Recently, many people are establishing corporations for various reasons. When you establish a corporation, you need to appoint a representative director to run it. However, there are some overlooked risk factors associated with this representative director, which I would like to discuss today. 

I received a comment on a video I posted earlier, asking a question that I found interesting. The commenter asked: If two people are in a partnership, one owning 50% and the other owning 40%, with a third party owning 10%, and they establish a company, does the person with 50% ownership have no obligation to pay the company's debts or taxes if they are the representative director? 

First of all, it is important to understand the relationship between shareholders and the representative director. Unlike individuals, a corporation is a legal entity created through documents, which grants it a separate personality. This entity was created because the shareholders invested in it; in other words, the shareholders contributed money to form the corporation.

So, this is how this corporation was created. At this time, the shareholders do not necessarily have to be individuals; corporations can also be shareholders. Anyway, a legal personality is granted by the court through this paperwork. Therefore, a subject to operate this entity is needed. They serve as directors, and among them, one becomes the representative director. If there are two shareholders, these shareholders have contributed capital to the corporation, and they need to appoint a representative director. The shareholder does not have to be the representative director. However, the representative director appointed at the shareholders' meeting, although not a shareholder, holds considerable authority. This is something to be mindful of. It would be good to check what kind of roles they can play and to what extent they can make changes. Looking at this question again, you asked whether there are no obligations regarding debts and tax payments. Most people should consider this...

You are saying that you will answer only from the perspective of the National Tax Basic Law. What does the National Tax Basic Law say? It concerns the tax aspect of corporations. The government has imposed taxes on that corporation. If that corporation fails to pay corporate tax, what happens? It states here that, since the text is too small to read, I made it larger. If a corporation's assets are insufficient to cover the national taxes that the corporation is liable for or the amounts due from tax delinquency, the tax liability arises under certain conditions. Specifically, if it falls under any of the following categories, the shareholder will be liable for the shortfall. Ultimately, this means that the unpaid taxes of the corporation will be assumed by the shareholders. This applies to shareholders who hold more than 50% of the shares. However, special relationships come into play. For example, if I own 25% and my wife owns 30%, together we hold 55%.

Then, if it exceeds, the taxpayer bears the tax obligation. But what about the earlier case? If a specific person holds 50% of the shares, then that person does not have the secondary tax obligation defined by the National Tax Basic Law. They would not have it, right? They need to exceed 50%. So, how much should they bear? If Company A made a profit of 1 billion won, then that shareholder would need to bear 510 million won. If their stake is 100%, they would bear the full amount. Up to 50%, there is no secondary obligation. So, many people believe they have no responsibility. However, the shareholder mentioned here refers not to the one listed in the shareholder registry, but to the person who actually controls the company and holds the de facto shares. Therefore, if one is not careful in proving their case, the national tax could fully come to them.

You need to pay attention to this part, and just for reference, if we examine the regulations, the response is that the current insufficient amount will require a re-bid. I’m not trying to suggest any loopholes; I just want to briefly introduce what is outlined in the regulations. However, we don’t think we will be able to pay corporate tax for 2020. We have been in a financial crunch for the past six months, and there are too many expenses coming up in the next few months. It seems that this corporation will no longer be able to pay corporate taxes. Originally, I held 70%, and I still hold 10% now. When does the obligation to pay corporate tax arise? Generally, corporate tax is paid for the income earned from January 1 to December 31 by March 30. When does the monetary tax obligation arise? It arises on December 31, 2020. I originally had 70%. If the J Corporation cannot pay its corporate tax, then I...

I have to bear 70%. However, instead of on December 30, I transferred the shares to this person the day before. That's why I ended up with 50%. So, do I need to pay corporate tax in advance? Is there a secondary tax obligation? No, right? What did that regulation say? The tax obligation is established when the current holder exceeds 50%. In this case, the tax obligation is not established on the 31st, as it does not exceed 50%. For them, there is no secondary obligation. Today, I actually want to discuss something else. We have a secondary tax obligation, right? If the national tax cannot be paid, only those who exceed 50% will be pursued for additional taxes. What if the tax is imposed on an individual? It is not a matter of the company; it is imposed on the individual. In that case, the individual has to bear it. That is entirely unrelated to the secondary obligation of the shareholders.

There are taxes that are directly imposed on the CEO, and the CEO must pay them. Even if I haven't received any money, they might say that I received money from the corporation, so how can they impose taxes on me? For example, we ran a restaurant as a corporation, and we spent a lot on renovations. However, the person involved didn't report the income properly. They said they would give me a discount if I didn't receive a formal payment, so I just paid them in cash. There were amounts like this, and also, the contributions for the four major insurances for the employees are quite high. Due to personal circumstances, some employees didn't use the insurance; they might be credit defaulters or foreign workers, and I provided them help like this. I need to remember each of these transactions, but I mistakenly recorded the bank transactions. After making that mistake, the outcome I received...

It should be possible to verify, but most CEOs struggle to do so. For example, if I am supposed to receive money from someone, let's say 1 million won, but it was recorded incorrectly, that could happen. Also, if I owe someone money but repaid less than I should have, that was recorded too. This might not have an immediate legal impact, but the records reflect those inaccuracies. Such issues could become problematic. When I initially established the corporation, I invested 100 million won in capital. Can I use that money however I want? If I can't use it freely, that would also be an issue. I used that money for interior work, but I wasn't able to recover it. That could pose a problem as well. These are the kinds of challenges we face. Money has been spent by the corporation, but the source of that expenditure is unclear. Such funds remain ambiguous over time.

This is the dictionary definition, but there were actual expenditures in the church. However, the details of the transactions are unclear. When you read something like this, you might think, Does that make sense? But in reality, there are vague records being kept. The representative may not be aware of this, but regardless, I don't have any ownership in the corporation. However, there was a mistake made in the accounting. If the corporation goes bankrupt in this state, will I disappear? No, the improperly recorded advances will still be attributed to the representative. So what will happen? It’s interesting because I only have a 50% stake, so I have no books, right? No, that's not the case; the representative is responsible. The responsibility for the advances lies with the representative, and they need to properly manage the income tax.

Of course, additional taxes must be imposed. This is related to the discussion on precedent number four, right? When the business closed, the special relationship was dissolved, so now it has been treated as a personal injury. It has been treated as a personal injury because the representative director took the salary without proper recording by the corporation. The representative, who is responsible for the corporation, must take on the income tax liability. This is entirely unrelated to the secondary tax obligation. 

Now, considering the amount that couldn't be received earlier, without any deductions, it adds up to about 500 million won. So, how much tax will that incur? For an individual, it would amount to approximately 500 million won, right? They would need to bear the income tax, as well as penalties for non-compliance in tax payments. This is how it could turn out for income tax. As the representative, it is important to understand not only that corporate taxes must be paid annually but also how the corporation's books are being maintained.

You need to be able to confirm whether there are any financial mistakes within the corporation. I can lend money to the corporation, but there are some people who do not record this properly. I have clearly lent about 500 million won to the corporation over five years. However, if I don't remember it accurately and do not check the financial statements, when I look back now, I see that the records show I have lent less than what I actually did. I distinctly remember lending 500 million won over five years, but the records indicate otherwise. This is the outcome of the situation, and I could end up not being able to recover the 500 million won I lent. That wouldn't be acceptable. Additionally, while we may think we can simply terminate relationships, there are customers who hide and change their identities without doing so. The CEO can also see those amounts. This is where we will conclude our learning for today. Thank you for staying until the end.

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Life is C

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[2023년 10월 기준]
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