147
i
c
e
regard to the sale of a business
manzoor ishani is a
by a partnership is similar to that
senior consultant solicitor h
i
s
E
e

a
d
v
of a sole proprietor.
with Sherrards (Solicitors),
There are other forms of
a commercial practice
partnership such as limited
advising franchisors and franchisees in
liability partnerships, limited
the UK and internationally
f
r
a
n
c
partnerships,  xed income
(01727 832 830, mgi@sherrards.com;
www.sherrards.com). He has
partnerships etc, but they are not
specialised in franchising for more than
within the scope of this article.
30 years and is a former member of
the Legal Committee of the British
Limited company Franchise Association. He is co-author
A third option for a franchisee
of Franchising in the UK, Franchising in
is to incorporate. This means
Europe and Franchising in Canada, and
that the franchisee forms a
has helped UK companies franchise
into more than 27 countries.
limited liability company, e.g.
XYZ Limited. This company will
issue shares to the individual, who could be someone who might have
been a sole proprietor or it could be two or more people who might
otherwise have been partners. They will all become shareholders in the
percentages that they agree.
In law, a limited company is a legal entity and exists in its own right.
The limited company will therefore be the entity which will sign the
franchise agreement and which will be bound by its terms.
With regard to the ownership of the business, it is the limited
company which will own the business and any debts of the business will
be the debts of the limited company. There is no chain beyond that so
that, if the company cannot pay its debts, the creditors cannot pursue
the individual shareholders. In this case, there is no personal liability as
there is for a sole proprietor or a partnership.
Newly formed insubstantial companies are seldom taken at face
circumstances, if they are to be co-owners, they can be said to be value and franchisors, banks and other people who could be owed
operating as a partnership and each person’s share of ownership will be money by the limited company, will usually ask for the personal
determined by whatever they agree. It does not necessarily have to be guarantees of the shareholders and to the extent that the shareholders
50:50. However, so far as the public is concerned, they are treated as if give personal guarantees, their position is no different from those of a
they own the business together as one person, i.e. jointly, without any sole proprietor or a partnership. So, although in theory it is possible for
reference to how much of the business is owned by each of the partners. an individual to avoid liability by trading through the means of a limited
Their liability is usually referred to as ‘joint and several’ and means that, if liability company, in practice this doesn’t often happen because many
the business owes money and the creditor wants to sue, the creditor has people will refuse to deal with such a company unless its shareholders
a choice of suing only one of the partners for the whole of the debt or give their personal guarantees.
all of the partners or some of the partners. Effectively, the creditor can When the time comes to selling the business, it is the company
‘cherry pick’ whom to sue. which sells the business. The proceeds of sale will go into the
More importantly, the position is that any partner (like a sole trader company and the company will then distribute
acting by himself or herself) can enter into commercial transactions the money to the shareholders generally
and arrangements which commit the business, except that in this case in the proportion in which they hold their
the partner will be committing all the other partners as well, even if shares. Pro ts made by the company will be
they have no knowledge of that particular arrangement or transaction. subject to corporation tax, and the only way
The signature of one partner is enough to bind all the other partners. that the individual shareholders can get
One, therefore, has to be very trusting of one’s fellow partners! A money out of the company is by
debt incurred by one partner in the course of the business will be, way of salary and or dividends,
effectively, the debt of all the partners and it won’t be suf cient for both of which will be
one partner simply to pay his or her ‘share’ of the debt; he can still taxed as income.
be pursued for the whole amount. This, of course, does not prevent a In summing
partner from seeking redress from his fellow partners, but that is not up, it is
something that the public (which includes customers) is interested in or important
necessarily concerned about. to choose the right vehicle for owning
So far as the franchise agreement is concerned, it is common and operating a business, involving as it
practice for a franchisor to require all the partners to sign the franchise does various elements such as tax, liability,
agreement in their personal capacity, because a partnership does accountability etc. Having chosen one of them, it
not exist in law, it is only the individuals collectively that constitute a is always open to a franchisee to change to another
partnership. So a breach of contract will be deemed to be a breach by medium, but usually this will require the consent of
all the partners as if they were all acting together. The position with the franchisor. ■
www.businessfranchise.com April 2009
BF146-147_Manzoor_Apr09 x.indd 3 26/2/09 11:32:19
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