Case Analysis / Legal Updates

Small Business Closures | As Closures Rise Amid Increasing Costs, How to Respond to the Legal Issues That May Arise

This article analyzes the causes behind the rise in small business closures and outlines the principal legal issues that may arise during the closure process.

1. Small Business Closures | The Recent Rise in Closures and Changes in Market Structure

Over the past several years, the self-employment market has continued to show a rising trend in small business closures.

As a slowing economy, weaker consumption, and increasing costs have combined, the number of cases in which businesses are wound down has been on the rise.

According to data from the Ministry of SMEs and Startups and Statistics Korea, the number of self-employed persons in Korea stands at approximately 5.5 million, accounting for a considerable share of the economically active population.

The self-employment market, however, has a structure with relatively low barriers to entry and high competition, so closures likewise continue to occur.

Key Characteristics of the Recent Self-Employment Market

Item

Details

Number of Self-Employed Persons

Approximately 5.5 million

Major Industries

Restaurants, cafes, retail, and the like

Market Characteristics

An overcrowded, highly competitive structure

Factors Affecting the Rise in Small Business Closures

The rise in small business closures is driven by a combination of economic and structural factors.

First, as stores in the same industry become concentrated, creating overcrowded commercial districts, competition among business operators has grown more intense.

In addition, as consumers change the way they spend, traditional sales methods centered on offline stores are increasingly affected.

Rising rents and labor costs also raise the fixed-cost burden on small business owners, and the expansion of online distribution and the increase in contactless consumption are likewise assessed as factors bringing about changes in the offline self-employment market environment.

These factors are analyzed as combining to affect the upward trend in closures.

2. Small Business Closures | Changes in Revenue Structure and Increasing Cost Burdens

Small Business Closures | As Closures Rise Amid Increasing Costs, the Need to Review Legal Issues

Behind the rise in small business closures, changes in revenue structure and rising operating costs are at work simultaneously.

Although sales recovered in some industries after COVID-19, some analyses indicate that actual profitability did not improve significantly.

In the food service and retail sectors in particular, cases of declining operating profit have been reported as the costs of raw materials, labor, and rent have risen.

Major Cost-Increasing Factors

Cost Item

Impact

Rent

Remains high in prime commercial areas

Labor Costs

Effect of minimum wage increases

Raw Material Costs

Rising food ingredient prices

Platform Fees

Burden of delivery service fees

Such a cost structure can create a situation in which actual remaining profit decreases even when sales are maintained at a certain level.

When profitability falls, it becomes harder to keep operating the business, and the number of cases in which operators decide to wind down their business may eventually rise.

The rise in small business closures, therefore, can be seen not as resulting from declining sales alone, but as the combined result of changes in cost structure and deteriorating profitability.

3. Small Business Closures | Legal Issues That May Arise During the Closure Process

A small business closure is accompanied by a process of settling various legal relationships.

In particular, where a business is operated on leased premises, contractual relationships, settlement of debts, and employment relationships must all be settled at the same time, so disputes during the closure process are not uncommon.

Lease Disputes

Where a business was operated on leased premises, issues related to the lease agreement may arise during the closure process.

If operations are terminated while the contract term remains, disputes may arise over matters such as termination of the lease, the timing for the return of the deposit, and the obligation to restore the premises to their original condition.

In particular, where the lessor does not accept early termination or claims damages, the matter may develop into a civil dispute.

Key Money Disputes

In the case of a small business owner who operated on leased commercial premises, recovery of the premium (kwonrigeum) is often a consideration in the process of winding down the business.

When finding a new lessee, however, if the lessor refuses to conclude a contract with the new lessee without justifiable grounds or demands an excessive rent increase, problems may arise with the recovery of the premium.

Debt Issues

Debts incurred in the course of operating the business, such as loans, payments for delivered goods, and unpaid expenses, must also be settled during the closure process.

Because existing debts do not automatically disappear even when a business is wound down, conflicts may arise in the settlement process with creditors.

In the case of a sole proprietor in particular, business debts may extend to personal liability, so it is necessary to confirm the debt structure.

Employment Relationship Issues

In the case of a business that employed workers, issues regarding the settlement of wages and the payment of severance pay may arise during the closure process.

Under the Labor Standards Act, when a worker has left employment, wages and severance pay must be paid within a set period from the date of departure, and a failure to comply may lead to a labor dispute.

In addition, issues related to dismissal procedures and the arrangement of working conditions during the closure process must be reviewed together.

4. Small Business Closures | Key Matters to Review During the Closure Process

Small Business Closures | As Closures Rise Amid Increasing Costs, the Need to Review Legal Issues

When preparing for a small business closure, the following matters should be confirmed.

Checklist

Pre-Closure Confirmation Checklist

Confirm the lease term and whether early termination is possible

Review whether a premium (kwonrigeum) agreement exists and the prospects for its recovery

Organize the status of financial institution loans and personal debts

Confirm unpaid amounts owed to suppliers and whether transactions are settled

Settle employment relationships, including employee wages, severance pay, and annual leave allowances

Confirm whether there is an obligation to restore the premises to their original condition

Confirm the procedures for the business closure report and tax filing

Check whether value-added tax and global income tax have been filed

Confirm the settlement of card sales and the termination of the payment gateway (PG) contract

Confirm whether various utility charges and maintenance fees are settled

Business Closure Reporting Procedure

When closing a business, a business operator must file a closure report with the National Tax Service.

Procedure

Details

Closure Report

Filing with the tax office or via Hometax

Value-Added Tax Filing

Final return as of the closure date

Cancellation of Business Registration

Processed after the closure report

If the closure report is not properly filed, tax issues may continue to arise, so confirming the correct procedure is necessary.

5. Small Business Closures | Why a Legal Review Is Necessary

When filing a small business closure report, the various contractual relationships and administrative procedures formed during the operation of the business must be settled together, and unanticipated liabilities or disputes may arise in this process.

In particular, because the legal liability of a sole proprietor is not entirely separated from that of the individual, certain obligations may remain even after closure.

Before proceeding with a closure, therefore, a process of comprehensively reviewing the existing transaction structure, administrative procedures, and contractual relationships is necessary.

Small Business Closures, the Assistance of Daeryun Law Firm LLP

At Daeryun Law Firm LLP, professionals from various fields, including labor consultants, corporate attorneys, certified public accountants, and tax accountants, work together to provide comprehensive advice on the legal and business issues that may arise during the small business closure process.

The response required for a small business closure may differ depending on the industry, business structure, and contractual relationships.

Accordingly, the various matters that may arise during the closure process, such as review of commercial lease agreements, organization of claims and debts, settlement of employment relationships, and review of tax filings, can be examined according to the circumstances, and the direction of the response can be explored together.

In addition, taking into account the operating form and contractual structure of each business, advice is provided to organize the scope of liability and settlement relationships and to review the necessary legal responses.

If you need to organize contractual relationships or confirm the scope of liability during the small business closure process, 🔗Corporate Attorney Legal Consultation Reservation, you may review the relevant matters.

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