Franchising a Hong Kong Business: Clarifying Responsibility for Business Registration and Licences

An existing business registration and licences for a company-owned outlet do not mean that a franchisee can simply use them. When building a franchise network in Hong Kong, businesses should distinguish clearly between who operates the outlet, who applies for licences and who holds them. This helps avoid discovering, after brand rights have been granted and equipment purchased, that the operating arrangements do not meet licensing requirements. The task is not simply to collect certificates, but to ensure that every franchised outlet has an appropriate legal and administrative basis for operating.

1. Distinguish between brand authorisation, business registration and operating licences

Hong Kong currently has no legislation specifically regulating franchising, nor any generally applicable franchise filing requirement, statutory franchise disclosure regime or mandatory franchising code. The filing and eligibility requirements under mainland China’s Regulations on the Administration of Commercial Franchises are not conditions for opening a local franchised outlet in Hong Kong.

However, the absence of specific franchise legislation does not remove the need to register a business or comply with other laws. Franchise agreements are subject to general principles of contract law. Businesses must comply with the Business Registration Ordinance (Cap. 310), while operating through a company also brings the Companies Ordinance (Cap. 622) into play. Brand use involves the Trade Marks Ordinance (Cap. 559), and operating arrangements may also be subject to general legislation such as the Competition Ordinance (Cap. 619).

Franchisors should explain these three distinct concepts clearly to prospective franchisees:

• Franchise agreement: sets out the rights to use the brand and operating system, together with each party’s responsibilities.
• Business registration: fulfils the obligation to register a business; it does not mean that the government has approved all its trading activities.
• Operating licences or permits: must be obtained according to the activities undertaken and the requirements for the premises. For example, operating a restaurant generally requires an appropriate licence from the Food and Environmental Hygiene Department.

Franchisors should not describe acceptance as a franchisee as confirmation that government requirements for opening have been met.

2. Identify the actual business operator first

An individual may conduct the initial franchise discussions, but a newly incorporated company may ultimately sign the agreement and operate the outlet. Before finalising the documents, the franchisor should check the party signing the franchise agreement, the operator named in the business registration, the licence applicant and the entity that will actually receive payments and employ staff.

These roles do not necessarily have to be held by the same person or entity in every arrangement. However, any differences should have a clear basis, and their acceptability should be checked against the relevant licensing requirements. For example, signing the franchise agreement through a company does not mean that the franchisee can operate under a licence held personally by its founder or by the franchisor.

It is advisable to create a business operator verification form recording the legal name, business registration details, company particulars, business address, business activities and the applicant for each licence. If names differ across documents, clarify the reasons rather than relying solely on the franchisee’s verbal assurances.

Under the Business Registration Ordinance, a person carrying on business in Hong Kong must generally register the business within one month of commencing business and display a valid business registration certificate at the business premises. This registration deadline is not a grace period for unlicensed trading. Activities requiring a licence in advance must still obtain approval in accordance with the relevant rules.

3. Set out application and ongoing compliance responsibilities in the agreement

A clause stating only that “the franchisee must comply with all laws” is not enough to allocate day-to-day responsibilities. Franchisors should draw up a licensing responsibility checklist based on the pilot outlet’s actual activities, then have it verified by professionals familiar with the relevant field.

For each registration or licence, the checklist should specify at least:

• who will identify the applicable requirements, submit the application and respond to the relevant authority;
• who will provide plans, equipment details or other supporting evidence;
• who will pay application, consultancy, remedial work and renewal costs;
• the validity period, attached conditions and location of stored documents;
• who must notify the other party and take action if an application is refused or a licence expires or is suspended.

Application support from the franchisor should not be understood as a guarantee of approval. The agreement should distinguish between providing information and coordination support and assuming responsibility as the licence holder. Nor should it suggest that a private contract can override the statutory requirements imposed on licence holders by the relevant authority.

The franchisor may also stipulate that regulated activities must not be carried out under the brand until the necessary approvals are in place. However, the specific restrictions and consequences should be clear, reasonable and reviewed by a lawyer.

4. Establish a review procedure for subsequent changes

Licence management does not end when the outlet opens. Adding products, changing production methods, expanding services, altering premises or replacing the business operator may require notification, an amendment application or a fresh licence. The actual requirements must be confirmed with the relevant authority.

In particular, when a franchisor asks its entire network to introduce a new service, it should not assume that every franchised outlet can do so simply because the service is feasible at company-owned outlets. The franchisor should first check the licensing conditions for different outlet formats before issuing operating instructions.

A simple procedure can be added to the operations manual: the franchisee first submits details of the proposed change; a designated person checks its licensing implications; professional advice or confirmation from the relevant authority is obtained where necessary; and approval documents are then retained and records updated. The franchisor’s consent to a change is not government approval.

Practical takeaway: Before recruiting franchisees, complete a business operator and licensing responsibility schedule for one model outlet, then check each outlet individually. Clearly allocating responsibility for applications, costs, renewals and changes offers both parties better protection than a sweeping promise that “head office will take care of everything needed to open”.