Sole trader or limited company: the contracting party for your first franchise

When expanding an existing business into a franchise network, you will usually negotiate with an individual, but may enter into the agreement with their company. This distinction affects liability, permits, invoicing and the continuation of the relationship. Before signing, establish which business entity will actually operate the outlet and take on the obligations. This is not simply a choice between a sole trader and a company: all the documentation needs to be consistent.

1. Distinguish between the candidate, the owner and the contracting party

The person presenting the business plan will not necessarily be the future franchisee in legal terms. They may be a shareholder in a new company, its director or simply the outlet manager. Do not treat these roles as interchangeable when drafting the agreement.

Prepare a brief identification sheet for each initial franchise outlet, covering:

• the contracting partner’s registered business name, registered office, business address and registration number;
• its legal form and tax details;
• its legal representative and how they are authorised to act;
• the person responsible for day-to-day operations;
• the entity that will employ staff, issue invoices and enter into contracts with suppliers.

Check these details against the relevant public registers maintained by AJPES, Slovenia’s Agency for Public Legal Records and Related Services. Check whether the signatory can sign alone or whether joint representation is required. If an authorised agent is signing, request appropriate evidence of their authority.

Carry out the same review on your own side. If one company owns the trade mark and another provides support, it must be clear who is granting the partner rights and on what basis. The contracting party must be able to deliver what it promises.

2. Understand the difference between an s. p. and a d. o. o.

Slovenian law does not prescribe a particular legal form for franchisees. A franchise network can include both sole traders and companies. The choice should reflect how the business will actually be organised, rather than simply the franchisor’s usual practice.

A sole trader (samostojni podjetnik, or s. p.) is an individual carrying on a business. They are liable for business obligations with all their assets. Their registered business name therefore does not represent a separate legal person that assumes liability in their place.

A limited liability company (družba z omejeno odgovornostjo, or d. o. o.) is a separate legal person. The company is liable for its obligations with its own assets, while its shareholders are generally not personally liable. Any personal guarantee is an additional commitment, not an automatic consequence of being an owner or director.

If you require a guarantee, have a lawyer specifically address its scope, duration and conditions for enforcement. A director’s signature on behalf of the company does not, in itself, amount to a personal guarantee.

Do not present either legal form to the candidate as universally the best option. They should review the tax, accounting and personal implications with their own adviser. Your main task is to set reasonable requirements concerning the partner’s ability to meet its contractual obligations.

3. Place the agreement within Slovenia’s legal framework

Slovenia has no dedicated franchising law, and franchise agreements are not specifically regulated as a distinct category of contract. They are subject to the general rules of the Obligations Code (Obligacijski zakonik, or OZ), including the principle of good faith and fair dealing. Freedom of contract is not unlimited: an agreement must not conflict with mandatory legal provisions or moral principles.

The Companies Act (Zakon o gospodarskih družbah, or ZGD-1) is relevant to the formation, representation and liability of companies, as well as the legal position of sole traders. Depending on the nature of the relationship, industrial property and competition law rules also apply, alongside sector-specific regulations.

There is no specific statutory requirement for a franchise pre-contractual disclosure document. This does not remove the general duty to act fairly during negotiations. Nor does business registration constitute specific approval to join a franchise network.

Put the agreement in writing. Since it will generally include a licence to use a trade mark or other rights, the OZ requirement for licence agreements to be in writing is also relevant. The details of the signatory, rights holder and licensee must be consistent with one another.

4. Check the entity before signing and opening

If the candidate has not yet incorporated the company, do not treat a draft bearing its proposed name as a final agreement with an existing company. First establish the sequence for incorporation, verification of details and signing. Have a lawyer structure any preliminary commitments so that it is clear who is taking them on.

Before operations begin, also check that the partner is registered for the relevant business activity and meets any specific requirements for carrying it out. Procedures available through Slovenia’s SPOT business support portal can simplify setting up a business, but registration alone does not replace permits or other operating requirements.

Prepare a checklist of supporting documents, assigning a responsible person and a submission deadline to each. Tailor the requirements to the type of activity; do not demand the same permits for every business model. Where permits are required, check that they cover the correct operator or business outlet.

5. Make provision for a later change of business entity

The partner may later propose operating through a different company. This is not merely a change to the details on an invoice: it may change the party responsible for the contractual obligations. Likewise, a sale of a shareholding is not the same as transferring the agreement to another legal person.

The agreement should therefore address separately the notification of changes in legal representatives, changes in ownership and proposed transfers of the agreement. Specify when consent is required, what supporting documents you need and how the continued validity of permits and guarantees will be checked.

Practical takeaway: before granting your first franchise, align three things: who signs, who operates the business and who is liable. Only then should you finalise the agreement and set the opening date.