Buying a franchise in France: choosing your legal structure

Joining a franchise network does not remove the need to choose the legal structure through which you will run your business. In France, no legal structure is reserved for franchisees: you remain legally and financially independent of the franchisor. Before incorporating a company, consider your personal circumstances, funding and draft franchise agreement together. A choice based solely on low set-up costs can prove restrictive later.

1. Start with your business plan, not the recommended structure

Begin by deciding who will invest, who will work in the business and who will make decisions. A sole entrepreneur might consider an EURL (a single-member limited liability company) or a SASU (a single-shareholder simplified joint-stock company). Where there are several shareholders, the comparison is often between a SARL (a limited liability company) and a SAS (a simplified joint-stock company). These are not the only options, but they are useful starting points.

Prepare a summary setting out:

• the proposed shareholders and their respective contributions;
• who will manage the outlet;
• your remuneration needs during the launch phase;
• whether an investor might join later;
• your plans to open further outlets.

French law does not require franchisees to adopt any particular company structure. A franchise brand may, however, require a specific arrangement before accepting your application. Distinguish between a legal obligation and a commercial condition imposed by the network, then ask why the latter is necessary.

If you are going into business with others, also clarify the role of shareholders who will not work in the business. Contributing funds does not automatically confer day-to-day management powers: the articles of association and, where appropriate, a shareholders’ agreement should govern these relationships.

2. Compare remuneration, social protection and tax

Do not limit your comparison to tax on profits. The company officer’s status also affects social security contributions, social protection and the cost of their remuneration to the business.

In an EURL, a manager who is also the sole shareholder generally falls under the French social security scheme for self-employed workers. In a SARL, a manager with a majority shareholding also falls under this scheme; the position differs for a paid manager who holds a minority stake or exactly half the shares. It would therefore be incorrect to say that every SARL manager is treated as self-employed.

A paid president of a SAS or SASU falls under the general social security scheme, with employee-equivalent status. This status alone does not entitle them to unemployment insurance cover. Taking no remuneration does not provide the same cover as receiving remuneration on which contributions are paid.

Ask your accountant to compare the options using identical assumptions: the same business activity, the same profit before remuneration and the same target personal income. The comparison should show the total cost to the company, your take-home income and the social protection provided.

Also compare the applicable tax regimes and available elections. Dividends are not a straightforward substitute for pay: their payment requires, among other things, distributable profits, and their treatment depends on the company structure and your circumstances.

3. Check compatibility with the franchise agreement

Check your proposed company structure against the franchise agreement before making a final decision. Some agreements are entered into on the basis of the individual running the company: this is known as the ‘intuitu personae’ element. The franchisor may therefore place conditions on a change of company officer, a transfer of shares or a change of control of the company.

Identify precisely which events require notification or prior approval. Bringing in a shareholder to finance a second outlet could require approval under the franchise agreement, even if the articles of association make the transaction straightforward.

In France, pre-contractual disclosure is governed in particular by Article L. 330-3 of the French Commercial Code, introduced by the Doubin Act of 31 December 1989, and by Article R. 330-1. Where the relevant conditions are met — the provision of a trade name, trade mark or trading identity alongside an exclusivity or near-exclusivity commitment — the pre-contractual disclosure document and draft agreement must be supplied at least twenty days before signing or making any advance payment.

Use this period to have the franchise agreement, articles of association and shareholders’ agreement checked for consistency. The statutory waiting period is no substitute for this review.

4. Set up the right company and identify who is signing

Before signing anything, check who is taking on the obligation: you personally, an already registered company or a company in the process of incorporation. This is not merely an administrative detail. For a company being incorporated, arrangements for the company to assume those obligations must comply with the applicable rules; this cannot be taken for granted.

Before entering into any commitment on behalf of a company that does not yet legally exist, have your adviser confirm who should sign and how the company will assume the obligations. Company formation formalities are handled through France’s single business formalities portal, the guichet unique des formalités des entreprises.

Finally, distinguish between share capital and your launch budget. A legally permitted low level of share capital does not demonstrate that the business has the resources it needs. Shareholders’ limited liability does not remove the consequences of a personal guarantee or the risks arising from certain management failings.

Key takeaway: have two structures compared using the same financial assumptions, then check their compatibility with the franchise agreement before filing the articles of association or signing.