Franchise Legal Structures: Where Do I Stand?
When buying a franchise, you may have to decide on a legal structure for your new business. In some circumstances this will be determined for you; larger franchises often dictate the structure that should be used, with many demanding that their franchisees establish limited companies. But in the case of smaller franchises, it is likely that it will be left up to you to decide how you wish to arrange your legal affairs.
Choosing a legal structure is one of the most important steps a new business owner needs to take. Each option has its own advantages and disadvantages – and, to a great extent, your choice will depend on your own circumstances.
Sole TraderA sole trader arrangement is the easiest to set up, and the one that confers the least severe regulatory burden on the business owner. There is no registration required to set up as a sole trader. You must register as self-employed, but you need not register your business with Companies House. After this you have a responsibility to keep accurate records of all business income and expenditure, and you will be required to complete an annual Self Assessment tax return by January of each year.
Despite the lack of paperwork, there are some significant drawbacks to a sole trader arrangement. Primarily, you will assume personal liability for any debts you run up. Similarly, if you are sued, you will be personally liable in law. If you operate in a sector that may leave you open to litigation, you should therefore seriously consider alternatives to a sole trader arrangement.
Limited CompanyThere is a little more paperwork involved if you wish to set up a limited company. You will be required to register your company with Companies House, a process that most new company directors choose to entrust to a formations specialist. You can expect to pay around £100 for this service.
Your limited company will be required to pay corporation tax and, as a result, you will have to complete an annual return for Companies House and HMRC. As a company director you will also probably have to complete your own Self Assessment tax return. If your company employs anyone you will have to run a payroll system.
Crucially, though, company directors and their firms are treated as separate legal entities. This means that you will only be personally liable for your own investment in the firm, and not for any debts run up in the company’s name.
PartnershipPartnerships are a particularly popular legal structure for franchises, as they offer some of the same protection from liability provided by limited companies while allowing partners to adopt a collaborative approach to the running of the company.
Partnerships must be registered, just like limited companies. You will have to draw up a document that outlines the way the partnership will be run – who makes which decisions and, crucially, how the profits will be shared. This is a vital document, and should be drafted with professional help – even if you are going into business with a friend.
Your choice of legal structure will have significant implications for the future management of your business. It is therefore vital that you make the right choice. Make sure that you seek independent professional advice before making a decision.