Q&A: Partnership Contracts (Kumiai Keiyaku) in Japan: Formation, Operation, and Comparison with LLPs

When businesses or individuals in Japan decide to collaborate on a common undertaking without forming a separate corporate entity, one of the fundamental legal structures available is the "partnership" as defined by the Japanese Civil Code, known as a kumiai (組合). This traditional form of partnership, governed by a kumiai keiyaku (組合契約 - partnership agreement), has distinct characteristics regarding its formation, internal governance, property ownership, and member liability. More recently, Japan also introduced the Limited Liability Partnership (LLP), offering an alternative with key differences.

Q1: How is a General Partnership (Kumiai Keiyaku) formed under the Japanese Civil Code?

A kumiai under the Japanese Civil Code is a contractual relationship, not a separate legal entity. Its formation is based on the following:

• A. Definition and Essential Elements (Civil Code Art. 667):
  A kumiai is formed when two or more persons agree to make contributions respectively and to engage in a common undertaking. The essential elements are:
  1. Contributions (出資 - shusshi) from each member: Contributions can take various forms, including money, other types of property, provision of credit, labor services, or technical expertise. It's a requirement that all members make some form of contribution.
  2. A Common Undertaking (共同の事業 - kyōdō no jigyō): The members must share a common business purpose or joint activity they intend to pursue together.
     The kumiai keiyaku is a consensual contract (formed by agreement) and an onerous contract (involving reciprocal obligations of value). Examples include joint ventures for specific construction projects, traditional professional partnerships (like some law firms or accounting firms if not incorporated or formed as LLPs), and collaborative business operations. Importantly, a Civil Code kumiai does not possess separate legal personality.
• B. Formation Formalities:
  Being a consensual contract, the kumiai keiyaku itself generally does not require any specific formalities for its valid formation. An oral agreement can suffice. However, for clarity, evidence, and to define the often complex relationships and obligations between members, a comprehensive written partnership agreement is highly advisable and standard practice.
• C. Impact of Defective Consent by One Member (Civil Code Art. 667-3):
  If the consent of one member to join the kumiai is later found to be invalid (e.g., due to mistake, fraud, or lack of capacity) or is rescinded, the kumiai agreement itself does not necessarily dissolve among the remaining members. The partnership can continue with the other members, and the affected member simply exits the arrangement.
• D. Non-Application of Certain General Contractual Rules to Contribution Obligations (Civil Code Art. 667-2):
  The Civil Code specifies that certain general rules applicable to bilateral contracts do not apply to the members' core obligation to make their contributions to the partnership:
  • The rules on the right to simultaneously perform (Civil Code Art. 533) and the general rules on bearing the risk of loss (Civil Code Art. 536) are not applicable to contribution obligations.
  • A member cannot terminate the entire kumiai agreement merely because another member fails to make their agreed-upon contribution. The partnership may have other remedies against the defaulting member, such as a claim for performance of the contribution, damages, or potentially expulsion under the terms of the agreement or specific Civil Code provisions.

Q2: How are business decisions made and operations managed within a Civil Code Kumiai? (Internal Relations)

The internal governance of a kumiai can be flexibly determined by the partnership agreement. If the agreement is silent, the Civil Code provides default rules (Civil Code Art. 670):

• A. Where No Managing Partners (業務執行者 - Gyōmu Shikkōsha) Are Designated:
  • Decision-Making: Decisions on matters concerning the partnership's business, other than ordinary day-to-day affairs, are made by a majority vote of all the members.
  • Execution of Business: Each member individually has the right to execute the business of the partnership.
  • Ordinary Affairs: Ordinary business affairs can be handled by any individual member acting alone. However, other members have the right to object to such an act before its completion, in which case it cannot proceed.
• B. Where Managing Partner(s) Are Designated:
  • The partnership agreement can delegate the authority to make decisions and execute the business to one or more managing partners. These managing partners can be selected from among the members or can even be third parties.
  • Decision-Making by Managing Partners: If there are multiple managing partners, decisions on matters other than ordinary business are made by a majority vote among the managing partners.
  • Execution by Managing Partners: Each designated managing partner has the authority to execute the business.
  • Ordinary Affairs by Managing Partners: Similar to the above, ordinary business affairs can be handled by any individual managing partner, subject to objection by other managing partners before completion.
  • Overriding Power of All Members: Even if managing partners are designated, all members acting by unanimous consent can still make decisions on or execute partnership business matters (Civil Code Art. 670(4)).
• C. Rights of Non-Managing Partners:
  Even if not involved in day-to-day management, every member retains the right to inspect the partnership's business operations and its financial condition (Civil Code Art. 673).
• D. Resignation and Dismissal of Managing Partner Members (Civil Code Art. 672):
  If a member is designated as a managing partner:
  • They can only resign from that management role for a "justifiable reason" (seitō jiyū - 正当事由).
  • They can be dismissed from their management role by the unanimous consent of all other members, also only for a "justifiable reason".

