Business Structures for Franchises

If you are considering operating a franchise and becoming a franchisee, you will want to make sure that you know what type of business structure you will operate under your franchise contract. Getting this right is highly important because it will determine how you manage profits, liability, and tax. There are numerous business structures for franchises. This article will explain some of the key business structures for franchises that you will want to consider if you are buying a franchise.

What is a Franchise Agreement?

A franchise agreement is how you begin a franchise relationship. The franchise agreement might, for example, give access to the franchised business’: 

• business model;
• brand;
• information and data; and 
• access to its supply chain (in some cases). 

A franchise relationship can create complications. To deal with those complications, you will want to make sure that you enter into a clear business structure where the roles and responsibilities of all parties are clearly defined. Specifically, the business structure will influence:

• how you set up the franchise, including documents and licences;
• how you raise money, by looking at credit scores and trading history;
• the way in which the profit is shared;
• what happens if the business gets into debt; and
• how much tax your franchise needs to pay.

Different Ways of Structuring a Franchise

Franchising is primarily a way for franchisors to expand their business and its brand. Additionally, as a franchisee, you are adopting a business model and brand with proven success. The type of structure you want for your franchise will depend on what is central or unique to the business, for example, a: 

• product;
• brand; or
• service.

Direct-Unit Franchise Model

You may want to use a direct-unit franchise model (also known as a single-unit franchise model). This is where you, as the franchisee, gain the right to operate in one location or in one branded business. Further, it is an agreement with one singular franchisor and the traditional franchise model.

A direct-unit franchise model can be ideal if you are looking to enter into a franchise agreement with a certain business in a particular area. As the franchisee, you are required to invest your own money and will manage the franchise on your own (with some support from the franchisor or master franchisee).  

Multiple-Unit Franchise Model

A multiple-unit franchise model is where the franchisee can run multiple units within the same franchise, in a specific area. The benefit of this model is that you are not reliant on the income from one single franchise. Having multiple franchises allows you to better account for any losses. 

Master Franchise Model

A master franchise relationship (otherwise known as master franchising) is similar to a multiple-unit franchise model. Further, a master franchise is where a franchisee pays the franchisor to: 

• become a ‘master franchisee’; 
• take on additional responsibilities; and
• act as the franchisor in a specific region. 

A master franchisee has the role of recruiting franchisees who are looking to become part of the franchise business and assist with training and support. This type of agreement is beneficial as it allows you to take on a managerial role and utilise your experience in the industry. Additionally, you may receive a percentage of royalties from the franchisees. 

Different Ways of Structuring Your Business

To deal with these issues, you will also need to adopt a business structure for your franchise. A business structure will determine your personal liability for debts and define how profits are distributed.

In some circumstances, you may not have a choice if the franchisor dictates how you are to structure your business in the franchise contract. However, if you are able to choose, there are various structures to consider. 

Sole Trader

One business structure for your franchise could be a sole trader structure. As a sole trader, you are responsible for preparing your financial documents, such as your annual accounts and trading history, to present to the Her Majesty Revenue and Customs (HMRC). This could be a good option for your franchise business if you can deal with the risks against your business on your own (for example, with insurance). 

Partnership

A partnership is similar to a sole trader structure. However, the key difference is that you will have another person who is your ‘partner’ in the franchise business. This can be good for sharing the difficulties of running a franchise business such as liabilities and costs. In other words, you have shared liability rather than personal liability. 

If you opt for this structure, then you will want to enter into a partnership with someone who is also able to bare the cost of potential future debts. Further, you want to come to an agreement on how to divide: 

• liabilities; 
• ownership; and 
• profit.

Limited Company

You can also run a limited company. A limited company must be incorporated by registering with the ‘Companies House’. Running a limited company can be beneficial as your personal liability is limited to the amount of money that you invest in the business. In this way, your personal finances will be more protected. Additionally, you will have a more favourable tax position. This structure can be good for increasing the credibility of your business. 

Key Takeaways

The structure of your franchise business will be highly important to manage your debts, profits, and the expansion of the franchised business. When deciding which of the business structures for franchises is best for you to use, it is recommended that you seek professional legal advice to prevent the risk of any mistakes in your contractual agreements with franchisors.

For help understanding business structures for franchises, LegalVision’s franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions