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Social Enterprise Law Surveys

Korea, Republic of

(Asia Pacific) Firm Lee & Ko
What jurisdiction(s) do you practice in?

Republic of Korea

What are the most commonly used types of for-profit corporate organizational forms in your jurisdiction (e.g., corporation, limited liability company, benefit corporation, social purpose corporation, etc.) used by Enterprises operating a trade ...

The two (2) organizational forms most frequently used by Enterprises operating a business are Chusik Hoesa (a joint stock company) and Yuhan Hoesa (a private limited liability company) prescribed under the Korean Commercial Code (“KCC”). Of the two, the Chusik Hoesa is more prevalent in South Korea due to, among other reasons, its convenience and flexibility in issuance and transferability of shares and debentures. In addition, given its prevalence, there are ample court precedents involving Chusik Hoesa, which provide a greater sense of certainty in regard to various legal issues.

(1) Chusik Hoesa (a joint stock company)

In a Chusik Hoesa, the liability of each shareholder is limited to the amount that the shareholder has invested by subscribing to, or acquiring, the shares of the company. The shares of a corporation are freely transferable unless otherwise provided in the articles of incorporation. A Chusik Hoesa may issue various classes of shares, such as common stock and preferred / convertible / redeemable stock.

(2) Yuhan hoesa (a private limited company)

A Yuhan Hoesa consists of members with limited liabilities who are responsible only to the extent of their capital investment. Although the units of the company are transferable, a Yuhan Hoesa may not issue bonds or different classes of shares and the shares issued by a Yuhan Hoesa may not be listed on a stock exchange or publicly traded.

a. Multiple owner Enterprises that seek financing from investors typically tend to use Chusik Hoesa (a joint stock company) as public offerings of shares is permitted for a Chusik Hoesa meeting certain requirements under the Financial Investment Services and Capital Markets Act.

b. Chusik Hoesa (a joint stock company) is the most widely used for-profit organizational form for a Social Enterprise.

 

Do any of your jurisdiction’s traditional organizational forms require or permit the board or managers to consider, balance or prioritize interests other than shareholder value in decision making? What other interests, if any, are they required...

Directors have a fiduciary duty to act solely in the best interest of the company (which may require the directors to consider the interest of the company’s employees). Despite the fact that directors are elected by the shareholders of the company, the directors do not owe a fiduciary duty to its shareholders. If a director manages the company in favor of any party, other than the company (including its shareholders), the director may be held liable for any damages incurred by the company.

Does your jurisdiction have organizational forms specifically designed for Social Enterprises? If so:a. What type(s) of organizational forms are they?b. How do they materially differ from the most closely analogous traditional organizational ...

a. According to the Social Enterprise Promotion Act (the “SEPA”), which governs Korea’s policy with respect to social enterprises, Enterprises falling under one of the following organizational forms may be certified as a Social Enterprise:

  • civil corporation or association under the Civil Code of Korea;
  • companies established pursuant to the KCC (joint-stock company, private limited company, partnership company, limited partnership company);
  • limited partnership established pursuant to the KCC;
  • corporation or other forms of non-profit organizations established pursuant to other legislation (e.g., corporation of public interest, non-profit private organization, social welfare corporation, consumers’ cooperatives, social cooperatives);

b. Unlike other companies, the business activities of a Social Enterprise is limited to achieving social objectives set forth in the SEPA (i.e., providing social services or job opportunities to vulnerable social groups, contributing to the welfare of the local communities). In addition, unlike other traditional organization forms, a Social Enterprise (i) must have a decision making structure in which stakeholders, including workers, are to be involved and (ii) must reinvest or dispose of at least two-thirds (2/3) of its profits for social objectives.

c. Social Enterprises may receive financial support from the government by means of subsidies for employee salaries, business development and social insurance fees. The government also provides consultations to qualified Social Enterprises regarding business, tax, labor and accounting. Social Enterprises are also eligible for certain tax benefits (e.g., reduction in corporate income tax and registration tax). 

For funders of Social Enterprises, they may receive tax benefits (local tax, national tax) (see III. Tax).

d. As mentioned in (b) above, the SEPA provides that Social Enterprises (i) should have a decision making structure in which stakeholders including workers are to be involved and (ii) should reinvest or dispose of at least two-thirds (2/3) of its profits for social objectives.

e. In order for an Enterprise to receive benefits under the SEPA, it must first be certified by the government as a Social Enterprise. The government certification process involves reviewing of the application documents, on-site inspection and review by the Ministry of Employment and Labor. The government certification is granted to those Enterprises that meet all the criteria for the Social Enterprise as set forth in the SEPA and the process generally takes at least 2 months from the application date.

f. Social Enterprises have been available in Korea for over 13 years. As of November 13, 2020, there were around 2,700 Social Enterprises operating in Korea.

