Who Should Sign Your Hong Kong Franchise Agreement: You or Your Company?

When exploring franchise opportunities in Hong Kong, many prospective franchisees compare brands and fees first, leaving the decision about whether to operate personally or through a company until it is time to sign. Yet the contracting party determines who holds the franchise rights, who is liable for debts and whether the operating arrangements can be changed later. Even if you are the sole investor, settle this question before making payments or signing documents.

1. Understand the difference between a trading name, an individual and a limited company

A sole proprietorship is not a legal entity separate from its owner. Operating under a trading name does not mean that only ‘the shop’ is responsible for the franchise agreement, rent or unpaid supplier invoices; the owner will generally be personally liable. A Business Registration Certificate is not evidence of limited liability either.

A limited company, by contrast, has a separate legal personality. If the company enters into the franchise agreement, it will generally hold the contractual rights and bear the obligations. Shareholders do not become liable for all the company’s debts simply because they hold shares. However, a limited company does not provide blanket protection: signing a separate personal guarantee, giving a personal undertaking or engaging in unlawful conduct yourself may still create personal liability.

When comparing these arrangements, look beyond the cost of setting up. Ask an accountant to estimate the ongoing cost of compliance, including company secretarial services, accounts, audits and tax returns. Then ask a lawyer to assess the personal liability the brand requires you to accept. If the franchisor requires both you and your company to be named as franchisees, establish whether each will be liable for the full payment obligations.

Ask the brand three questions before signing:

• Will it accept a newly incorporated limited company as the franchise rights holder?
• What eligibility requirements apply to shareholders, directors or the person actually running the business?
• Does ‘franchisee’ in the agreement mean the company, you personally or both?

2. If the company does not yet exist, do not assume you can sign first and change the name later

A common approach is to pay a deposit and sign a letter of intent personally, then ask the franchisor to substitute the company’s name once it has been incorporated. However, replacing an individual with a company may amount to changing the contracting party, rather than simply updating contact details. The franchisor may have no obligation to agree, and incorporation alone does not automatically remove existing personal liability.

Section 122 of the Companies Ordinance (Chapter 622 of the Laws of Hong Kong) deals with pre-incorporation contracts. Broadly, someone purporting to enter into a contract on behalf of a company that has not yet been formed may be personally liable unless there is an agreement to the contrary. The company may ratify the contract after incorporation. However, a lawyer should review the actual documents to confirm how ratification, any subsequent agreements between the parties and the original signatory’s liability fit together.

The safer approach is to obtain the brand’s written approval of the proposed contracting entity, complete incorporation and then have an authorised person sign on the company’s behalf. If commercial circumstances genuinely require an earlier signature, the documents should specify a deadline for incorporation, the conditions for the brand’s acceptance and what happens to any money paid if the process is not completed.

If you have already signed personally, request formal documentation clearly stating when the rights and obligations transfer to the company, how payments already made will be credited and whether you are released from your original liabilities. Do not rely solely on a franchise sales representative saying, ‘We can change the name later.’

3. Check that the franchise rights, lease and payment arrangements align

Having the same brand name above the door does not mean that all the underlying documents relate to the same operator. For example, the company might hold the franchise rights while you personally rent the premises; another company might pay the franchise fee while sales revenue goes into a personal bank account. Such arrangements are not necessarily unworkable, but every difference needs a sound explanation and supporting documentation.

Before signing, prepare a ‘contracting-party checklist’ covering:

• Franchise agreement: The franchisee’s full name, company number and the capacity in which the signatory is signing.
• Premises documents: Who the tenant is and whether the actual occupier’s use complies with the lease.
• Purchasing and equipment: Who places orders, who owes suppliers and who owns the assets.
• Banking and payments: Who receives sales revenue and who pays royalties and refunds.
• Registrations and licences: Whether the business registration and licensing arrangements reflect how the business actually operates.

Where names differ, do not assume that changing one document to match the others resolves the issue. Check whether consent is needed from the landlord, franchisor, bank or licensing authority, and whether separate arrangements for use, payment or authorisation are required.

If you use personal funds to pay the company’s franchise fee, retain proof of payment and ask an accountant to record it appropriately as a capital contribution or an amount due between you and the company. The person making the payment is not necessarily the franchise rights holder; the receipts, accounts and agreement should explain the payment’s true purpose.

4. Hong Kong has no franchise-specific legislation, so protections must be documented

Hong Kong currently has no legislation specifically regulating franchising. Nor does it have a generally mandatory franchise disclosure document regime, franchise rights registration system or statutory franchise code of conduct. A brand’s acceptance of your application does not mean that the government has approved the franchise arrangement. Voluntary standards within the franchise sector are not equivalent to legal protection either.

Questions about the contracting party and liability are governed primarily by general contract law, common law and equitable principles. Misrepresentation disputes may involve the Misrepresentation Ordinance (Chapter 284). A limited company must comply with the Companies Ordinance, while business registration is governed by the Business Registration Ordinance (Chapter 310). Other legislation will apply according to the activities carried out; using a franchise model does not create an exemption.

Generally, anyone carrying on business in Hong Kong must complete business registration under the applicable procedures, usually within one month of starting business. Local company incorporation is covered by a separate one-stop company and business registration service. Business registration does not replace licences required for activities such as operating a food business, and incorporating a limited company does not mean that brand authorisation has been obtained.

Even where the company remains the same contracting party, changes to shareholders or directors may trigger change-of-control or approval provisions in the franchise agreement. If you intend to bring in investors later, establish at the outset which changes require consent, how to apply and what fees are involved, rather than discovering restrictions when you are seeking funding.

Practical summary: Before paying, establish who will hold the franchise rights, then use the same contracting-party checklist to review the agreement, lease, banking and registration documents. Where an individual signs first and a company takes over later, or different parties assume different responsibilities, obtain written arrangements and legal advice before proceeding.