Things to Do While Choosing the Right Business Entity in Korea

In South Korea, the type of business entity that you choose is one of the most important decisions you’ll make. For foreign investors, this decision must also align with the requirements of the Foreign Investment Promotion Act (FIPA). This basic decision determines not only your personal liability and tax liability but also how much capital you can raise and how much administrative work you will have. 

To entrepreneurs who want to have a presence in this dynamic economy, it is important to know the Korean corporate law. It is about being strategic to your vision, resources, and long-term objectives. 

So what type of entity is suitable for your venture in Korea? This guide will take you through the crucial things to do and things to ponder upon in this critical selection process.

Understanding Business Structure Types in South Korea

Korea offers several distinct business entity types, each with its own characteristics.

Sole Proprietorship (gaeinsaeobja - Gaein Saeopja)

This is the simplest type, which is basically a business run by an individual. No legal separation of the owner and the business. Be noted that Foreign nationals without a long-term residence visa(e.g., F-2, F-5, or F-6) are generally not eligible to operate a sole proprietorship in Korea.

• Pros: Easy and affordable to set up; less administrative overhead expenses.

• Cons: Unlimited personal liability (risking your personal property), more difficult to raise funds, less credibility to do big deals.

• Ideal For: Freelancers, small consultants, very small home-based businesses, and low-risk.

Partnership (habmyeonghoesa - Hapmyeong Hoesa or habjahoesa - Hapja Hoesa)

Two or more persons come into an agreement to conduct a business. Hapmyeong Hoesa (General Partnership) is liable to all the partners. Hapja Hoesa (Limited Partnership) has one or more limited partners having limited liability and at least one general partner having unlimited liability.

• Pros: Relatively simple to establish in case of multiple owners, shared resources.

• Cons: In the case of Hapmyeong Hoesa, everybody is liable. In the case of Hapja Hoesa, it is the difficulty of handling various levels of liability.

• Ideal For: Professional service firms (e.g., law firms, accounting firms) where partners actively participate in management and trust each other implicitly. Less common for startups.

Limited Company (Yuhanhoesa - Yuhan Hoesa)

As in the case of a private limited company, the liability is capped at the invested amount. It does not have as many public disclosure requirements as Co., Ltd.

• Pros: Limited liability, less complex corporate governance than Co., Ltd., appropriate to a smaller family business or joint venture that does not require raising public capital.

• Cons: Public fundraising not possible, restrictions on transfer of shares, may not be as prestigious as Co., Ltd.

• Ideal for: Small to medium-sized companies, subsidiaries of foreign companies with no intention to go public in Korea, and joint ventures.

Company Limited by Shares (jusighoesa - Chusik Hoesa or Co., Ltd.)

This is the most common and versatile entity type, equivalent to a corporation or public limited company. Ownership is divided into shares, and shareholders have limited liability.

• Pros: Shareholders have limited liability. Moreover, it is the simplest entity to raise capital (public and private). Other benefits include a good corporate image, unlimited existence, and the smooth transfer of ownership.

• Cons: More complicated and costly to establish, increased administration responsibilities (e.g., board meetings, shareholder meetings, auditing requirements), and stricter compliance.

• Idea For: Startups seeking venture capital, businesses planning significant growth, larger enterprises, foreign direct investment vehicles. When considering how one knows which entity type is right for scaling, Chusik Hoesa is often the answer.

Branch Office / Liaison Office:

A branch office is not a separate legal entity but an extension of the foreign parent company.

• Pros: It is easier and quicker to set up than a local subsidiary.

• Cons: The parent company remains fully liable for the branch's activities. A Liaison Office has very limited activities (market research, liaison, not revenue-generating).

• Ideal for: The companies that are testing the market, do small non-sales activities, or need to have a local presence without creating a separate legal entity at this point. This isn't strictly choosing the right business entity type for a new local business, but for an extension of an existing foreign one.

Identify Your Business Goals:

You need to make a decision based on your business objectives. Ask yourself the following questions:

Do you plan to operate locally or expand globally?

Will you need to raise capital from investors or keep control as the sole owner?

Do you expect to hire employees and scale quickly?

For example:

A sole proprietorship is an ideal business entity when you are testing the market or have a small business.

In case you are starting a business and you are interested in attracting investors in the future, a corporation (Chusik Hoesa) will be more suitable.

If you are a foreign firm looking to explore opportunities in Korea without direct selling, the establishment of a liaison office may be effective.

Assess the Tax Implications

In Korea, there are various tax requirements that are associated with each type of business. It is possible to know them before you start a company to avoid surprises in the future.

Sole Proprietorships: The income is taxed as personal income. The tax rate is based on the total income of the owner (including the income of the business).

Corporations (Chusik Hoesa): Corporate income tax applies to a corporation and is usually between 10 and 25 percent, depending on the profits.

Limited Liability Companies (Yuhan Hoesa): Taxed like corporations, although accounting regulations might be a little less complex.

Branch Offices: These are regarded as the extensions of the parent company and are subject to taxation on the profits made in Korea.

In addition, it is important to remember that the Value Added Tax (VAT) is imposed on the majority of goods and services at 10%.

To make sure that you comply and maximize your tax structure, seek the advice of a tax accountant or legal advisor who is familiar with Korean business law.

Check Registration and Documentation Requirements

Every type of entity is registered with certain steps and documents. Typically, you'll need:

• Registration certificate of business.

• Articles of incorporation (corporations).

• Address identification and proof.

• Lease agreement of office space.

• Investment reports (for foreign-owned entities).

The initial paperwork should be done correctly to make the approval process run smoothly and prevent unwarranted delays.

Know Employment and Labor Laws

If your business involves hiring employees in Korea, you must comply with local labor regulations.

Key points to consider:

• The employment contracts should be written and define the wages, working hours, and benefits.

• You must make contributions to four large social insurances, including National Pension, Health Insurance, Employment Insurance, and Industrial Accident Compensation Insurance.

• All employees are covered by the minimum wage and working hours.

• The compliance of labor may be cumbersome, particularly to foreign companies, requiring you to consult a local HR or legal advisor.

Compare Cost and Administrative Burden

Before you settle on the business structure, you should estimate the total costs involved in the foundation and management of your business. 

Costs may include:

• Registration fees.

• Notary and legal expenses.

• Lease and capital requirements in the office.

• Accounting and audit costs.

Taxes and Bank Account Opening  

After deciding on the type of entity, you have to:  

1. Acquire the NTS business registration number.

2. Register for VAT and other relevant taxes.

3. Open a business bank account.

The process also involves fund source verification and foreign investment approval if it concerns foreign investors.

Final Thoughts

Choosing the right business entity is a basic yet important step to kick-start your business in South Korea. It requires you to walk through various considerations to start your venture on the right foot. However, some entrepreneurs find it challenging to go through these steps, making them look for professional support. In this case, you can reach out to us at J&J Korea as we help you with the complex business registration process along with other aspects. Get in touch now.