Starting a business in Korea: Visas, entities, and taxes
Published : 2014-08-19 20:38
Updated : 2014-08-19 20:38
The Korean economy has seen a constant stream of new small businesses opening, many operated by non-Koreans. The government has been proactive in trying to reduce barriers to entry, even offering free classes, office space, and money to selected ventures. But whether they are restaurants (and we thank you, tasty Indian and Mexican places that are multiplying), IT services, advertising consultants, hagwon, or other enterprises, all businesses and business owners face some central issues.
First, you need to be able to legally be in the country and run a business. E-series visa holders and those in the country on visa waivers are generally not permitted to do so. If you invest 100 million won you can qualify for a D-8 visa, but you will be limited to the type of business the company does and cannot open other businesses or accept outside employment. Those who have one of several residential visas (F-2, F-4, F-5, and F-6) have the freedom to basically operate just as a Korean citizen would, with no limitations on business type or kind, except that, of course, the business must be lawful. Leave the drugs and guns overseas, please, and think twice about that “Kiss Bang” with extra services you always wanted to manage.
After you’re sure you can open a business without risking deportation, the next step from a legal perspective is to determine its structure. The most common structures are solo proprietorship (“sa-eopja”), general partnership (“hapmyeong hoesa”), limited company (“yuhan hoesa”) and stock corporation (“jushik hoesa”). Which structure is used generally depends on the ownership and management structure and tax consequences of the business. There are other forms, too, but they are less common.
The first two, proprietorship and partnership, are not separate entities from a tax or liability perspective ― that is, the proprietor or partners directly receive earnings and are directly liable for damages caused by the business. Ownership is simple and, in the case of more than one person, equal. These structures are typical for “mom and pop” style shops and small businesses such as small hagwons, restaurants, stores, or legal offices with few partners. You do not need any formal corporate documents (such as articles of incorporation) but in the case of a partnership, a partnership agreement is recommended to minimize possible future disputes.
The last two, limited company and stock company, are separate entities and taxed separately ―that is, the entity is taxed and then the person is taxed, creating the possibility of double taxation and making planning a bit more complicated . Generally a well-planned entity can minimize tax liabilities. Also, ownership interests can be transferred by sale and broken into different classes, allowing more flexibility in terms of control and profit sharing. You will, however, need corporate documents (such as articles of incorporation) and the law places certain restrictions and liabilities on directors and other parties.
A Korean limited company is like most other nations’ limited liability companies, and has fewer reporting requirements than a stock corporation. Many larger foreign businesses begin life as limited companies and become stock corporations only if they need the additional flexibility or will seek to be listed on a stock exchange.
Of course, if your business needs to change, the structure can always be changed with a little time, planning, and of course paperwork.
Whichever your type of business, you should register with the local branch of the tax office, and the commercial registry. You will need to pay at least two types of taxes: value-added tax and income tax. Some businesses, including translation, are VAT-exempt so what purpose you pursue can affect how much of your income you keep. Tax itself could be several articles, particularly once you start considering personal and business income tax planning, so we would suggest finding an accountant with whom you can communicate, although we will try to address those issues in the future.
You may also need to register with and meet the requirements of other government entities, such as the Ministry of Education (if you are a teacher) or the Ministry of Foreign Affairs (if you are assisting with foreign visa applications). If you invested more than 100 million won you will need to register with the Ministry of Knowledge Economy and you will have some extra legal protections under the Foreign Investment Promotion Act.
The Seoul Global Center has great pamphlets on businesses and registration in multiple languages, as well as information about the periodic sponsorships the government has been giving, so we would suggest starting there. As any small business owner can tell you, there is a small mountain of paperwork to surmount and headaches to suffer, but generally the long-term personal rewards and financial freedom are worth it.
By Darren Bean and Yuna Lee
Yuna Lee is a Korean attorney at Seowoo & Minyul Law Firm in Seoul. You can read her blog at askakoreanlawyer.blogspot.com or if there is a legal issue you would like to be addressed, email firstname.lastname@example.org. ― Ed.
This column is not intended as legal advice. No action should be taken or avoided based on this column, no attorney-client relationship is formed by reading this column or contacting the authors, and the authors expressly disclaim any liability for the content of this column. Those with legal problems in Korea should seek advice from an attorney.