Reading time: 5 minutes

There are a number of structures to consider when purchasing an existing franchise or setting up a new one. These include: operating as a sole trader, a partnership, a company, a two-tiered company structure or through a trust. This article considers the advantages and disadvantages of each franchise business structure.

Single Company

Setting up a proprietary limited company to operate a franchise will protect your personal assets, as a company is a separate legal entity. It is capable of owning its own assets and liabilities and entering into contracts on behalf of the franchise.

It is a more straightforward structure to operate than a two-tiered company or trust. This is because you will generally have a single set of accounts and regulatory requirements to meet.

There are some potential disadvantages of having a single company operate a business. If your company falls into financial difficulties, generally all of the valuable assets and intellectual property of the business would be at risk. If you needed to wind up the company, you could potentially lose all of the business’ assets. This is important to consider if you want to have these assets for future use.

In the case of a franchise system, it is common for the franchisor to be the owner of the intellectual property of the business. They will then license this to your company for use in operating the franchise. This means that these more valuable assets would not be at risk if your company fails.

Two-Tiered Company

Some businesses decide to set up a two-tiered company structure to protect the valuable assets of the business. This is usually done through a holding company and operating company relationship.

The holding company owns the assets and intellectual property of the business and the subsidiary company is the operating company. This means that the subsidiary company is the entity that enters into contracts and incurs liabilities. It does not own any assets of the business.

If a third party sued the operating company, the assets of the business would generally be protected because they are owned by the holding company. There are exceptions to this, however, so it is important to discuss this with a legal professional. Some other advantages can include tax and investment benefits which should be discussed with your accountant or financial advisor.

The main disadvantages of this structure are that it is expensive to set up and manage. This is because you need to have clearly separated accounts and records for each company. You will also need legal agreements in place between the companies for the licensing of any intellectual property.

As mentioned in the above section, in a franchise relationship, generally the franchisor is the owner of the valuable assets of the business; so operating a franchise through a two-tiered structure may be unnecessary in these circumstances.

Franchise Trust Structure

The final structure to consider operating your franchise through is a trust. There are two different types of trusts, discretionary (family) or unit trusts. With either trust type, there is a trustee that owns the assets of the business and operates the business on behalf of the trust.

A discretionary trust allows the trustee to choose how to distribute the assets to the beneficiaries of the trust. A unit trust is different in that the trustee doesn’t have the choice in how it wants to distribute the assets. The beneficiaries of a unit trust own a set amount of units and receive a set amount of the distribution based on this.

With a trust, the trustee is the legal entity, not the trust itself. A trustee can be an individual or a company. The advantages of a trust are that there are tax and asset protection benefits. These should be discussed with an accountant to see how this would affect your particular circumstances.

The disadvantages of a trust is that it is more expensive to set up than a company. This is particularly so if you also want to set up a corporate trustee. The trust must distribute the profit/income of the trust to the beneficiaries each financial year to avoid paying the highest tax rate. This can be a problem if your business needs working capital or wants to attract investment.

Whether or not a trust structure will work for your franchise will depend on:

  • what your business plans are;
  • how much working capital the franchise requires to operate; and
  • how long you want to be in the franchise for.

Issues to Consider

Now that you know the structures available to you, it is important to consider your particular circumstances and other requirements specific to the franchise you wish to purchase.

For example, while there are benefits of operating a franchise through a company, franchisors often require franchisees to enter into a personal guarantee. This is to effectively get around the personal asset protections of a company. This means that you would be personally liable in your dealings with the franchisor. Despite this, a company structure would still provide personal asset protection in your dealings with third parties, such as customers or suppliers.

If you wish to set up a company to operate your franchise, it is also important to consider how you will own your shares in that company. You can own your shares individually, through another company or a trust. Discussing this with an accountant will help to understand the tax implications of each personal ownership model.

The Ultimate Guide to Setting Up a Franchise

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.

Download Now

Key Takeaways

Choosing the right business structure for your franchise can be complicated. You will need to consider the best option for your business and examine all the relevant circumstances. Popular business structures include:

  • single companies;
  • two-tiered companies; and
  • franchise trust structure.

If you have any questions about choosing the right business structure for your franchise, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Webinars

Everything You Need to Know about SaaS Agreements

Thursday 7 April | 11:00 - 11:45am

Online
Understand which contracts will protect your SaaS contract from risk, and how. Register for free today.
Register Now

What to Consider When Buying a Tech or Online Business

Wednesday 13 April | 11:00 - 11:45am

Online
Learn how to get the best deal when buying a tech or online business. Register for our free webinar today.
Register Now

Corporate Governance 101: Responsibilities for New Directors

Wednesday 27 April | 11:00 - 11:45am

Online
If you are a new company director, join our free webinar to understand your legal compliance obligations. Register today.
Register Now

Rogue Directors and Business Divorces: How to Remove a Director

Thursday 28 April | 11:00 - 11:45am

Online
Removing a board director is not simple. Join our free webinar to learn how to handle rogue directors. Register today.
Register Now

Employment Essentials for Tech Businesses

Thursday 5 May | 11:00 - 11:45am

Online
Protect your tech business and your employees by understanding your employment legal obligations. Register for our free webinar today.
Register Now

How to Protect and Enforce Your Trade Mark

Wednesday 11 May | 11:00 - 11:45am

Online
Protect your business’ brand from copycats and competitors. Register for this free webinar to learn how.
Register Now

How Franchisors Can Avoid Misleading and Deceptive Conduct

Wednesday 18 May | 11:00 - 11:45am

Online
Ensure your franchise is not accused of misleading and deceptive conduct. Register for our free webinar today.
Register Now

New Kid on the Blockchain: Understanding the Proposed Laws for Crypto, NFT and Blockchain Projects

Wednesday 25 May | 10:00 - 10:45am

Online
If you operate in the crypto space, ensure you understand the Federal Government’s proposed licensing and regulation changes. Register today for our free webinar.
Register Now

How to Expand Your Business Into a Franchise

Thursday 26 May | 11:00 - 11:45am

Online
Drive rapid growth in your business by turning it into a franchise. To learn how, join our free webinar. Register today.
Register Now

Startup Financing: Venture Debt 101

Thursday 23 June | 11:00 - 11:45am

Online
Learn how venture debt can help take your startup to the next level. Register for our free webinar today.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year - Australasian Law Awards
  • 2019 Most Innovative Firm - Australasian Lawyer