Kim Han-sik, president of Chonghaejin Marine Co Ltd, became the company's fifth person under arrest after investigators raised suspicion that improper stowage and overloading of cargo might have contributed to the April 16 disaster.
Kim is facing allegations that he was aware that the ferry exceeded its cargo limit but didn't do anything to stop it from leaving port, according to prosecutors.
Senior prosecutor Yang Jung-jin of a joint investigation team confirmed Kim's arrest.
More than three weeks after the sinking, 273 bodies have been retrieved most of them high school students with 31 others still missing.
Search teams have been hampered by strong currents, bad weather and floating debris inside the ship. A civilian diver fell unconscious while searching and died on Tuesday.
Relatives of the dead and missing passengers and many other South Koreans have been highly critical of the government's handling of the operation and the regulatory failures that may have allowed the disaster to happen.
President Park Geun-hye has apologised over the sinking at least three times during meetings with top officials, religious leaders and in a speech marking Buddha's birthday. Family members insist she deliver a separate speech to the nation.
All 15 surviving crew members involved in the ferry's navigation have been arrested, accused of negligence and failing to protect passengers.
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