Are Social Enterprises permitted to be formed and operated as Nonprofits? If so: a. Are Nonprofits that are Social Enterprises treated differently under the law as compared to Nonprofits that are not Social Enterprises, whether from a corporat...

Social Enterprises may be formed and operated as Nonprofit.

Being a Nonprofit does not grant any special treatment to a Social Enterprise. Nonprofits that are Social Enterprises can receive the same benefits set forth in the SEPA (see I.4(c) for the benefits provided to Social Enterprises).

There are no “hybrid” Nonprofit form that requires less reporting and/or allows for faster formation.

Although the majority of Social Enterprises have been established as for-profit companies rather than Non-Profits, Nonprofit Social Enterprises are still popular. As of December 2019, 23% of the Social Enterprises have been formed and operated as Nonprofits.  

Does your jurisdiction allow for worker-owned Enterprises, such as cooperatives? If so, please describe any material benefits of, and/or restrictions on, using such forms.

The Framework Act on Cooperatives allows establishment of cooperatives, including worker cooperatives.

The material benefit of forming a worker-owned cooperative is that it allows for worker control and management and aligns the interest of the cooperative and its workers. Additionally, qualified cooperatives may receive subsidies and other operational support (including consultation, education and training for workers) from the national government and enjoy special tax treatments.

The major restrictions of forming a worker-owned cooperative is related to its governance structure. Since members equally have one vote each and its control is not determined by the level of investment into the cooperative, cooperatives experience difficulties in raising capital, and decision-making procedures may be slower when compared to other corporate entities.

Are there unique reporting requirements for Social Enterprises? If there are, please describe them. Please also discuss what government bodies Social Enterprises are required to report to.

A Social Enterprise must submit a business report to the Ministry of Employment and Labor by the end of April and October each year. The business report must state an assessment of the business performance from the previous year, business plan for the relevant year and the details of stakeholders’ participation in their decision-making process.

In addition, the Minister of Employment and Labor may require a Social Enterprise or its members to file reports or submit relevant documents necessary for the supervision of the Social Enterprise.

In your jurisdiction, has case law and jurisprudence evolved to address Social Enterprises? If there is meaningful jurisprudence around Social Enterprises, please provide some brief examples.

Social Enterprise is a relatively new concept in Korea, as the SEPA has been effective since July 1, 2007. Accordingly, case law or jurisprudence involving Social Enterprises is fairly limited.

Does your jurisdiction have any ESG requirements for Enterprises generally? If it does, please describe.

No.

Does your jurisdiction have any ESG requirements specifically for Social Enterprises? If it does, please describe.

In order to maintain the status as a Social Enterprise under the SEPA, a Social Enterprise’s primary objective should be to provide social services or job opportunities to vulnerable social groups, contribute to the welfare of the local communities and dispose of more than two thirds of its profit for the social objectives.

Does your jurisdiction have any ESG requirements for investors? If it does, please describe.

No.

Are any major investor classes (e.g., pension funds, mutual funds, etc.) required to look at ESG issues when making investment decisions in your jurisdiction? a. If they are, please describe the requirements.b. If they are not, are they permi...

Although there is no legal requirement for major investors to consider ESG issues when making their investment decisions, investors are encouraged to consider ESG issues in making their investment decision.

For example, the Korea Corporate Governance Service released the “Stewardship Code” in 2016 in which it recommended that major institutional shareholders should actively participate in matters of corporate governance. As a result, some large institutional investors, such as the National Pension Service, take into account ESG issues in their investment decision making process.

What kinds of philanthropic funding do Social Enterprises in your jurisdiction commonly receive (e.g., grants, charitable investment, traditional investment)?

Social Enterprises can receive grants or subsidies from the national and local government for personnel expenses, operating expenses, advisory fees and other expenses incurred in connection with the operation of such Social Enterprises. The type of funding varies depending on the enterprise form. For example, certain grants and charitable investments are reserved solely for Social Enterprises formed as non-profits.

How prevalent, if at all, are new for-profit impact investments in your jurisdiction (e.g. traditional instruments with impact terms, new investment instruments, aggregation with philanthropic capital, community based funding, etc.)?

The awareness of impact investment is increasing in Korea. For example, major impact investors, venture capitals and other institutions have established Korea Impact Investing Network (KIIN) for the purposes of enhancing impact investment ecosystem in Korea.

What are the types of government funding and support available to Social Enterprises, if any, available in your jurisdiction (e.g., grants, investments, bonds, and guarantees)? a. How difficult is it for Social Enterprises to obtain government...

