When you start a business in Korea, whether it is a Korean subsidiary or a startup, choosing the right business structure has huge implications for its operation, liability, and future investment.
In the U.S., a joint stock company(C-Corporation) and a limited liability Company(LLC) are often used as business entity by foreign investors and startups. The same applies in South Korea.
So, in this article, our Korean business lawyer explains these two entities with more emphasis on the Korean LLC, which is called a Yuhan Chegim Hoesa(YCH).
Similarities between a U.S. LLC and a Korean YCH
A YCH was firstly introduced by the amended Corporate Act of 2012. It is called a Korean equivalent of a U.S. limited liability Company. By contrast, a joint stock company in Korea is called a Jusik Hoesa.
Here are the similarities between the two corporates.
- YCH has a separate legal entity from its members. Thus, the members are not personally liable for the company’s debts. Member’s financial loss is limited to the amount of capital investment.
- YCH is owned and managed by the members. The members, however, typically appoint a managing member or a representative member.
- YCH has far fewer formalities than a stock company, as shareholders’ meetings and minutes are not required. No need for a board of directors and minutes, either. This makes the operating costs lower than a stock company.
- The setup cost is also less than a stock company.
- It is allowed that the profit distribution is not in proportion to investment so long as the members agree.
Differences between a U.S. LLC and a Korean YCH
- Unlike LLC, pass-through taxation does not apply to YCH in Korea.
- The capital contribution cannot be made in the form of services. Only cash and other property are allowed.
- Also, it is notable that an expulsion of any member, i.e. forced dissociation, is only possible when the court approves it.
Which is Better: YCH or JH?
A Korean joint stock company(Jusik Hoesa, JH) and a YCH both can benefit a corporate sheild. So the decisive factor in choosing the business entity type will come down to whether you want to minimize the operating costs and burden, whether you plan to get an equity investment, and whether you want to keep your business 100% private to its founders.
Simplicity and Flexibility of Business Operation
As explained above, YCH has far fewer formalities than a stock company. Also, YCH’s incorporation takes less money ad time. So, if you want to minimize the initial cost of business setup and remove too much overhead work, YCH would be better than a JH.
Many investors, especially venture capitalist, requires the business to take a joint stock company form because a YCH can’t issue stock. Thus, generally speaking, if you look to raise outside capital, a JH would be the better choice.
However, as explained above, unlike a U.S. LLC, a Korean YCH doesn’t pass through its profits and losses, there could be a different conclusion that a YCH can bring in investment from the venture capitalist. In Korea, only a stock company can be listed. Therefore if going public is expected, a YCH cannot be an option.
KeepING Your Business Private: Restriction on trasnfer
If you want to restrict the transfer of the share to your business, a YCH will be the better option. That is because under Korean law the members of the YCH cannot transfer its share to any 3rd party in violation of a restriction in the operating agreement.
The JH, often a joint venture company, can aim to procure the same effect by having a shareholders agreement that puts some restriction on the share transfer. But, the Korean court finds such agreement is not enforceable. This means you cannot prevent other members from transferring the share. What you can do is only seeking the damages, if provable. a YUH, a Korean LLC, can be an effective solution to this.
There is another 3rd type of commonly used business entity in Korea, which is a Yuhan Hoesa(YH). Yuhan Hoesa is translated into a Limited Company, and its legal nature is located between a JH(stock company) and a YCH( LLC).
It is more similar to a YCH but has critical differences that a member of a Yuhan Hoesa is free to transfer its share, and a Yuhan Hoesa must have members’ meetings and minutes. And the statutory range of profits available for the dividend is smaller than a YCH.
|Jusik Hoesa (Stock Company)||Yuhan Hoesa (Limited Company)||Yuhan Chegim Hoesa (Limited Liability Company)|
|Capital||100KRW or more||100KRW or more||100KRW or more|
|Number of investors||1 or more||1 or more||1 or more|
|Personal Liability||Shareholders are not personally liable for the debts of the company.||Members are not personal liable for the debts of the company.||Members are not personal liable for the debts of the company.|
|Transferability of Interests||No restriction except the company may require a prior consent of the company.||No restriction except the company may require a prior consent of the company.||Restricted, requires approval of every member.|
|Formalities of Decision Making||Resolution by the Shareholder’s meeting||Resolution by the Member’s meeting||Formal meetings and minutes are not required.|
|Voting Right||Pro rata||Pro rata||Per capita|
|Management and Operation||Managed by the directors appointed by the shareholders||Managed by the directors appointed by the members||Managed by the managing members appointed by the members|
|Company Representation||Representative Director||Representative Member||Representative Member|
|Number of Auditors||1 or more||1 or more||None|
|Profit Distribution||In proportion to investment||Special allocation permitted||Special allocation permitted|
|Public Announcement of Annual Report||Required||Not required||Not required|
|Pass Through Tax Treatment||No||No||No|
Converting a YCH to a JH
It is notable that a YCH, a Korean LLC, can convert to a JH, a Korean joint stock company at any time. It only requires an agreement among the members. So you start the business in a YCH format and then convert the YCH to a stock company when the time is right. This would be a reasonable and realistic approach considering most startups never make profits.
Korean Visas for a Subsidiary or Startup
There is no specific type of visa for a startup. However, for a foreign company or person that invests at least KRW 100 million to set up a Korean company, and owns at least 10 percent of the total number of voting shares, there is a D-8 visa.
D-8 visa is a special visa under Korea’s foreign direct investment scheme. It is both a commercial and a resident visa. Its initial term is 5 years and extendable if the investment thresholds are maintained. The share to acquire could be either a newly issued one or an existing one.
Furthermore, if your investment amount is more than 500,000USD and the company has hired 5 Korean employees under for at least 6 months, you can get a Korean permanent resident visa(F-5).