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If you are purchasing a franchise, you might wonder if you can operate your business as a sole trader. Sole traders are the most common business structure within Australia. Typically, these businesses are relatively simple to register, operate and dissolve if necessary. This article will explore whether sole traders can operate as franchisees and some of the advantages and disadvantages of being a sole trader in a franchising context.
Making the decision to franchise your business can be difficult. This Franchisor Toolkit covers all the essential topics you need to know about franchising your business.
This Toolkit also contains case studies from leading franchisors including leading Australian franchises including Just Cuts, FlipOut and Fibonacci Coffee.
What is Franchising?
The franchising business model allows one business to operate under another’s brand. Furthermore, a franchisor licenses specific rights to franchisees, including their business’:
- name;
- brand;
- intellectual property; and
- business systems.
Additionally, these franchisees gain the right to sell a franchisor’s product or services in return for payment.
You can enter such an arrangement by signing a franchise agreement. Furthermore, all parties to a franchise agreement must comply with the Franchising Code of Conduct (the Code). This Code sets out the minimum conduct of participants in a franchising agreement.
Benefits of Buying a Franchise
There is a range of benefits to buying a franchise business. Firstly, a franchise could be a great option if you are unsure how to run a business. Most franchisors provide you with a confidential and comprehensive operations manual.
An operations manual will give you the essential information you need to operate the franchise. Additionally, it will detail the methods and systems you must follow. Furthermore, the upfront costs of purchasing a franchise are often much lower than starting a new business. You also do not need to rely on building a customer base, as it is likely that the franchise already has loyal customers willing to support your business.
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Can a Sole Trader Be a Franchisee?
If you are considering entering a franchising agreement as a franchisee, you might be wondering about the best business structure to choose. Subject to franchisor requirements, a franchisee can be a sole trader, partnership or company. In addition, you might also operate your franchise through a trust structure. However, the best business structure you choose for your franchise will depend on several factors, including any financial limitations and whether you want to limit your personal liability.
Benefits of Being a Sole Trader
There are many benefits to registering your franchise as a sole trader. Firstly, a sole proprietorship is the simplest business structure. In this way, it is easy to:
- set up;
- manage; and
- dissolve.
Furthermore, taxation as a sole trader is also relatively straightforward. Under a franchise system, your sole proprietorship can claim many tax deductions and exemptions, including:
- royalties and interest payments;
- franchisor training fees; and
- GST from payments to the franchisor.
Drawbacks of Being a Sole Trader
Despite the tax deductions available to sole traders, taxation for sole traders is much higher than for private companies. This is because companies get some tax benefits that sole traders do not.
However, one of the most significant disadvantages of being a sole trader is that it carries unlimited liability. Unlimited liability means the sole trader is personally liable for the business’ debts and liabilities. This is because the business is not a separate entity. Instead, the trader and the business are one. As a result, unlimited liability is often considered a significant downfall of the sole proprietorship business structure.
Key Takeaways
If you are considering entering a franchising agreement, you might be wondering about the best business structure to choose. A franchisee can be a sole trader, partnership or company. However, some key things to note about purchasing a franchise as a sole trader is that:
- sole traders can claim some tax deductions and exemptions relating to franchising;
- taxation for sole traders is much higher than that of private companies; and
- sole traders carry unlimited liability.
If you need assistance setting up a business as a franchisee, our experienced franchise lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A franchisee can be a sole trader, partnership or company. The best business structure you choose for your franchise will depend on many factors, including any financial limitations and whether you want to limit your liability.
There are several benefits to registering your franchise as a sole trader. Firstly, a sole proprietorship is the simplest business structure, making it easy to set up, manage and dissolve. Due to its simplicity, taxation as a sole trader is also quite simple. Sole traders can claim several tax deductions and exemptions relating to a franchise.
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