A franchise allows you to use the resources and existing customers of an already successful business. As a franchisee, you open a branch of another business and operate it as your own. You pay the franchisor an agreed amount for using their resources and contacts. Just like starting any business, it will require a structure to operate with. Read this article to find out what franchise business structure you will need.
Single company structure
There are a lot of benefits of setting up your new franchise as a propriety limited company. It will be a separate legal entity, capable of owning its own assets and liabilities. This way it can all be separated from you personally. This is also the easiest business structure to operate as there will be only one set of contracts and regulatory requirements.
The main downsides happen to come with the benefits though. If you run into financial difficulties, all the companies assets are at risk. So while it was beneficial to have it separate, it is also a risk. The good thing about a franchise is that because it is a branch of the parent company, you are operating under their license. This can actually offer some more protection for you.
Two-tiered company structure
This is another franchise business structure designed to help you protect your assets. It entails a relationship between an operating company and a holding company. This splits up the legal responsibilities and ownership of the assets for more protection. The holding company will have control and ownership of the assets, while the operating company will be able to enter into contracts and has the liabilities.
The biggest benefit of this is that if the operating company is sued, the assets are protected because it is technically owned by the holding company. However, as there are some exceptions to this, you should discuss with a lawyer before deciding on this structure.
The biggest disadvantage to this structure is the expenses and difficulty in managing it. As there must be 2 distinct companies, you will need to establish twice the amount of legal documents, paperwork and accounts.
While this is a viable franchise business structure, it may not be entirely necessary. This is because the franchisor is already the effective ‘holding company’. They already own and are responsible for the assets, and you are the effective operating company. There exists a contract between you and the franchisor as well. In a sense, it’s like your own two-tier business structure already.
Franchise trust structure
For this type of franchise business structure, there are 2 options of trusts. Family (discretionary) trust or unit trust. The difference between these 2 types of trusts is how the assets are distributed. A family trust will allow the trustee to choose how it is distributed, while for a unit trust it is not a choice. It is dependent on the amount of units they own, and their share received will be distributed accordingly.
There are a number of complications when it comes to tax with a trust structure. There are indeed tax benefits, and this should be discussed with your financial advisor.
On the other hand, this type of structure is the most expensive to set up. The trust must distribute the assets by the end of each financial year to avoid paying the highest tax rates. This is a problem if you need capital or want to attract investment, as it will appear that you have no assets.
Consider how long you want to stay in the franchise for, if you want to sell it soon or at all, and what you ultimate plans are. If you want to operate this franchise short term or sell soon, consider a different structure.
Conclusion
From the 3 franchise business structures, you will need to properly analyse what your intentions and long term plans are. Unsurprisingly, the more expensive it is to set up the more protection of your assets you will receive and the more complicated it will be to manage.
If you need to discuss your situation specifically, speak to a legal professional to see what is right for you.
