Who should be the franchisor: an individual entrepreneur, an existing LLC or a new company?

Before selling a franchise, a business owner needs to decide who will act as the franchisor: an individual entrepreneur, an existing limited liability company (known in Russia as an OOO) or a separate company. This is not simply a matter of filling in the contract details. The choice determines who receives payments, who can grant intellectual property rights and who is liable to franchisees. A sustainable franchise network needs commitments to come from the person or company that can actually fulfil them.

1. Establish who is legally entitled to enter into the agreement

Russia has no standalone federal law on franchising, but commercial concession agreements—the legal framework used for franchising—are specifically governed by Chapter 54 of the Russian Civil Code. It would therefore be wrong to regard these relationships as unregulated. General rules on obligations and the intellectual property provisions in Part Four of the Civil Code also apply.

Under Article 1027 of the Russian Civil Code, commercial organisations and individuals registered as individual entrepreneurs (known as IPs in Russia) may be parties to a commercial concession agreement. This means that either an OOO or an IP can act as the franchisor. An individual who is not registered as an IP cannot be a party to such an agreement. Registration under Russia’s tax on professional income regime does not, by itself, replace the required business status.

The agreement grants the right to use a bundle of exclusive rights, including rights to a trade mark or service mark. The intended contracting party must hold the relevant rights or operate under another legally permissible arrangement, which will need to be checked separately.

Practical step: write down the full legal name of the proposed franchisor and, alongside it, the legal basis on which it can grant use of each promised asset. If the explanation is ‘it belongs to the founder’ or ‘it is registered to another company we own’, the structure is not yet ready.

2. Compare the three options without assuming one suits everyone

An existing IP. This is worth considering if the entrepreneur already runs the business, holds the necessary rights and will personally organise support for franchisees. There is no need to create a new legal entity simply to call it a ‘management company’. However, an IP is liable for business obligations with their personal assets, except those protected from enforcement by law. Operational and contractual risks are concentrated in one person.

An existing OOO. The company may already have employees, contractor agreements, equipment and intellectual property rights. This makes it easier to fulfil obligations to franchisees in practice. The downside is that obligations relating to company-owned outlets and the development of the franchise network remain within the same company. Separating budgets internally does not legally ring-fence risks.

A separate OOO. This allows franchisee agreements, income and support costs to be placed in a separate entity. It makes sense when there is a clear plan for the functions and resources the new company will receive. But incorporating an OOO does not, in itself, transfer brand rights, staff or technology to it. Nor does limited liability provide absolute protection for those who control the company: the law provides for circumstances in which they can be personally liable.

Compare the options using four questions: who holds the rights, who does the work, who receives the money and who is responsible for delivery? Choose not the most elaborate structure, but the one whose answers are backed by documents and real resources.

3. Do not leave the new company without the means to deliver

A common mistake is to register a separate OOO and put it in charge of sales while leaving all the resources needed to fulfil its obligations in the existing business. The franchisee then pays one company, receives training from another company’s employees, and effectively depends on the owner personally for permission to use materials.

Before signing the first agreement, draw up a table allocating responsibilities:

• Intellectual property rights: who holds the rights, and who is authorised to grant franchisees permission to use them, on what legal basis?
• Training and advice: who provides the services, using whose staff and under which agreement?
• Materials and software: who is entitled to supply manuals, photographs, designs and access to software?
• Costs: which company pays for support, and how does it receive the funds to do so?
• Liability: who does the franchisee turn to if commitments are not met?

If the new company engages the existing OOO to provide services, formalise their relationship: scope, deadlines, fees, acceptance procedures and the necessary access rights. Appointing a service provider does not, in itself, release the franchisor from its obligations to the franchisee.

Check intellectual property rights particularly carefully. Common ownership does not automatically entitle companies to use one another’s assets. Assignment of an exclusive right, licensing and sub-concession are different legal mechanisms; one cannot be substituted for another simply to make payment arrangements more convenient.

4. Test the structure before accepting payments

Walk through a sample transaction, from the commercial proposal to the fulfilment of obligations. Check who is named in the presentation, draft agreement, invoice and documents recording the handover of materials. If several people or entities are involved, their roles must be clear to the franchisee, and the basis for receiving payments must be documented.

Under Article 1028 of the Russian Civil Code, a commercial concession agreement must be in writing; failure to meet this requirement renders it void. The grant of the right to use the bundle of exclusive rights must be registered with Rospatent, Russia’s intellectual property office. Without registration, it is the grant of rights that is deemed not to have taken effect. This consequence should not be confused with the agreement being void because it was not made in writing.

Discuss tax, documentation and payments between related companies separately with an accountant. A new OOO does not guarantee savings: it brings its own costs and obligations. Creating a separate company should serve a clear business purpose, rather than merely redirecting payments.

Practical takeaway: choose a franchisor whose rights are properly documented and whose ability to fulfil its obligations is genuinely in place. If you opt for a separate company, equip it with the resources and agreements it needs first—and only then accept payments from franchisees.