Q3: How does a Civil Code Kumiai interact with third parties, especially concerning contracts? (External Relations & Agency)

Since a kumiai lacks separate legal personality, its dealings with third parties are conducted by or on behalf of its members.

• A. All Members as Contracting Parties:
  When a kumiai enters into a contract with a third party, legally, all individual members of the kumiai are considered to be the parties to that contract. The partnership itself cannot be a contracting party.
• B. Partnership Agency (組合代理 - Kumiai Dairi):
  To facilitate external transactions, kumiai typically operate through principles of agency. The general rules of agency under the Civil Code (Article 99 et seq.) apply. The specific authority of members or managing partners to act as agents is governed by Article 670-2:
  • If No Managing Partners Are Designated: For matters other than ordinary business, a member generally needs the consent of a majority of the other members to act as an agent for the partnership and bind all members (Art. 670-2(1)). An individual member does not automatically possess agency power for significant external transactions. Any member can, however, act as an agent for ordinary business affairs (Art. 670-2(3)).
  • If Managing Partners Are Designated: Generally, only the designated managing partner(s) have the authority to represent the partnership and act as its agent(s) externally (Art. 670-2(2), first part). If there are multiple managing partners, their majority consent is usually required for them to act as agents in non-ordinary business matters (Art. 670-2(2), latter part). Any managing partner can act as an agent for ordinary business matters (Art. 670-2(3)).
• C. Disclosure of Principal (Kenmei - 顕名) in Agency:
  When a managing partner (or authorized member) acts as an agent for the kumiai, it is generally considered sufficient for them to indicate that they are acting on behalf of the "[Partnership Name], by [Managing Partner's Name and Title]." It is not strictly necessary to list the names of all individual members in every transaction. The use of the partnership name is understood to imply that the act is being done for all members collectively (see Supreme Court, July 31, 1961, Minshū Vol. 15, No. 7, p. 1982, regarding a fishery cooperative). This is viewed as a method of satisfying the general agency requirement to disclose the principal, rather than an exception to it.

Q4: How is property owned and how are debts handled in a Civil Code Kumiai?

The property and liability regime of a kumiai is distinct:

• A. Partnership Property (組合財産 - Kumiai Zaisan) – Collective Ownership (Gōyū - 合有):
  All property contributed by the members or acquired by the kumiai through its business activities becomes partnership property (Civil Code Art. 668). This property is held in a special form of co-ownership known as collective ownership (gōyū) by all the members. This is different from ordinary co-ownership (kyōyū - 共有) found elsewhere in the Civil Code, which allows for more individual rights over shares.
  Key features of gōyū:
  1. Restricted Disposition of Individual Shares: A member cannot freely dispose of their individual share or interest in specific partnership assets in a way that would be effective against the partnership or third parties dealing with the partnership (Civil Code Art. 676(1)).
  2. No Partition Before Dissolution: Members cannot demand a partition or division of the partnership property before the partnership is dissolved and its affairs are formally liquidated (Civil Code Art. 676(3)). This is to preserve the assets for the common undertaking.
• B. Claims by Personal Creditors of an Individual Member (Civil Code Art. 677):
  A personal creditor of an individual member (i.e., a creditor whose claim is unrelated to the partnership's business) cannot attach or execute against that member's interest in specific partnership property. The creditor must pursue the member's separate, individual assets.
• C. Partnership Claims (組合債権 - Kumiai Saiken):
  Claims that are owed to the partnership (e.g., receivables from customers) are also owned collectively (gōyū) by all members. These claims are generally indivisible, and an individual member cannot independently enforce or dispose of what they perceive as their pro-rata portion of a partnership claim (Civil Code Art. 676(2)). Furthermore, a debtor of the partnership generally cannot set off a debt they owe to the partnership against a separate claim they may have against an individual member.
• D. Partnership Debts (組合債務 - Kumiai Saibō):
  Debts and obligations incurred by the kumiai in the course of its business are owed collectively by all members.
  1. Primary Recourse to Partnership Property: Creditors of the partnership can primarily seek satisfaction of their claims from the partnership property (Civil Code Art. 675(1)).
  2. Personal Liability of Members (Civil Code Art. 675(2)): This is a crucial aspect. In addition to liability against the partnership's assets, each member is also personally liable for the partnership's debts with their individual, separate assets. This liability is often described as being "joint and several" in effect, although the Civil Code frames it such that a partnership creditor can choose to pursue each member for their respective share of the debt. This share is determined by the members' agreed-upon loss-sharing ratio. If no such ratio is agreed, or if the creditor was unaware of the ratio at the time the debt arose, the creditor can claim an equal share of the debt from each member. This personal liability of members is direct and divisible according to these ratios.

