"Be Careful When Concentrating Shares in Children"... 'Tax Savings and Risks' to Check When Establishing a Family Corporation

A "family corporation," where family members participate as shareholders, is gaining attention as a means of asset transfer and tax reduction. However, indiscriminate distribution of shares can actually increase tax risks, requiring caution. Tax accountant Kim Jong-seok of Rodem Tax Corporation analyzed the definition of a family corporation, precautions during establishment, and practical tax-saving effects through a recently released video.

When designing share structure, 'Youth Startup Tax Reduction' and 'Loan Risks' must be considered

A family corporation does not require special legal procedures; it refers to a form where family members participate as shareholders to establish a stock company or a limited company. Since the representative director and shareholders can be separate, the representative director does not necessarily have to be a shareholder. However, there are variables that must be considered when designing the share structure.

The first is the 'Youth Startup Small and Medium Enterprise Tax Reduction' benefit. According to the video, for a youth aged 15 to 34 (up to 39 when considering military service period) at the time of startup to receive the startup reduction, the representative director must be the largest shareholder. If too many shares are transferred to children to transfer assets, causing the representative director's share to decrease, they may miss the powerful benefit of being exempt from corporate or income tax for five years. Tax accountant Kim explained, "There are cases where a representative director completely removes their shares and gives 50% entirely to children to transfer assets, but this may fail to meet the requirements for the youth startup tax reduction."

The second is the issue of financial sector loans. When reviewing loans, banks closely examine the representative director's credit information and capital holding status. In the case of a so-called 'empty representative' who holds almost no shares, they may face disadvantages in executing loans as it is judged to be different from the general form of SME management (owner management). The video pointed out that if a representative director has neither capital nor shares, the bank may judge them as 'empty' and refuse to issue a loan.

'Gift After Establishment' strategy to avoid investigation of capital source

Investigation into the source of funds during the capital payment process is also a major checkpoint. If a high amount of capital is set and a high share is allocated to a minor child, the National Tax Service may consider that the funds flowed from the parents and raise gift tax issues. To prevent this, Tax accountant Kim advised not to set the initial capital excessively high.

For example, if a corporation with a capital of 10 million won is established, even if a 20% share is granted to a minor child, the gift value is only 2 million won. Since this is within the gift property deduction limit for a minor child of 20 million won (total over 10 years), gift tax issues almost never arise. In the case of a spouse, considering they live together, the deduction limit is larger at 600 million won. For an adult child, the deduction limit is 50 million won.

In particular, rather than including minor children as shareholders from the establishment stage, Tax accountant Kim presented the method of the representative director completing the establishment alone and then gifting the shares as a 'Rodem tip.' This is because if a minor shareholder is included at the time of establishment, administrative procedures such as seal certificates and documents related to legal representatives become very complex, whereas transferring shares through a gift agreement after establishment makes the procedure much simpler. Kim added, "When establishing, it is much more convenient for the taxpayer to proceed simply with the representative director alone or with a spouse, and then transfer shares by writing a single gift agreement and receiving help from a tax accountant after the establishment is complete."

Reducing inheritance and gift taxes through distribution of dividend income and distribution of corporate value

The core purpose of utilizing a family corporation lies in 'tax savings.' It can be effective in two major aspects.

The first is the 'distribution of dividend income.' If the profits generated through corporate operations are monopolized by a single shareholder, a burden of high-rate global income tax and health insurance premiums occurs. However, if the shares are distributed among family members, the dividend amount per person can be managed below the 20 million won threshold for global taxation of financial income, allowing funds to be recovered while lowering the tax burden. The video explained, "Rather than receiving 20 million won alone, if you divide the dividends among your spouse and children—for example, 20 million won, 16 million won, etc.—you can withdraw dividends while reducing the burden of global taxation or health insurance premiums."

The second is reducing inheritance and gift taxes through the 'distribution of corporate value.' When surplus accumulates in the corporation, if the shares are distributed, the value is already divided according to the shares when passing assets to children in the future. This is much more efficient than paying large amounts of gift or inheritance tax later. Kim explained, "Unlike gift tax, which reaches a maximum rate of 50%, you can enjoy the effect of distributing assets over a long period while only bearing the corporate tax (at the level of 10–20%) that occurs during the process of operating the corporation."

However, caution is needed when involving parents as shareholders. If shares are gifted to parents, inheritance tax issues may arise in the future, and there is a risk that management rights could be shaken if shares are split equally during the process of property division between siblings under civil law. The video warned that assets given to parents might be distributed equally among siblings when they are inherited later, which could shake one's own shareholding rights. Therefore, it is recommended to design the family corporation centered around direct descendants (children) and the spouse.