Incorporation in Korea for foreign investors:
When entering the Korean market, investors face a key decision: which entity structure to adopt. While the Stock Company remains the default for larger ventures, the Limited Company is increasingly favored by foreign investors for its simplicity and flexibility. By contrast, the Limited Liability Company, despite its name resembling the popular U.S. LLC, is seldom chosen.
From a legal perspective, the Korean Commercial Act (the “KCA”) recognizes all of the structures above as legal entities with limited liability protection for their investors. However, their structural differences carry meaningful implications for cost, governance, and long-term strategy.
The Limited Liability Company will not be a focus of this article, as it is a relatively recent addition with limited precedent and weaker legal stability. It also carries lower social and economic credibility than the other two structures. Most importantly, unless otherwise provided in its Articles of Incorporation, any transfer of equity interest requires unanimous consent of all members.
If you are a foreign investor with ample resources seeking speedy, streamlined operations and tight control in the company to be established in Korea, with little need for outside capital or disclosure, then the Limited Company may be the right fit.
Limited Company’s member meetings retain broad authority to decide most matters. This contrasts with Stock Companies, where the KCA strictly divides powers between the shareholders meeting and the board of directors. In Stock Companies with capital under KRW 10 billion there is no board, so the shareholders decide most matters. Even so, the procedures for convocation and execution are simpler in a members meeting. Quorum requirements also differ. Most importantly, in a Limited Company, the Articles of Incorporation can grant specific investors enhanced voting rights regardless of their actual investment if certain conditions are met. This allows a foreign lead investor to secure certain percent of the voting rights without contributing an equivalent percentage of the capital.
Another feature of a Limited Company which can cut both ways, advantage or setback, is that capital and ownership is tailored within a closed group. While the members of a Limited Company can freely transfer their equity interest in principle, transfer restrictions can still be hard-wired into the Articles of Incorporation, giving founding investors greater control over ownership changes. Stock Companies can too subject transfer of shares to BoD resolution but that is the only extent and the restruction has limited effect. Secondly, this is a set back. a Limited Company cannot issue shares or make a public offering; capital is raised through additional contributions by existing members or the private admission of new members, subject to the Articles of Incorporation and member approvals.
Another feature of a Limited Company, which can be either an advantage or a drawback, is that capital and ownership remain confined to a closed group. In principle, members may freely transfer their equity interests, but transfer restrictions can be hard-wired into the Articles of Incorporation, giving founding investors strong control over ownership changes. While Stock Companies may also condition share transfers on board approval, the restriction is considerably limited in scope and effect. The key drawback for Limited Companies is that they cannot issue securities or make a public offering; capital must instead be raised through additional contributions by existing members or the private admission of new members, subject to the Articles of Incorporation and member approvals.
Therefore, there still remains contexts where a Stock Company is preferable. Stock Companies are eligible for public offerings and stock exchange listings in Korea. They are also more familiar to local counterparties and financial institutions, which can smooth business dealings. If the exit strategy involves an IPO, if the business requires broad-based fundraising, or if the company intends to issue debentures, the Stock Company structure may be the better path.
At the end of the day, each investment situation is unique, and the optimal choice depends on the investor’s business model, related parties, tax position, and long-term goals. If you are considering establishing a corporate presence in Korea, we at Inpyeong Law are ready to provide tailored advice, utilizing our expertise and experience to benefit your business to the best of our ability.
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