8/17/2011

Establishing a Company in Korea: New Corporate Forms Available under Revised Korean Code

According to the Ministry of Justice, over 95% of corporations in Korea are formed as a Chushik Hoesa, while the Korean Commercial Code (KCC), at this time, defines four different types of Korean potential business entities.  In order to allow a little more flexibility, two new business forms have been created. 

The recent amendment to the Korea Commercial Code, that will be promulgated from April of 2012, introduces two new forms of Korean business entities:
  • Hapja Johap (LLP)
  • Yuhan Chaekim Hoesa  (LLC)
We expect that more foreign investors will choose the Hapja Johap and Yuhan Chaekim Hoesa forms and few new market entrants will utilize the Yuhan Hoesa form, because of the added flexibility of the Hapja Johap.

Chushik Haesa (Joint Stock Company; Co. Ltd.; Corp.;  Ltd.)
Chushik Hoesa is the only corporate entity that is allowed, at the present, to publicly issue shares.  The revision will not change this.  The vast majority of incorporators in Korea chose the Chushik Hoesa corporate form.  It is also the most common corporate form for foreign companies establishing subsidiaries in Korea and this will not change with the April 2012 revisions.

Yuhan Hoesa (Private Company, sometimes referred to as an LLC)
Yunhan Hoesa is a closely held company that is prohibited from having more than 50 shareholders.

In recent years, a few foreign companies (including some international hedge funds) have chosen Yuhan Hoesa.

A few companies, recently, have chosen this form because of possible U.S. and E.U. tax benefits (pass-through benefits).  Additionally, there are few requirements in regard to directors, publication of balance sheet and accounting.  However, the KCC prohibits securitizing shares and issuing corporate bonds.

Hapja Hoesa (Limited Partnership; LLP)
With a Hapja Hoesa one or more partners must maintain unlimited liability and one or more partners may maintain limited liability. The entity is responsible to pay Korean corporate taxes and thus may not be treated as a pass-through entity.

Hapmyeong Hoesa (Partnership)
In a Hapmyeong Hoesa two or more partners form the partnership. The partners must maintain unlimited liability. The entity is responsible for corporate taxes and thus is not a pass-through entity.

Hapja Johap (Limited Liability Partnership; LLP)
Hapja Johap is similar to Hapja Hoesa. With a Hapja Johap one or more partners may have unlimited liability and one or more partners may maintain limited liability. The critical difference between Hapja Hoesa and Hapja Johab is that Hapja Johap, like Johap (partnership) is not a separate legal entity. The tax treatment issues are not yet resolved; however, we doubt that it will be subject to double taxation, thus, we assume that it will be treated as a pass-through entity.  The form, after the tax treatment issue is resolved, may be, in most cases, a more advisable solution than the Yunhan Hoesa form for those that may benefit from the pass-through nature of the entity. 

Yuhan Chaekim Hoesa (Limited Liability Company; LLC)
Yuhan Chaekim Hoesa is very similar to a U.S. LLC.  It is intended to provide the advantages of Yuhan Hoesa and Chushik Hoesa. The liability is limited, shares are freely transferrable between members, bonds may be issued, no capitalization requirements are imposed, no director or auditor requirements are imposed and the entity has easy exit requirements.  The tax treatment issues are not yet resolved, but, however, we doubt that it will be subject to double taxation, thus, we assume that it will be treated for tax purposes in the same manner as a Chushik Hoesa.

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SeanHayes@ipglegal.com