Buying a franchise in Germany: agree the legal structure before you commit

Joining a franchise network involves more than choosing the right brand. It is equally important to decide who will sign the franchise agreement: you personally or a company? This decision affects liability, set-up costs and how your business will be organised later on. Discuss the permitted legal structures with the franchisor early and make sure all related contracts are consistent with your choice.

1. Agree the legal structure and contracting party together

Franchisees generally run their businesses as legally independent operators, in their own name and for their own account. However, this does not dictate a particular legal structure. You might operate as a sole trader or through a GmbH, a German limited liability company, or an Unternehmergesellschaft, known as a UG (haftungsbeschränkt), a limited liability company with a lower minimum share capital requirement. You must establish in advance which arrangements the particular franchise system accepts.

Ask the franchisor explicitly whether a company may be the contracting party. Some draft agreements are designed for an individual: they link the rights granted directly to that person's qualifications and personal involvement in the business. In such cases, you cannot simply substitute a company by changing the name on the agreement.

In particular, obtain written answers to these questions:

• Which legal structures does the franchise system accept for new partners?
• Must a particular individual act as managing director or run the business?
• Are additional shareholders permitted, and is approval required before they can join?
• Which obligations fall on the company, and which also apply to the founder personally?

What matters is not just the legal structure on the letterhead, but precisely how rights and obligations are allocated. For example, if the company is to operate the business, it must itself be entitled to use the franchise concept.

2. Do not confuse limited liability with freedom from liability

Germany has no dedicated franchise statute and does not prescribe a particular legal structure for franchisees. The main relevant legislation includes the German Civil Code (BGB), the Commercial Code (HGB), depending on the arrangements, and the Limited Liability Companies Act (GmbHG) for GmbHs and UGs. There is no special government franchise registration that removes the need to examine these requirements.

As a sole trader, you are generally liable for business obligations with your personal assets as well as your business assets. For a registered GmbH or UG, liability for the company's debts generally rests with the company's assets. This does not mean that liability is limited to its share capital, nor that the individuals acting on its behalf are protected in all circumstances.

Personal guarantees, agreements to assume joint liability or other security arrangements can create personal liability alongside that of the company. Your own breaches of duty may also expose you to personal liability. You should therefore review not only the franchise agreement but also security arrangements with banks, landlords and suppliers.

Draw up a simple overview: who owes the debt, who provides security, which claims are covered and when does the security end? A personal commitment covering all present and future claims deserves particular attention.

Standard contract terms are generally subject to sections 305 to 310 of the BGB, with special rules applying in business-to-business dealings. Have a qualified adviser check whether a particular liability clause is enforceable. Do not assume that a far-reaching clause will simply be found unenforceable later.

3. Coordinate incorporation and signing

The interim period when the future company is planned but has not yet been entered in the German Commercial Register is particularly risky. Describing it as a “GmbH in formation” does not, by itself, provide comprehensive protection against personal liability. Anyone acting in the company's name before registration may be personally liable under section 11(2) of the GmbHG. The precise legal position depends on the stage of incorporation and the transaction concerned.

Do not rush into signing personally on the assumption that you can easily transfer the agreement to the GmbH later. Forming a company later does not automatically transfer a franchise agreement you have already entered into personally. Transferring the agreement generally requires the involvement or consent of the contracting parties concerned.

With legal advice, establish a sequence: first agree who may be the contracting party, then organise the company's incorporation, and finally enter into the appropriate agreement. If binding arrangements are needed earlier, the contracting party, the stage of incorporation and personal responsibility must be expressly clarified.

Make sure the franchise agreement, lease, financing arrangements and key supply contracts fit together. Having different contracting parties can leave the company earning the revenue while you remain personally responsible for core obligations.

4. Plan for administration and future changes

Do not compare legal structures solely on the basis of liability. An incorporated company involves additional set-up and administrative work, particularly for notarial procedures, Commercial Register requirements, financial reporting and disclosure. A UG is not a low-administration alternative to operating as a sole trader; it is also subject to special rules on building up reserves.

Ask an adviser to explain the tax implications and ongoing administrative requirements in light of your planned business size. Include the managing director's remuneration and the actual funding required. A low statutory minimum share capital does not mean that the franchise can be launched sustainably with an equally small amount of money.

Finally, check whether changes in shareholders or management require approval. A legal structure that suits you today is of little help if necessary organisational changes are later blocked by unresolved contractual terms.

Practical conclusion: Before signing, establish who will run the business, who will be the contracting party and who will be personally liable. Have the company formation and franchise agreement reviewed together, rather than treating them as separate tasks to be dealt with one after the other.