Sole trader or limited company: who should sign your franchise agreement?

Choosing a brand is not the only decision to make before buying a franchise. You also need to decide who will be the franchisee: you as a sole trader, operating a Polish sole proprietorship (JDG), or a company you set up. Businesses within a franchise network remain legally independent. Your business structure therefore affects liability for debts and other obligations, tax and accounting arrangements, and your options for reorganising later. It is worth choosing it before signing any binding documents.

1. Establish which business structures the network accepts

Do not assume that the franchisor will accept every business structure. Ask whether the opportunity is open to sole traders, limited liability companies and companies with several shareholders. Request a draft agreement suited to your chosen structure. Security requirements and the obligations placed on those managing the business may differ.

In Poland, a franchise agreement remains an ‘unnamed contract’: there is no separate, comprehensive statute governing its terms, nor a dedicated state register of franchises. The main legal basis is the Polish Civil Code, including the principle of freedom of contract under Article 353¹. That freedom is limited by legislation, the nature of the legal relationship and principles of social conduct.

If you choose a company, the Polish Commercial Companies Code is also relevant, while tax legislation and the Accounting Act govern tax and accounting matters. Franchise codes of ethics and good practice do not replace these statutes and are not generally binding law.

Your first question to the network should be: is my proposed business structure acceptable, and how does it affect the terms of our relationship?

2. Compare liability, not just ease of registration

As a sole trader, you are the business operator. A trading name, separate bank account or separate expense records do not create an entity distinct from you. As a rule, you are liable for business obligations with all your assets. The position of assets jointly owned with a spouse requires separate analysis.

A Polish limited liability company (spółka z ograniczoną odpowiedzialnością, abbreviated to sp. z o.o.) is a separate legal person. It can be the contracting party, employ staff and incur obligations. Shareholders are generally not liable for its debts simply because they hold shares. This does not, however, automatically protect everyone involved in the company.

Pay attention to three distinct roles:

• A shareholder contributes capital and exercises the rights attached to their shares.
• A management board member manages the company’s affairs and may incur liability under the law, including in certain circumstances where enforcement against the company proves unsuccessful.
• A person providing security may assume a personal obligation towards the franchisor, independently of any shareholding.

If you fulfil all three roles, assess each separately. The suffix ‘sp. z o.o.’ alone does not tell you the true extent of your risk.

3. Calculate operating costs under both structures

Do not choose a structure solely on the basis of tax on current income. Your comparison should cover the full arrangements for funding and running the outlet, as well as taking money out for personal use.

Work with an accountant to prepare two scenarios using the same assumptions for sales, staffing and franchise fees. Include:

• start-up costs and ongoing accounting and legal fees;
• taxes and social security contributions applicable to your circumstances;
• the rules for putting your own money into the business;
• how remuneration or profits will be paid to you;
• record-keeping, reporting and organisational requirements.

A Polish limited liability company must keep full accounting books and meet financial reporting obligations. For a sole trader, the extent of record-keeping depends on the applicable statutory conditions. Nor should you assume that choosing a company always means no social security contributions: its ownership structure and the basis on which you work are among the relevant factors.

Money in the company’s bank account is not a shareholder’s personal money. Taking it out requires an appropriate legal basis and the correct tax and accounting treatment. Factor this in if the outlet is expected to support your family from the outset.

4. Make sure the contracting party matches the outlet’s operating arrangements

Before signing, check that the same appropriate person or entity is named in the franchise agreement, orders, sales documents and other contracts needed to run the outlet. Different entities can be involved in the venture, but their roles must be deliberately and clearly organised.

If a company is to be the franchisee, verify its details and rules of representation in Poland’s National Court Register (KRS). A shareholder’s signature does not necessarily bind the company. You need to establish who is authorised to represent it and whether any additional approvals are required.

Take particular care when signing documents before the company is registered. A Polish limited liability company ‘in formation’ can incur obligations, but special rules on representation and liability apply. Do not sign an agreement in your own name assuming that setting up a company later will automatically transfer all your obligations to it.

5. Plan for a change of structure before you need one

Ask what will happen if, after opening the outlet, you want to move from sole trader status to a company, bring in a co-owner or change the management board. The agreement may require you to notify the franchisor, obtain its consent or meet additional conditions.

Setting up a new company and transferring the business to it is not the same as converting a sole trader business into a company through a statutory conversion procedure. The effects on contracts, obligations and permits must be assessed separately. Do not accept assurances that it is ‘a simple change of details’ without establishing the precise procedure.

Practical takeaway: before signing, obtain the network’s approval for your chosen structure, compare the full costs with an accountant and ask a lawyer to assess your personal liability. Only then decide who should be the party to the franchise agreement.