Sole trader or limited liability company before launching a franchise in Poland?

Are you growing an established business and looking to welcome your first franchisees? Before signing any agreements, decide who will act as the franchisor: you as a sole trader or a company. This is not just a tax question. Your choice affects liability, access to resources and continuity of obligations towards franchisees. Changing the contracting entity once the relationship is under way can involve considerably more work than putting the right structure in place beforehand.

1. Separate legal requirements from business decisions

In Poland, a franchisor does not have to operate as a limited liability company (spółka z o.o.). A sole trader, operating what is known in Polish as a jednoosobowa działalność gospodarcza (JDG), can also be a franchisor. There is no separate compulsory register of franchisors. Registration in CEIDG, Poland’s register of sole traders, or KRS, the National Court Register, follows from the chosen business structure, not from granting franchises itself.

Franchising, as a network of independent businesses, is not governed by a separate franchise act in Poland. A franchise agreement remains an ‘unnamed contract’: a type of agreement not specifically defined by statute, based primarily on the Civil Code and the principle of freedom of contract. The Competition and Consumer Protection Act, Industrial Property Law and tax legislation are also relevant. The Commercial Companies Code is central to choosing and changing a company’s legal form.

Nor is there a general statutory requirement to provide a special disclosure document within a specified period before entering into a franchise agreement. Descriptions of proposed regulations should not be treated as current law. This does not, however, remove liability for misleading information or for conducting negotiations contrary to good commercial practice. Franchise associations’ codes of ethics do not replace legislation.

2. Compare liability, not just accounting costs

A sole trader and their business are not separate legal entities. As a rule, you are liable for business debts and obligations with your personal assets. Claims relating to your own outlet, supplies and franchise relationships therefore fall on the same person.

A Polish limited liability company is a separate legal person. It is liable for its obligations with its own assets, while shareholders are generally not personally liable. This does not, however, mean that everyone involved in the venture is fully protected. Management board members may be liable in circumstances specified by law, including where enforcement against the company is unsuccessful. A personal guarantee can also expose the person giving it to liability.

Before deciding, prepare two lists:

• obligations: leases, loans, supplies, employment and future services or support owed to franchisees;
• resources: funds, equipment, rights to materials, IT contracts and the team’s expertise.

With an accountant and a lawyer, compare administration costs, taxes, arrangements for payments to the owner and the risks involved. A company with minimal financial backing does not become a credible business partner simply by being registered in KRS.

3. Choose how to make the change: statutory conversion or a new entity

Converting a sole trader business into a single-shareholder company under the Commercial Companies Code is different from setting up a new company and transferring selected business assets to it.

A statutory conversion requires, among other things, a conversion plan with supporting documents, examination of the plan by a statutory auditor, a declaration of conversion, company documents and registration in KRS. The plan and declaration must take the form of notarial deeds. Allow time for advisers’ work, the auditor’s examination and registration when planning the process.

As a rule, the converted company assumes the rights and obligations of the sole trader. However, permits, concessions, reliefs and tax implications need to be assessed separately. Do not assume that every aspect of the business transfers without exception. The sole trader remains jointly and severally liable with the company for business obligations incurred before conversion for three years from the conversion date.

Setting up a new company does not provide the same continuity. Transferring contracts, taking over debts, selling the business or contributing it to the company in kind all require separate analysis. Consent from contractual counterparties may be needed. Do not automatically apply guidance on converting one company into another to the conversion of a sole trader business.

4. Check whether the franchisor can deliver on its promises

The chosen entity must have the actual legal right to make every element of the business model available to franchisees. It is not enough for the company’s owner to hold the necessary resources personally.

For example, an entrepreneur sets up a company to sign franchise agreements, but the contracts with the software supplier remain with their sole trader business. If the licence does not allow the system to be made available to other entities, the company cannot safely promise franchisees access.

Prepare a simple checklist:

• Resource or contract: what does the franchisee need to operate?
• Current rights holder: who owns it or is party to the contract?
• Intended franchisor: on what legal basis will it use the resource?
• Action before launch: is consent, a new agreement, a licence or a transfer of rights required?

The review should also cover training staff, domain names, materials and personal data processing. Franchisees must know which entity is responsible for performing the agreement.

5. Decide when to start working with franchisees

The clearest approach is to sign the first franchise agreements only once the intended structure is in place. Check register entries, signing authority, the bank account for payments and the details shown on documents. Make sure the offer is also consistent with the identity of the entity entering into the agreement.

If the change takes place during an existing franchise relationship, prepare a notice explaining its basis, effective date and impact on billing and payments. Agree with a lawyer whether notification alone is sufficient or whether additional documents or consents are needed.

Practical takeaway: before signing the first agreement, establish not only the legal structure but also whether the future franchisor has the rights, resources and funding needed to meet its obligations to the franchise network.