Signing a Franchise Agreement in China: Moving Rights and Liabilities from an Individual to a Company
Planning to run a franchise through a company does not mean an agreement signed first in your own name will automatically transfer to it. Before signing, clarify who receives the franchise rights, who must pay, and how the company will take over the agreement once incorporated.
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After choosing a brand, many entrepreneurs sign and pay in their own name, then register a company to open the outlet. In franchising, this may look like a simple matter of administrative timing, but it can affect brand authorisation, debt recovery and refund claims. This article examines one specific issue when signing a franchise agreement in mainland China: how to ensure a clear transition of contractual rights and liabilities between an individual and a company yet to be incorporated.
1. Distinguish between who can become a franchisee and who can recruit franchisees
Article 3 of the Regulations on the Administration of Commercial Franchising provides that organisations other than enterprises, and individuals, may not act as franchisors. This restriction applies to the brand-side party that provides business resources and recruits franchisees. It should not be read as a blanket ban on individuals signing as franchisees.
However, the fact that an individual can sign does not mean a company incorporated later automatically becomes a party to the agreement. To establish the contractual relationship, start with the named franchisee, the capacity in which the agreement was signed and its specific terms—not simply whose business licence is displayed at the outlet.
Before paying, answer three questions:
- Are the franchise rights being granted to the individual or to the proposed company?
- Who will actually make sales, employ staff and receive payments?
- Who does the franchisor require to pay the initial franchise fee and ongoing charges, and to bear liability for breach of contract?
If the answers point to different parties, you need a written arrangement rather than a recruitment representative’s assurance that “we can just change it later”.
2. Before incorporation, do not treat a reserved company name as a transfer arrangement
Article 75 of the Civil Code of the People’s Republic of China addresses the legal consequences of civil activities undertaken while establishing a legal person. Where a founder undertakes such activities for the purpose of establishing a legal person, the resulting legal consequences are borne by that legal person once it is established. If it is not established, they are borne by the founder. Where the founder undertakes these activities in their own name, a third party may, after incorporation, choose to assert its rights against either the legal person or the founder in accordance with the law.
It is therefore too simplistic to say that “if an individual signs, only that individual will ever be liable”. Equally, incorporation does not necessarily release the individual from liability. Whether signing formed part of the activities undertaken to establish the company, how the agreement is worded and how it is subsequently performed may all affect the assessment.
A safer approach is to record the purpose of incorporation and the transitional arrangements clearly when signing, including:
- Basic details of the proposed company, and how its identity will be confirmed if its final registered name differs;
- Deadlines for incorporation and for providing registration documents;
- Whether brand resources may be used during the transitional period, and who is authorised to use them;
- How the agreement will end and payments already made will be settled if the company is not incorporated.
An undecided company name is no reason to let a recruitment representative fill in the details for you or to sign with blanks left in the document. If you genuinely need to sign first, have a lawyer review the wording against your incorporation plans. If you can wait until the company is incorporated, doing so can reduce the need to change the contracting party later.
3. The transfer agreement must address rights, debts and personal liability together
Once the company is incorporated, paying the next instalment from its bank account or asking the franchisor to issue invoices to it should not be treated as sufficient proof that the agreement has been transferred in full.
The Civil Code sets out different rules for assigning contractual rights, transferring debts, and transferring contractual rights and obligations together. In particular, transferring a debt generally requires the creditor’s consent, while transferring contractual rights and obligations together requires the other contracting party’s consent. In practice, the individual, the company and the franchisor can sign a three-party agreement, rather than relying solely on an internal arrangement between the individual and the company.
The transfer document should address at least the following points individually:
| Issue | What to clarify |
|---|---|
| Scope of authorisation | Whether the company acquires the brand-use rights and operating permissions granted under the original agreement |
| Payments already made | Whether fees paid by the individual count towards the company’s contractual obligations, and whether any additional payment is required |
| Effective date | The date from which the company assumes future obligations |
| Earlier liabilities and claims | Who takes over outstanding fees, liability for breaches or refund claims arising before the effective date |
| Release of the individual | Whether the franchisor agrees to release the individual from the relevant contractual obligations |
Pay particular attention to wording stating that “the individual and the company bear joint and several liability”. This does more than confirm that the company may operate the business: it may also mean the franchisor can still pursue the individual for the relevant debts. The company taking on contractual performance and the individual being released from liability are two separate matters, and each must be agreed expressly.
If the franchisor also requires a personal guarantee, review its scope, type and duration separately. Do not simply sign it as a routine attachment to the change of contracting party.
4. Keep authorisation, payments and actual operations aligned in the records
After the handover, check that the contracting party, brand authorisation documents, payment records and the entity actually operating the outlet are consistent with one another. Leases, employment arrangements and operating licences are governed by their own rules; they do not transfer automatically merely because the party to the franchise agreement has changed.
It is advisable to keep a handover checklist. Retain the original agreement, evidence of the individual’s payments, company registration documents, the three-party transfer agreement and the franchisor’s confirmation letter. Reconcile in writing how payments already made have been allocated and what balances remain. Ask the franchisor to confirm who should receive future notices, bills and documents relating to performance of the agreement.
For refunds, also clarify who has the right to make the claim, which account should receive the money and whether receipt settles the relevant obligations. Do not wait until a dispute arises to discover that the individual is claiming a refund, the company is running the business and the franchisor denies that the transfer ever took place.
Practical takeaway: Signing as an individual before incorporating a company is not necessarily unworkable. But “the company has been incorporated”, “the company has taken over the agreement” and “the individual has been released from liability” are not the same thing. Agree the transition before paying, then complete the written confirmation after incorporation to reduce the risk of a mismatch between the outlet’s operations and your personal liability.
