship to a Company

Over the years, I have signed about 100 contracts between myself and different companies. These contracts had a success fee specified in them, meaning if someone got hired via TokyoDev, I’d be owed a fee.

This arrangement meant I couldn’t easily just terminate my existing contracts as an individual, and re-sign as a company. If I did, I’d have to distinguish between hires made when I was running the service as an individual and as a company, and invoice differently. Not only would that create complexity process wise, I also thought it might raise some issues tax-wise.

So I consulted a lawyer about it. The lawyer pointed out that under Article 539-2 of Japanese Civil Law contracts can be transferred with consent of all parties:

If one of the parties to a contract made an agreement with a third party to transfer that party’s contractual status to that third party, and the other party to the contract gives consent to the transfer, the contractual status is transferred to the third party.

To accomplish this, he drafted an Memorandum of Understanding (MOU). I then set about the arduous process of asking every active client to re-sign. They all did so, with only a few proposing minor changes, so I think the agreement was good enough.

For your reference, here’s the agreement. While it is fairly generic, there are some parts that are specific to my business, so you won’t be able to use it without some modification. But it should help you understand how you might do it.

Transferring Intellectual Property From a Sole Proprietorship to a Company

I wanted to have a formal record of transferring the IP from me as an individual to the company. This was a just in case sort of thing, where some time later down the line, TokyoDev might be audited or go through a due diligence process, and I might not be around to attest that I had transferred it.

Because this was essentially an agreement between myself though, I thought it wasn’t worth the cost in getting a lawyer to draft something bespoke, so I found an agreement that transfers the digital assets of an individual to a US LLC, and made some modifications to it myself.

For consideration, I consulted the lawyer who drafted the MOU. He explained not having any consideration might make it be considered a gift, while assets like a name, website, and other digital assets are hard to evaluate monetarily. As such, he suggested setting it to 1 JPY, which I also confirmed with my accountant that was fine from a tax perspective.

With my changes in place, I asked the lawyer to review it for any major issues. He reported he didn’t find any.