Social Enterprises may receive financial support from the government by means of subsidies for employee salaries, business development and social insurance fees. The government also provides consultations to qualified Social Enterprises regarding business, tax, labor and accounting. Social Enterprises are also granted certain tax benefits (reduction in corporate income tax and registration tax, etc.).

Social Enterprises must meet certain qualifications set forth in the SEPA to receive government funding. The government considers factors including the type of Social Enterprise (whether Nonprofit or for-profit), their contribution to society and whether the enterprise has been receiving similar financial support from the national or local government.

Are there any companies that are formed as a Social Enterprise listed on your jurisdiction’s leading securities exchange(s)?

No. 

To what extent are publicly traded Enterprises required to disclose ESG related factors in annual reports/public filings in your jurisdiction.

Green Posting System:

The Financial Services Commission (FSC) introduced Green Posting System in 2012, based on the Low Carbon Green Growth Act, which requires certain designated companies to disclose the amount of greenhouse gas emission, energy usage and the certification of green technology and green business. Moreover, if such companies are listed on the Korean Exchange, they are required to include the relevant information in their annual business reports.

Corporate Governance Report:

The FSC revised its posting regulations for the Korea Exchange (KRX) effective from 2019. According to the revised posting regulations, it is mandatory for KOSPI listed compa­nies with total assets of more than KRW 2 trillion to submit their corporate governance reports within two months from the deadline for the annual business report submission. The FSC has announced that it will gradually widen the range of companies that are required to submit corporate governance reports.

The companies subject to this report obligation must state in their corporate governance reports whether they are in compliance with the key governance principles on a “comply or explain” basis. These key governance principles, as required by the KRX, cover areas including shareholders’ right, fair treatment of shareholders, operation and composition of the board, responsibilities and assessment of outside directors, internal audit functions, committees within the board, and external auditors.

How prevalent, if at all, are impact bonds in your jurisdiction?

There have been a few cases of social impact bonds administered by local governments, impact bonds are not yet prevalent in Korea.

In your jurisdiction, are there any restrictions on foreign investments or donations that are unique to Social Enterprises (whether incorporated as for profit entities or as Nonprofits)?

No.

Is “crowdfunding” legal in your jurisdiction? Are there rules under applicable securities laws that make it easier for smaller businesses or Social Enterprises to take money from investors that are not sophisticated/accredited/qualified under a...

Crowdfunding is legal in Korea, allowing qualified small businesses and Social Enterprises to solicit investment from the public. The Financial Investment Services and Capital Markets Act regulates crowdfunding and set forth certain restrictions to protect investors (e.g., qualifications for crowdfunding platforms, funding caps for companies that utilize crowdfunding, investment cap for individual investor, etc.).

Are there any tax exemptions that are uniquely available for Social Enterprises? a. Please describe any tax exemptions that are available and whether they are partial or full.b. Are they dependent on the Social Enterprise utilized using a spe...

Generally, under the Korean tax law, Social Enterprises can obtain tax exemptions/tax benefits if it meets the requirements to qualify as a Public Service Company.

Public Service Company can be exempt from income tax on income earned from nonprofit business activity.  However, Public Service Company is taxed on income from profit-making activities. 

Contributions to designated nonprofit organizations (including Public Service Companies) are deductible up to a certain limit for the donor (e.g., 20% of corporate donor’s certain taxable income, etc.).  Designated nonprofit organizations (including Public Service Companies) include, inter alia, hospitals, religious organizations, scholarship foundations, etc.

Are individuals or other organizations able to provide tax deductible donations to for-profit Social Enterprises? If they are, please describe any restrictions applicable to tax deductible donations?

If the Public Service Company does not qualify as a designated nonprofit organization under the tax law, then tax deduction for donations would be denied.  Therefore, donations to for-profit Social Enterprises would not grant tax deductions for donors thereof.

 

Are there any other tax benefits uniquely available for Social Enterprises? (e.g. deferrals, favorable tax rates, business deductions, etc.)

Yes, For example, the tax benefits available for Social Enterprises include the following: (i) reduction or exemption in corporate income tax; (ii) reduction in acquisition tax, registration tax, and property tax; etc.

 

Does your jurisdiction provide for reciprocal recognition of tax-exempt status that has been granted under the law of any other jurisdictions?

No.

Does your jurisdiction have Regulatory Sandboxes or similar policy frameworks for Social Enterprises? If it does, please describe.

No.

What government operational support, resources, training or services, are available for small businesses or Social Enterprises?

