Franchising in Quebec: choosing your legal structure

Buying a franchise in your own name or through a company is more than an administrative formality. Your choice determines, among other things, who owns the business, enters into commitments and reports the income. If you plan to join a franchise network in Quebec, it is best to settle this question before signing. Here is how to compare the options and put a structure in place that suits your plans.

1. Distinguish between the operator, shareholder and manager

As a sole trader, you run the business personally. There is no separate legal entity between you and the business’s obligations. This arrangement may seem simpler, but it leaves you personally liable for the debts incurred in running the business.

An incorporated company has a separate legal personality. It can own assets, employ staff and enter into the franchise agreement. You can be its shareholder, an officer of the company and the person responsible for day-to-day operations at the same time, but these roles are legally distinct.

Incorporation does not, however, remove all personal liability. A personal guarantee, certain statutory duties of directors or your own wrongful acts can still make you personally liable despite that separation.

Before choosing, draw up a summary setting out:

• who will provide the funding and in what form;
• who will own the business;
• who will work at the premises;
• who will make important decisions;
• whether other investors might join later.

The franchisor may also impose requirements concerning share ownership, control of the company or the operator’s personal involvement. Ask about these before incurring incorporation costs.

2. Compare the total cost, not just the tax bill

An incorporated company is not automatically the least expensive option. It involves costs for incorporation, maintaining company records, accounting and tax returns. A simpler structure may cost less to administer without necessarily offering the protection or flexibility you need.

Ask your accountant to compare the structures using the same assumptions: expected profit, the amount you need for personal expenses, funds retained to grow the business and annual compliance costs.

An apparently attractive tax rate is not enough to decide the issue. The outcome depends in particular on your circumstances, eligibility for applicable tax provisions and how money will be taken out of the company. Also have your accountant review the treatment of any start-up losses: their tax effects may differ depending on the structure.

If you are investing with someone else, add one essential question: will your contributions be share capital or loans to the company? This distinction affects your rights and the terms of repayment. It calls for a documented decision rather than a verbal agreement between friends or relatives.

3. Understand Quebec’s legal framework

Quebec has no specific legislation imposing a pre-contractual disclosure regime for franchises. The general rules of the Civil Code of Québec, particularly those governing contracts and good faith, govern the relationship. Other legislation applies depending on the structure chosen and the activities carried out.

A company can, for example, be incorporated under Quebec’s Business Corporations Act or the federal Canada Business Corporations Act. Choosing federal incorporation does not exempt the company from applicable Quebec requirements, particularly those relating to business registration and statutory public disclosure.

Do not therefore assume that a timetable you find for another province applies in Quebec. In Ontario, for example, the Arthur Wishart Act (Franchise Disclosure), 2000 requires, subject to applicable exceptions, a disclosure document to be provided at least 14 days before signing or payment. That statutory period does not automatically apply to your purchase in Quebec.

This is no reason to rush into signing. Request draft agreements early enough for your lawyer to check the proposed structure and each signatory’s obligations.

4. Put the right structure in place before committing

If you choose an incorporated company, co-ordinate its incorporation with the purchase timetable. Do not assume that an agreement signed in your own name can later be transferred to your company without conditions. An assignment may require consent and involve formalities or fees.

Before signing, have the following confirmed:

• the company’s legal existence and exact name;
• its acceptance by the franchisor as the franchisee;
• the authority of the person signing on its behalf;
• consistency between the franchise agreement, financing arrangements and other commitments;
• the distinction between signatures on behalf of the company and personal commitments.

If several shareholders are involved, also establish rules for decision-making, additional funding contributions and exit arrangements. Check that these are compatible with the restrictions in the franchise agreement.

Key takeaway: choose your structure before committing. A costed comparison with your accountant, followed by a legal review of the signatories and documents, can avoid the need to restructure the purchase afterwards.