Concept of Franchise Business
Concept of Franchise Business- The term "franchise business" describes an continuous business relationship in which a franchiser allows its franchisees to use its own trademarks, service marks, trade names, signs, or any other business marks in selling goods (including raw materials and auxiliary materials) or services in compliance with certain quality standards or business methods, and supports, trains, and controls its franchisees in regard to their management, business activities. etc., and in which franchisees pay franchise fees to their franchiser in return for the use of said business marks and the support and training provided for their management, business activities, etc. (Subparagraph 1 of Article 2 of the 「Fair Transactions in Franchise Business Act」).
Basic Commercial Activities
- A franchise business (franchise) encompasses the "activities involving business by consent to the use of a trade name, trademark, etc." and is a type of basic commercial activities (Subparagraph 20 of Article 46 of the 「Commercial Act」).
Conditions for Franchise Business
- A franchise business shall meet each and every condition stated below (Subparagraph 1 of Article 2 of the 「Fair Transactions in Franchise Business Act」).
· A franchiser allows its franchisees to use its business marks.
√ Irrespective of the registration of business marks, it is permissible if a third party can appreciate the business marks independently.
· A franchisee sells goods or services in compliance with certain quality standards or business methods.
√ If a franchiser supplies only goods, etc. irrelevant to the main business of a franchisee, it is not a franchise business.
· A franchiser supports, trains, and controls its franchisees in regard to their management, business activities, etc.
√ If a franchisee fails to follow the business policy of a franchiser but is not subject to any disadvantage, it is not a franchise business.
· A franchisee pays franchise fees to a franchiser in return for the use of business marks and the support and training provided for its management, business activities, etc.
√ Even where a franchiser supplies a franchisee goods at a price that is higher than the wholesale price, franchise fees shall be paid.
· Continuous business
√ If a franchiser provides only temporary support, it is not a franchise business.
Division of franchise business from similar concepts
- Please note that a business transaction or a merchant that falls under any of the following categories is not a "franchise business."
· Commission agent: A person who makes a profit or a loss from the sale of goods under his/her own name belong to another and receives certain commissions therefor (Article 101 of the 「Commercial Act」).
· Commercial agent: A person who does not perform a commercial transaction on his/her own but engages in the business of acting on behalf of another merchant as an agent or a broker for such merchant (Article 87 of the 「Commercial Act」).
· Chain business: The term "chain business" refers to a business that directly operates multiple retail stores in the same field of business (referring to direct operation of stores under their responsibilities and according to their calculations in their own stores or rented stores; the same shall apply hereinafter) or that supplies commodities, raw materials, or services to multiple retail stores in the same field of business, while consistently providing management counseling thereto (Subparagraph 6 of Article 2 of the 「Distribution Industry Development Act」).
Parties in Franchise Business
Prospective franchisee
- The term "prospective franchisee" refers to any person who discusses or negotiates with a franchiser or a master franchisee with intent to sign a franchise agreement (Subparagraph 4 of Article 2 of the 「Fair Transactions in Franchise Business Act」).
Franchisee
- The term "franchisee" refers to a business entity that holds a franchise license granted by a franchiser to run a franchise store in relation to a certain franchise business. In other words, where a prospective franchisee enters into a franchise agreement with a franchiser, he/she becomes a franchisee (Subparagraph 3 of Article 2 of the 「Fair Transactions in Franchise Business Act」).
Franchiser
- The term "franchiser" refers to a business entity that grants franchisees a license to run a franchise store (Subparagraph 2 of Article 2 of the 「Fair Transactions in Franchise Business Act」). When it is difficult for a franchiser to directly manage a number of franchisees, the franchiser may have master franchisees for individual regions.
Scope of Laws and Regulations for Franchise Business
Exclusion from application of the 「Fair Transactions in Franchise Business Act」
- In any of the following cases, the 「Fair Transactions in Franchise Business Act」 shall not apply (Article 3 of the 「Fair Transactions in Franchise Business Act」, Article 5(1) and (2) of the 「Enforcement Decree of the Fair Transactions in Franchise Business Act」).
· The total franchise fee that a franchisee pays to a franchiser during the period of up to six months from the date of the initial payment of the franchise fee does not exceed one million won.
· Annual sales of a franchiser are less than KRW 50 million [in the case of opening and operating direct retail stores (directly managed stores upon the responsibility and planning of the franchiser) that sell products or services according to the same quality standards or business methods as the franchise business, their sales are included)].
※ Provided, however, that this shall not apply where the number of franchisees which have entered into a contract with a franchiser is more than or equal to five (Article 5(5) of the 「Enforcement Decree of the Fair Transactions in Franchise Business Act」).
· Where a franchiser has opened and operated for more than one year a direct retail store that sells goods or services in compliance with the same quality standards or business methods as a relevant franchise business before starting its franchise business, and its annual sales are less than 200 million won (including sales of the direct retail store).
※ In this case, the amount shall be calculated in compliance with the following as per Article 5(3) and (4) of the 「Enforcement Decree of the Fair Transactions in Franchise Business Act」.
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Classification
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Details
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Where one year has elapsed after a franchiser started a franchise business
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① Where a franchiser prepares a profit and loss statement, the amount shall be based on the sales stated in the profit and loss statement of the preceding business year.
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② Where a franchiser does not prepare a profit and loss statement, the amount shall be the total amount of the tax basis and the amount of tax-free income on the final return of value-added tax for the preceding two taxation periods.
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Where one year has not elapsed after a franchiser started a franchise business
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The total amount of the tax basis on the final return of value-added tax (where the franchiser has failed to file the final return of value-added tax, referring to an estimated return of value-added tax) from the time the franchiser started its business until the franchiser filed the final return of value-added tax finally shall be deemed the amount referred to in ②.
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Exceptions
- Even if the total franchise fees or the annual sales of a franchiser fall short of a certain amount or scale, some provisions of the Fair Transactions in Franchise Business Act shall apply, as follows (Article 3 of the 「Fair Transactions in Franchise Business Act」 and Article 5(1) and (2) of the 「 Enforcement Decree of the Fair Transactions in Franchise Business Act」).
· Provisions prohibiting a franchiser from providing false or exaggerated information to a franchisee (Article 9 of the 「Fair Transactions in Franchise Business Act」)
· Provisions governing the return of franchise fees (Article 10 of the 「Fair Transactions in Franchise Business Act」)