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If you wish to convert your corporate business into a franchise, you should first consider your current business structure before signing a franchise agreement. Often, businesses will need to undergo some restructuring to allow them to flourish as a franchise.
This article outlines the advantages and disadvantages of different franchise business structures to help you decide the best structure for your franchise system.
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Single Company
A single company franchise is where you set up a proprietary limited company to operate as the franchise. In this sense, the company operates as a separate legal entity that owns its assets and incurs its own liabilities.
Advantages
One of the main advantages of this structure is that it is relatively easy to operate. In addition, for a single company franchise, you will generally have a single set of accounts and regulatory requirements to meet.
Furthermore, running a single company franchise can help protect your personal assets as a business owner.
Disadvantages
However, one of the main disadvantages of this structure is that if your franchise business faces financial difficulties, you risk losing the business’ valuable assets and intellectual property. For example, if you need to wind up the company, you could lose all of the business’ assets. If this occurs, you will not be able to use the assets in other ways.
Two-Tiered Company
Some business owners set up a two-tiered company structure to operate their franchise. A two-tiered company structure generally consists of a holding company and an operating company.
The holding company owns the business’s assets and intellectual property, while the subsidiary company is the operating company. The holding company then owns 100% of the shares in the operating companies of the franchise system. These operating companies are the entities that enter into contracts and incur liabilities. Therefore, operating companies generally will not own any assets of the franchise business.
Advantages
Under this structure, you can generally protect your business’s assets when a third party sues the operating company. This is because the holding company owns the business assets. However, you should note that there are some exceptions to this rule. For this reason, discussing this structure further with a legal professional would be helpful.
Another advantage of a two-tiered company structure is that you can enjoy specific tax and investment benefits. It would help if you discussed these benefits with your financial advisor.
Disadvantages
The main disadvantage of this structure is that it incurs high startup and management costs. This is because you must create separate accounts and records for each company. Additionally, you will need legal agreements between the holding company and the operating companies for the licensing of any intellectual property. Moreover, this can become more complex as your franchise system grows.
Continue reading this article below the formTrust Structure
A trust is a legal relationship where the trustee owns the business’s assets and operates the business on behalf of the trust’s beneficiaries.
The two broad categories of trusts include:
- a discretionary trust, where the trustee chooses how to distribute the assets to the trust’s beneficiaries; and
- a unit trust, where the trustee does not have a choice in how to distribute the trust assets. Instead, the beneficiaries of a unit trust own a set amount of units, meaning you must make your distributions around these set amounts.
Advantages
There are asset protection benefits to operating a franchise through a trust as the trustee owns the business’s assets and operates the business on behalf of the trust.
Additionally, there are some tax benefits to operating a franchise through a trust. It would help if you discussed these benefits with your financial advisor.
Disadvantages
The main disadvantage of operating a franchise through a trust is that it is more expensive to set up than a company.
Additionally, a trust distribution can cause problems if your business needs working capital or wants to attract investment. This is because the trustee must distribute the trust’s income (and profit, if any) to the beneficiaries each financial year.
Key Takeaways
Different franchise business structures can help protect your business’ assets. However, each structure can incur different costs. Therefore, regardless of your chosen structure, you should seek legal and financial advice before turning your existing corporate business into a franchise.
If you have questions about franchise business structures, our experienced franchising 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 trust is a legal relationship where the trustee owns the assets on behalf of the trust’s beneficiaries.
A range of asset protection and tax benefits exist when operating a franchise through a trust. To find out more about these benefits, feel free to contact one of our experienced franchising lawyers.
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