Incorporation of the franchisee’s business into a private limited company
When the franchisor and franchisee conclude their franchise agreement, in most cases the franchisees sign the franchise agreement in the capacity of private individuals. The starting franchisee then enjoys various tax benefits, such as the start-up deduction.
Over time, it sometimes happens that for tax and other reasons it can be interesting for the franchisee to place his activities in a private limited company. Does the franchisor have to cooperate in this?
It is of course primarily dependent on whether the parties have arranged something in this regard in the franchise agreement. If this is not the case, the franchisor and franchisee must consult properly. After all, due to the contribution to a private limited company, the franchisor suddenly has to deal with another contracting party. A good franchisor would be wise to cooperate with the transfer of the company (and the franchise agreement) into a private limited company by the franchisee, but will set reasonable conditions for this. These conditions may consist of the fact that the franchisee must, of course, remain the majority shareholder or sole shareholder. The articles of association of the private company must also be assessed. For example, it must be prevented that the private company can be used for debt dumping from a holding company located above the company. It is also important that the franchisee remains privately bound to the obligations under the franchise agreement vis-à-vis the franchisor. After all, the franchisee has also entered into obligations towards the franchisor as a private person. In doing so, one must again guard against the risks concerning the independence of the franchisee and a possible fictitious employment relationship. The franchisor is therefore well advised to coordinate this with the franchisee before actually establishing a private limited company. If this consultation takes place properly, it is very well possible to effectuate things without surprises afterwards.
Ludwig & Van Dam franchise attorneys, franchise legal advice
Other messages
Article Franchise+ – “Recipient’s liability in a franchise context, what exactly is that about?” – mr. K. Bastiaans – dated November 24, 2020
The phenomenon of hirer's liability means that a third party can be held liable for the debts of another under certain conditions.
Franchisor liable for errors made by a franchisee? – mr. AW Dolphijn – dated November 23, 2020
A franchise organization asked the court to declare that the franchisor is not liable if a franchisee has made a serious mistake with a customer.
The Real Intentions of the Parties to a Franchise Agreement – Mr. C. Damen – dated November 23, 2020
What really was the idea of the parties when they concluded a franchise agreement?
Circumventing the prohibition of competition in the franchise agreement – mr. AW Dolphijn – dated November 10, 2020
A non-competition clause in a franchise agreement is often experienced as objectionable by franchisees, especially if the non-competition clause also applies after the franchise agreement has expired.
Article Franchise+ – “How do I get rid of my debts: Also for franchisees and franchisors” – mr. AW Dolphijn – dated October 20, 2020
A reorganization may also be necessary for franchisees and franchisors who are in financial difficulties in order to continue to exist.
Article De Nationale Franchise Gids: “Reinvestment obligation for franchisees has limits” – dated October 13, 2020 – mr. RCWL Albers
In practice, it often happens that franchisors choose to renew their franchise formula and the appropriate image