Social Enterprises may receive financial support from the government by means of subsidies for employee salaries, business development and social insurance fees. The government also provides consultations to qualified Social Enterprises regarding business, tax, labor and accounting. Social Enterprises are also granted certain tax benefits (reduction in corporate income tax and registration tax, etc.).

For small and medium enterprises in general, the government operates various support programs for qualified SMEs, including financial support in the form of loans, grants and subsidies, consultation, training, education, and special tax treatment.

Are there different compliance requirements for different types of Social Enterprises than for traditional Enterprises? Please provide examples if there are.

A Social Enterprise must submit a business report to the Ministry of Employment and Labor twice each fiscal year by the end of April and October. The business report must state an assessment of the business performance from the previous year, business plan for the relevant year and the details of stakeholders’ participation in their decision-making process. This reporting requirement is applicable to all types of Social Enterprises.

 

Is there a dedicated government agency or department that oversees Social Enterprises? If there is, please describe its mandate and effectiveness.

Ministry of Employment and Labor oversees Social Enterprises.

Is there a different bankruptcy system available for Social Enterprises?

No.

What are the average time and filing fees to form an Enterprise in your jurisdiction?

Assuming that all the necessary documents for the incorporation of an Enterprise (e.g. articles of incorporation, documents necessary for the registration of incorporation), it generally takes a couple of days to a week to incorporate a legal entity.

For Non-profits, it can take longer (maximum 20 days), as incorporation of a Nonprofit requires the relevant government authority’s review and approval.

 

What government or third-party certifications or accreditations, if any, are available for Social Enterprises that allow for access to benefits e.g. funding, beneficial tax status, etc.? Please provide examples and briefly describe them as well...

An Enterprise must be certified as a Social Enterprise by the Ministry of Employment and Labor, pursuant to the SEPA to enjoy benefits granted to Social Enterprises.

To maintain the certification as a Social Enterprise, it must (i) conduct business activities aimed at achieving social objects set forth in the SEPA (i.e., providing social services or job opportunities to vulnerable social groups, contributing to the welfare of the local communities), (ii) have a decision-making structure in which stakeholders including workers are to be involved and (ii) reinvest or dispose at least two-thirds (2/3) of its profits for social objectives.

 

Please describe whether, in your opinion, startups and other entrepreneurial Enterprises generally can easily form and flourish in your jurisdiction.

Startups can easily form and flourish in Korea. Startup entrepreneurs can receive a variety of support, both from the government and the market, including government-backed incubator programs (e.g., TIPS or Tech Incubator Program for Startups), and ample funding from many accelerator programs, angels, and VC firms. Also, there are over 100 co-working spaces in Korea.

Please describe whether, in your opinion, Social Enterprises, in particular, can easily form and flourish in your jurisdiction.

Social Enterprises can be formed relatively easily in Korea. Since 2007, 4,951 Enterprises have applied to be certified as Social Enterprises, and 3,212 were certified. As of November 2020, there are over 2,700 Social Enterprises operating in Korea.

Please describe whether in your opinion there are any laws that are obstructive to the formation of Social Enterprises (i.e. that actively disfavor or penalize, or otherwise discourage their formation) in your jurisdiction (for example, are Soc...

None. 

In your jurisdiction, are there any major fraud concerns or defects due to corruption or fraud that should be addressed? If there are, please briefly discuss the concerns or defects.

No.

What changes to the law do you think would be most beneficial to enabling Social Enterprises to flourish in your jurisdiction?

Currently, the social objectives are more focused on providing social services and job opportunities to vulnerable social groups. That said, expanding the scope of the social objectives set forth in the SEPA may help Social Enterprises to flourish.

Also, revising certification requirements to allow one-person Social Enterprise may also help Social Enterprises to flourish and provide a wider variety of social services (currently, a Social Enterprise must hire at least one or more employee, which practically excludes one-person Enterprise not hiring an employee from being certified as a Social Enterprise).

What changes to the law do you think would be most beneficial to enhancing the social and environmental responsibility of Enterprises generally (whether or not Social Enterprises)?

In Korea, there has been legislation discussions to expand the scope of the existing class action law and introduce award of punitive damages for intentional or grossly negligent acts, regardless of the industry or areas of law involved. Currently, class action suits are only available for securities-related cases and punitive damages are only available under certain statutes, such as the Products Liability Act, the Personal Information Protection Act and the Patent Act.

If adopted, the proposed changes will enhance the social and environmental responsibilities of Enterprises but will likely have a significant impact on the business environment.

Is there anything else you would like to add or guidance you would like to provide? Are there any questions we should have asked but did not?

No.

Social Enterprise Law Surveys

Korea, Republic of

(Asia Pacific) Firm Lee & Ko Updated