Sole proprietorship to company in Korea: three routes and tax deferral

Many sole proprietors (개인사업자) in Korea think about turning the business into a company (법인) once income grows. You can close the business and start a new company, or use a tax-deferred route under the Restriction of Special Taxation Act (조세특례제한법, Article 32). This guide compares the routes and the duties that follow, with tax rates as of 2026.

What changes, and the 2026 tax rates

Converting means a company takes over your existing business. A company is a separate legal person (Commercial Act, 상법, Article 169), so the taxpayer changes from you to the company. The company files corporate tax instead of your personal income tax, files VAT in its own name, and takes over contracts, assets, debts and staff. You become a shareholder and usually a director, and you can take money out only as salary, bonus or dividends.

Personal income tax rises in steps from 6% to 45% (Income Tax Act, 소득세법, Article 55). Local income tax adds 10% of that amount, so the top rate is 49.5%. Corporate tax rates for business years starting on or after January 1, 2026 are:

For 2023~2025 the rates were 9%, 19%, 21% and 24%. The December 2025 amendment raised each bracket by 1 point (Corporate Tax Act, Article 55). Corporate local income tax adds 1%~2.5% (Local Tax Act, Article 103-20). Profit reaches you only as salary or dividends, which are taxed again, so compare the total tax.

When conversion is worth checking

• Your income keeps rising and the higher personal rates start to apply.
• Your revenue reaches the faithful filing (성실신고확인) threshold for your industry: ₩1,500,000,000, ₩750,000,000 or ₩500,000,000 (Enforcement Decree of the Income Tax Act, Article 133). A faithful filing business must have its books checked by a tax accountant, and missing the report brings a penalty (Income Tax Act, Article 81-2).
• You need outside investors or larger bank loans.

Converting does not avoid faithful filing. If you were a faithful filing business in the year the company was founded or the year before, and you converted by in-kind contribution or business transfer, the company must submit the report for business years ending within 3 years of the conversion (Corporate Tax Act, Article 60-2; Enforcement Decree, Article 97-4).

Route 1: close the business and start a new company

This simplest route suits a business with few assets to move.

1. Report the closure of the sole proprietorship (폐업신고) at the tax office or on Hometax (홈택스), the National Tax Service website.
2. File the final VAT return by the 25th of the month after the month of closure (VAT Act, 부가가치세법, Article 49).
3. Apply for the company's incorporation registration at a registry office (등기소) or the Internet Registry Office (인터넷등기소).
4. Apply for the company's business registration (사업자등록).

Tax points: goods left when the business closes are treated as supplied to yourself, so VAT applies (VAT Act, Article 10(6)). Selling business assets to the new company is a taxable supply unless the whole business is transferred. Transferring land or buildings is subject to capital gains tax (양도소득세, Income Tax Act, Article 94), and a double-entry bookkeeper who sells business vehicles or equipment has business income (Article 19(1)20). The company does not take over your tax reductions or unused credits.

Route 2: tax-deferred business transfer (Article 32)

Conditions (Enforcement Decree of the Restriction of Special Taxation Act, Article 29):

• You act as a promoter (발기인), found the company and invest at least the net asset value (순자산가액) of the business: the market value of its assets minus its liabilities, including provisions, on the conversion date.
• Within 3 months of the company's founding, you transfer all rights and duties of the business to it (포괄양수도).
• The company's capital must be at least that net asset value (Act, Article 32(2)).
• Consumption-oriented businesses (소비성서비스업), such as certain hotels, inns and entertainment bars, are excluded, and housing or rights to acquire housing get no deferral (Article 32(1)).

Benefits:

• Capital gains tax on business fixed assets (사업용고정자산) is deferred (이월과세). The company pays it as corporate tax when it later sells the asset (Article 2).
• A transfer of the whole business is not a supply for VAT, so no VAT is charged and no tax invoice is issued (VAT Act, Article 10(9)2; Enforcement Decree, Article 23).
• The company can use the remaining period of certain reductions, such as the start-up SME reduction (Article 6), and your unused tax credits carried forward (Articles 32(4) and 31(4)~(6)).

Steps: found and register the company; sign a business transfer agreement; file the carryover application (이월과세적용신청서, Form No. 12 of the Enforcement Rule) together with the new company; report the closure of the sole proprietorship; then move assets, debts and accounts to the company's books. The application goes in with the capital gains tax return, including a preliminary return, for the year of the transfer (Enforcement Decree, Article 29(4)).

Five-year rule (Article 32(5)): if within 5 years of the company's incorporation registration the company closes the business it took over, or you dispose of 50% or more of the shares you received, you must pay the deferred tax as capital gains tax within 2 months from the end of the month in which this happens. The company disposing of half or more of the business fixed assets it took over, or no longer using them in the business, counts as closing the business (Enforcement Decree, Article 29(6)).

Route 3: in-kind contribution of business assets

If the business owns large assets such as real estate, you can contribute the assets themselves as capital (현물출자) instead of cash. The same deferral, five-year rule and carryover of reductions apply. Under the Commercial Act, an in-kind contribution must be written into the articles of incorporation (Article 290). A court-appointed inspector (검사인) examines it and reports to the court, or a certified appraiser (감정인) does this instead (Articles 299 and 299-2), and the court can change unfair terms (Article 300). No inspection is needed if the contributed assets are no more than one fifth of the capital and no more than ₩50,000,000 (Article 299(2); Enforcement Decree, Article 7). For VAT, an in-kind contribution is a supply of goods (VAT Enforcement Decree, Article 18(1)4) unless it transfers the whole business. Expect more time and cost for appraisals and court steps. A fourth route, merging small and medium businesses (Article 31), is rare.

After conversion: costs and new duties

• Registration licence tax (등록면허세) on incorporation is 0.4% of paid-in capital, at least ₩112,500. In a "large city" (대도시), meaning the overcrowding control zone of the capital region, it is three times that unless the business type is exempt (Local Tax Act, Article 28).
• The articles of incorporation need no notarization if capital is under ₩1,000,000,000 and the promoters take all the shares (발기설립) (Commercial Act, Article 292).
• File the corporate tax return within 3 months after the end of the month in which the business year ends, or within 4 months with a faithful filing report (Corporate Tax Act, Article 60). See Corporate tax return due March 31: start preparing in November.
• Pay the interim prepayment (중간예납) within 2 months after the first 6 months of the business year. A new company's first business year and SMEs whose amount is under ₩500,000 are exempt (Article 63).
• Hold an annual general meeting of shareholders (Commercial Act, Article 365). With capital under ₩1,000,000,000, one or two directors are allowed and no board of directors is needed (Article 383).
• Move contracts, leases and permits into the company's name, and set your pay by the articles or a shareholders' resolution: see Director pay in Korea needs the articles or a shareholders' resolution.

Checklist

• Compare the total tax at 2026 rates, including tax on salary and dividends.
• Ask the licensing authority whether your permits can move to a company.
• For the deferral, invest at least the net asset value and transfer the whole business within 3 months.
• File Form No. 12 with the capital gains tax return for the year of the transfer.
• Keep the business and at least half of your shares for 5 years.
• If you were a faithful filing business, plan for 3 more years of faithful filing in the company.