Choosing the Right Business Structure For Your Franchise

19/04/2018 17:15 | Start a business

Choosing the right business structure for your franchise

Setting up a franchise can be a less risky and more supportive route to becoming a business owner. Many of the elements of starting your new venture will be taken care of as part of the franchise business model, but youll still need to decide the best way to structure your business. You may not have a choice if the franchisor states how you should structure your business in the franchise contract, but if its left up to you to decide, how do you choose?

Several structures can be used to establish your business operation. Here are the options, along with the pros and cons, available to franchisees:

Sole trader

This is the most straightforward business structure and so is the most common for business owners with no or few employees.

Youll 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 dont 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 which 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 youre on the hook for all of your companys liabilities.
  • If your business is sued or you go bankrupt, your personal assets are at risk.

Its when your franchise business starts to grow that you may encounter problems as a sole trader. Since your profits are taxed as income, youll be paying 40% as soon as they exceed £34,501 and 45% above £150,000, if you have a standard Personal Allowance of £11,850.

Partnership

Partnerships are a very common extension of the sole trader business structure. This works well for franchisees who 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.

Youll need to agree how the liabilities, ownership and profits of the business will be divided and this will be detailed in the franchise contract. Youll also need to discuss what will happen to the franchise should one of you wish to leave the partnership.

In one of you decides to continue to operate the business, youll need to transfer ownership of the franchise to the remaining partner legally. Your franchise contract will require that ownership of the franchise cannot be moved 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 through a 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 is better off than a sole trader. A limited company must pay corporation tax on its profits which is currently set at 19%. As a company director, you would be taxed in the same way as your employees.

Pros

  • Your business will benefit from increased credibility.
  • Your personal finances are protected as the company is deemed as a separate legal entity to you as a 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, youll also need to pay employees income tax (PAYE) and National Insurance Contributions on a monthly or quarterly basis.

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 is a range of legal requirements, including the maintenance of the companys 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 youre 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

  • Doesnt 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.

Figures based on 2018/19 tax year.

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