WHAT TYPE OF COMPANY TO ESTABLISH IN KOREA – part 2

by Andrew Baek

July 15, 2024

Under the Commercial Act of Korea, there are a total of five types of companies: General Partnership Company, Limited Partnership Company, Limited Liability Company, Stock Company, and Limited Company. For the purposes of this Article, we will skip the first two types, as they require at least one general partner with unlimited liability. Accordingly, we will begin with the Limited Liability Company (“LLC”).

The two major advantages of organizing an LLC in Korea are that LLC allows for self-governance through its articles of incorporation and that the investors’ liability is limited to the extent of their invested capital. However, LLCs are not as popular in Korea compared to those organized in the U.S., primarily due to the lack of tax flexibility. Generally, pass-through taxation is not available for LLCs in Korea.

In LLCs organized in the U.S., corporate governance is largely determined by operating agreements executed among their members with state laws generally acting as default rules for matters not addressed in the agreements. In contrast, Korean law imposes crucial mandatory provisions that override the articles of incorporation (“AoI”; AoI serves as the articles of organization and sometimes even as operating agreements for U.S. LLCs). For instance, the Korean law dictates that the admission of a new member requires an amendment to the AoI, which cannot be otherwise stipulated. In a Korean LLC, important decisions such as amending the AoI, electing representatives, and transferring member interests require unanimous consent of all members, irrespective of their interest percentage, unless otherwise provided in the AoI.

Most of our clients invest to achieve a high ownership percentage in their target companies. Therefore, there is little incentive for them to choose a Korean LLC, where voting rights are generally disproportionate to interest percentages, and decision-making can be challenging. In a Korean LLC, business management is conducted by managers, who may or may not be members; when there are multiple managers, unanimous consent among them is necessary for business operations. Additionally, an LLC is not the only type of company that allows non-residents or foreigners to hold ownership.

In conclusion, unless the client has special needs requiring a different type of company, association, etc., we usually advise choosing between a Stock Company and a Limited Company when establishing a company in Korea through capital investment.

In the following articles, we will examine these two types of companies in detail, one by one.

To be Continued