Q5: How are profits and losses shared among members of a Kumiai?

The distribution of profits and allocation of losses are fundamental to a partnership:

• The partnership agreement can freely specify the ratio for sharing profits and losses (Civil Code Art. 674).
• If the agreement specifies a ratio for only profits or only losses, that ratio is presumed to apply to both (Art. 674(2)).
• If the agreement is silent on profit/loss sharing ratios, then profits and losses are shared in proportion to the value of each member's capital contribution to the partnership (Art. 674(1)).

Q6: How does a Japanese Civil Code Kumiai differ from a Japanese Limited Liability Partnership (LLP - 有限責任事業組合 Yūgen Sekinin Jigyō Kumiai)?

While both are forms of partnership, there are critical distinctions:

• A. Civil Code Kumiai (General Partnership):
  • Liability of Members: The most significant characteristic is that members have unlimited personal liability for the debts and obligations of the partnership (Civil Code Art. 675(2)). Their personal assets are at risk beyond their capital contributions.
  • Legal Personality: Does not have separate legal personality.
  • Governing Law: Primarily the Japanese Civil Code.
  • Taxation: Generally operates on a pass-through basis, where profits and losses are allocated to the individual members, who then report them on their respective tax returns.
• B. Japanese Limited Liability Partnership (LLP) (有限責任事業組合 - Yūgen Sekinin Jigyō Kumiai):
  • Governing Law: Established under a specific statute, the Limited Liability Partnership Act of 2005 (有限責任事業組合契約に関する法律 - Yūgen Sekinin Jigyō Kumiai Keiyaku ni Kansuru Hōritsu).
  • Liability of Members: This is the defining difference. Members of a Japanese LLP enjoy limited liability. Their liability for the LLP's debts and obligations is generally restricted to the amount of their respective capital contributions. Their personal assets are, therefore, shielded from the LLP's business liabilities beyond their investment in the LLP.
  • Legal Personality: Like the Civil Code kumiai, a Japanese LLP does not have separate legal personality. It remains a contractual entity, albeit one with specific statutory features, including registration requirements.
  • Internal Governance: The LLP Act allows for significant flexibility and autonomy in structuring the internal governance, management, and decision-making processes of the LLP (known as the principle of internal autonomy - 内部自治の原則 naibu jichi no gensoku). For instance, formal oversight bodies like a board of directors are not mandated.
  • Taxation: A key feature of the Japanese LLP is its pass-through taxation (構成員課税 - kōseiin kazei) regime. The LLP itself is not subject to corporate income tax. Instead, profits and losses are directly allocated to the members, who then include these amounts in their own taxable income. This can offer tax advantages compared to traditional corporate structures.
  • Purpose and Use: The Japanese LLP was designed to encourage joint ventures and collaborative enterprises, particularly those involving specialized skills, technology, or professional services, by offering the benefit of limited liability without the full complexities and tax implications of incorporation.

The primary distinction for businesses considering a partnership structure in Japan is the liability aspect. The unlimited personal liability inherent in a Civil Code kumiai is a significant exposure that can be a deterrent for many ventures. The Japanese LLP provides an important alternative that combines some of the operational flexibility and pass-through tax treatment of a partnership with the crucial protection of limited liability for its members, making it a more attractive vehicle for a wide range of modern collaborative undertakings.

Conclusion

The general partnership under the Japanese Civil Code, the kumiai keiyaku, provides a traditional and flexible structure for joint business activities, founded on the principles of member contributions to a common undertaking. It is characterized by collective ownership of partnership assets (gōyū) and, most critically, the unlimited personal liability of its members for the partnership's debts. While its internal operations can be tailored by agreement, the Civil Code provides default rules for governance and external representation. For businesses seeking the benefits of partnership but requiring protection from unlimited personal liability, the more modern Japanese Limited Liability Partnership (LLP) offers a distinct alternative with limited liability and pass-through taxation, albeit without separate legal personality. Understanding these fundamental differences in liability, governance, and property treatment is essential when choosing the appropriate structure for collaborative ventures in Japan.