LLCs to be included in obligatory gov’t auditsExternal audits for limited liability companies will be made obligatory, extending the law to include Korean branches of well-known global brands including Louis Vuitton, Chanel, Microsoft and Google.
The measure is part of a set of revised auditing bills approved by the National Assembly late last month, which the FSC has been pushing for since 2014 after Daewoo Shipbuilding and Marine Engineering was found to have overstated its profits.
Under the current law, obligatory tax audits and public announcements are confined to corporations and listed companies whose stocks are exchanged on the market. LLCs or private companies are not subject to the audits and are generally less regulated.
According to a statement released by the FSC last month, LLCs will have to start submitting audit reports beginning in 2019. The extent of the information that will be required to be revealed and the LLCs that will be impacted has not yet been decided.
The purpose of LLCs is to ensure a more flexible business environment for small companies with a limited pool of owners. In Korea, commercial law abolished the limit of 50 employees or under in legally defining an LLC in 2012, as well as permitting the external transfer of company shares.
Over the last few years, critics pointed out that the lowered barriers created a gray zone, allowing companies closer in size and structure to corporations to legitimately shift to become an LLC as a way to benefit from weaker regulations.
Among over 25,000 LLCs, around 2,000 have more than 12 billion won ($10.5 million) in capital.
Some Korean branches of global brands do business as LLCs in a wide variety of industries including luxury goods, food franchises and IT giants.
Some global brands even shifted from corporations to LLCs, including Louis Vuitton Korea in 2012 and Gucci Korea in 2014.
Criticism was particularly high regarding global brands that are thought to be sending a large portion of their revenue to foreign headquarters without reporting tax information.
Of course, these companies are required to submit sales figures to the tax office upon request, but they have less of an obligation to cooperate in sharing information that could allow the government to better assess how much tax they should be paying.
Statistics from the FSC and the National Tax Service showed that the total number of LLCs shot up after new laws were implemented: There were 26,858 LLCs in Korea as of 2015, a 42 percent jump from 18,818 in 2011.
BY SONG KYOUNG-SON [firstname.lastname@example.org]
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