Franchising 101: The Pros and Cons of Different Franchise Business Structures

Operating your very own franchise with the right business structure is so much more than a matter of paperwork. Choosing a franchise business structure can actually seriously impact your personal life too – by selecting the right one for you, you’re limiting liability and maintaining control. But which franchise business structure do you choose? You may not have a choice if the franchisor states how you should structure your business in the franchise contract, but if it’s left up to you, you can use the pros and cons below to help make your decision.

What does the business structure directly impact?

• The set up process, including the paperwork, the permissions, licenses and clearances you need.
• How you raise the capital. This process can be difficult in some cases. To make it as smooth as possible, you want to choose the right business structure. This will determine the trading history and credit scores they refer to before they make a decision.
• How the profits are handled. The legal control you have over your franchise will impact how you get paid from the business activities. E.g. if you sell your equity, get a monthly paycheque or implement a profit-sharing contract among partners.
• How the liability is managed. If the business gets into debt, the business structure you choose dictates how the liability is shared and can protect your personal assets.
• **How you deal with the taxman.**The taxes your franchise will need to pay depends on the business structure and your personal taxes will depend on how you get paid.

Several structures can be used to establish your business operation. Here are the options, along with the pros and cons, available to franchisees. To make these assessments, we used the Gov.uk website and a blog by Companies House, the UK’s registrar of companies and trading fund of Her Majesty’s Government.

Sole trader

This is the most straightforward business structure and so is the most common for business owners with no or few employees. You’ll be responsible for preparing your annual accounts which will then be included on your tax return to be submitted to HM Revenue & Customs (HMRC) each year. You don’t need to present your accounts, but you should keep them updated and in a safe place in case your tax return is queried. If you have no assets to protect and can mitigate many of the risks that your business faces with adequate insurance, this could be the business structure to use when setting up a franchise.

Pros

• This is a low-cost, easy option that suits the franchise business model well.
• Other than an annual tax return, there is very little paperwork to complete.

Cons

• Commercially, you are the business – so you’re on the hook for all of your company’s liabilities.
• If your business is sued or you go bankrupt, your personal assets are at risk.

>> Read more:

• The Consequences of Choosing the Wrong Legal Business Structure For Your Franchise
• Franchising 101: 6 Reasons Why You Should Hire a Franchise Lawyer
• Understanding Franchising Law: Top 5 Issues to Consider

Partnership

Partnerships are a very common extension of the sole trader business structure. This works well for franchisees that wish to start a business as husband and wife or father and son, for example. A partnership has all of the benefits of the sole trader model but has the added advantage of the support of another person who can bring a range of skills and experience to the business.

Pros

• You get to share the challenges of running a business with your partner, and you get to celebrate the successes with them too.
• You get more flexibility to run your business with someone else to provide cover if you become sick or want to take a holiday.

Cons

• All partners are responsible for all the debts owed by the business, so you need to be careful about who you choose to buy a franchise with.
• Both partners must register as self-employed and submit separate tax returns.

Tips

• You’ll need to agree how the liabilities, ownership and profits of the business will be divided and this will be detailed in the franchise contract. You’ll also need to discuss what will happen to the franchise should one of you wish to leave the partnership.
• If one of you decides to continue to operate the business, you’ll need to transfer ownership of the franchise to the remaining partner legally. Your franchise contract will often state that ownership of the franchise cannot be changed without the consent of the franchisor, so you need to let them know that a transfer of ownership is taking place at the earliest opportunity.

Limited Company

To become a limited company, you need to become incorporated by registering with Companies House. If you choose to operate your business as a limited company, your personal financial risk will be limited to how much you invest in the business, including any guarantees you have given to secure financing. From a tax perspective, a registered company can leave you better off than you would be operating as a sole trader. As a company director, you’ll be taxed in the same way as your employees if you pay yourself a salary, or you can choose to take dividends as your payment.

Pros

• Your business will benefit from increased credibility.
• Your personal finances are protected as the company is deemed a separate legal entity to you as its director.
• More favourable taxation compared to a sole trader or partnership business structures.

Cons

• Increased administration and paperwork to complete.
• You must submit full statutory accounts and a company tax return to HMRC every year.
• If you have any employees, you’ll also need to pay employees’ income tax (PAYE) and National Insurance Contributions on a monthly or quarterly basis.

Tips

You should always consult an accountant and a solicitor before deciding on the right type of business structure that is appropriate for your franchise business model. However, with a limited company, the need for professional help is even more significant. There are a range of legal requirements, including the maintenance of the company’s public records, which are best dealt with by experts.

Limited Liability Partnership

A limited liability partnership (LLP) is a combination of the partnership and limited company models. This relatively new business structure is ideal for businesses in professional service industries. So, if you’re considering setting up a franchise as an accountant or a business coach, this could be the right legal structure for you.

Pros

• The level of liability is limited, so your personal assets are not put at risk.
• You benefit from the flexibility of a partnership arrangement while enjoying the security of a limited company.

Cons

• Doesn’t have the same tax benefits that are applied to limited companies.
• Each member must register as self-employed and submit a tax return to HMRC annually.

Choosing a franchise business structure – the takeaway

To guarantee that your franchise investment works for you, it’s vital to choose the correct business structure. Not only because of this, but it’s also very important to make sure you save money and time further down the line. Prioritise your long term interests when making the decision and always consult a professional before finalising your decision.

Check out our UK franchise directory to view our full list of franchise opportunities.