What should be considered when choosing the legal form

Becoming self-employed in franchising is popular. No wonder, because franchisees can rely on comprehensive support from franchisors when starting their own business. Nevertheless, franchisees are considered independent entrepreneurs who own decisions need to meet for their company. These decisions include, for example, choosing the right legal form.

Franchisees and franchisors work hand and hand. However, the legal form of a franchisee has nothing to do with the legal form of a franchisor. This means that if the franchisor runs a GmbH, for example, the franchisee is not bound to this legal form, but can also set one up independently other form of business choose. Business founders who want to get into a franchising system are therefore faced with the question: “Which legal form suits me and my business start-up best?”

Which legal forms exist

Choosing the legal form is an important decision that company founders have to make at the beginning of the company formation. Because the legal form forms the formal framework of a company. This has numerous consequences, such as questions about personal liability or the type of taxes that have to be paid. The most important legal forms in Germany include:

  • one-man business
  • Partnerships
  • Corporations

(reading tip: Which legal form is the right one for founding your company?)

Which legal forms are particularly suitable for franchisees

It can be said that there is not “one” legal form that is equally suitable for all franchisees. Which form business founders ultimately decide on depends in particular on personal requirements – this is also the case in franchising. Among other things, when deciding on the appropriate legal form following factors play an important role:

  • type of business start-up
  • expected annual turnover
  • Establishing a company with business partners or alone
  • required capital requirement

However, the following legal forms have become established for franchisees particularly suitable exposed:

  • Open trading company
  • one-man business
  • entrepreneur company
  • Company with limited liability

However, it is not possible to say in general terms which type of company is suitable for founders. Because each of these forms of society offers different ones Advantages and disadvantageswhich should be taken into account when choosing.

The respective advantages and disadvantages of the legal forms for franchisees

The question of the right legal form has an impact on liability, image, old-age security and tax expenses (service tip: find a tax advisor). Therefore, the advantages and disadvantages of the most important legal forms in Germany are summarized below.

Open trading company

The advantages of this legal form are that no minimum capital is required to set up a company and that it is quite easy to set up a business compared to, for example, a corporation. In addition, the creditworthiness with the banks is particularly good due to personal liability.

A decisive disadvantage of the general partnership, however, is that the founders are liable with their entire private assets. In addition, an entry in the commercial register is mandatory. Although this alone is not a great effort, it does result in some requirements as far as the form of accounting is concerned.

one-man business

A major advantage of a sole proprietorship is that no seed capital is required when starting a business. Individual entrepreneurs have sole decision-making power.

In the case of sole proprietorships, liability is not limited to the company’s assets, but includes all assets. This comes into play when the company does not make as large profits as expected. In addition, there are no other shareholders who can contribute to the equity. So it has to be set up on its own.

entrepreneur company

Many founders who want to found a company together with others choose the legal form of an entrepreneurial company (UG). A big advantage of a UG is that there is no liability with private assets.

A disadvantage can be that the low share capital can act as a deterrent to potential financiers and business partners. In addition, the low share capital increases the likelihood of insolvency. There are additional taxes for the payment of pensions and salaries. In order to increase the credit rating in the long term, each UG must also set aside at least 25% of the profit as a reserve every year. This part may not be distributed to the shareholders. If the company grows, it can subsequently be renamed a GmbH.

Company with limited liability

In the case of a GmbH/Limited company, liability is limited to the company’s assets. The foundation is possible as a sole shareholder or as a team. The advantage of this type of company is that a GmbH appears more serious to business partners than, for example, a sole proprietorship and also offers better access to the financial market. Another advantage is the low investment liability for founders.

However, many founders cannot raise the share capital of 25,000 euros. In addition, this type of company is associated with different publication requirements and a high level of accounting work.

It is better to approach the choice of legal form within the framework of business start-up advice

Choosing the legal form is an important decision that founders have to make at the beginning and record it in a business plan. However, which legal form is most suitable depends on a number of criteria. If franchise founders notice that a company form is no longer suitable, it can be changed again at a later point in time.

The choice between the various forms of partnership or corporation is therefore more dependent on issues such as accounting, liability, taxes and raising capital.

In order not to make the wrong decision at the beginning, entrepreneurs should rely on business start-up advice. Because an experienced consultant knows which legal form is best suited for the respective franchising founder. In addition, a start-up consultant can help to create a well-founded business plan and set up founders pitfalls and stumbling blocks on the way of founding a company. Such advice can even be subsidized by the state. You can find out which funding programs are possible for you with the help of our free funding check.