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A great way to get into business in New Zealand is through franchising. Franchising is a business structure in which one person (‘the franchisor’) lets another party (‘the franchisee’) use and replicate their business model in a separate location. It is beneficial for franchisees as you can skip the startup stage and implement a proven business model. However, if you are a franchisee or are looking to become one, there are a few legal considerations that you should think about. This article will address what they are. 

How Should I Structure my Business?

The first thing franchisees should think about is how to structure their business. There are three main ways of structuring your business. These are;

  • sole trader;
  • partnership; and
  • company.

Each one of these business structures has its unique share of advantages and disadvantages.

Sole Trader

A sole trader model is the stock standard model for those who work for themselves and are the sole owner of your business. 

Advantages

Disadvantages

As a sole trader, you are entitled to keep all the profits. This is because you are the sole shareholder.

You have unlimited liability. This means that if your business becomes insolvent, your personal assets could be sold to pay off debts.

You retain control over your business and are the only person who can make decisions. This means you can change and alter the business in whatever way you want.

As you are the sole owner, you are not able to take breaks or pass on decisions to somebody else. This may be overwhelming for some business owners.

Partnership

A partnership is a business structure where two or more people run and own a business. The shareholders take their share of the profits.

Advantages

Disadvantages

Easier to establish than a company as the start up costs are low.

Each partner is jointly liable for the debts of the company and also liable for the debts of their partnership holding.

As there is more than one person who owns the business, there is more capacity to borrow money as well as more capacity to raise capital among the partners.

Each partner is liable for the actions of other partners in the business. This means each partner should be someone who you consider trustworthy.

Company

A company is a business model in which an entity is created by one or more people to engage in business affairs. 

Advantages

Disadvantages

All shareholders of a company have limited liability. This means that if the business becomes insolvent, the shareholders are not personally liable, and their personal assets cannot be sold to pay off debts.

A company can be expensive to start and the process is more complicated in comparison to a sole trader or partnership.

It is easier to bring on new shareholders and, in turn, raise capital. This is beneficial if the business is looking to grow.

Some company affairs can be made public through the companies register and other reporting databases. 

Which Model Should I Choose?

Although all three business models are sufficient to become a franchisee, the most popular sturcture is a company. This is because of limited liability. Most business owners do not want to be personally liable for company debts. If you want to protect your personal assets but do not want to set up a company, then you should consider putting them into a trust. 

Franchise Agreement

The franchise agreement is the legal document that outlines the relationship between the franchisee and the franchisor. The rights and obligations of each party are also outlined in the agreement. There are a few key provisions that your franchise agreement should contain in order to start protected. Your franchisor will also include clauses that protect them and so you should always read the agreement carefully before you sign. The agreement may contain a:

This is not a full list of clauses but these are the most important. They are important legal considerations that will determine your rights and obligations as a franchisee. 

Key Takeaways

As franchising becomes more popular in New Zealand, it is increasingly important that franchisees think about their legal considerations. The most important of these is choosing a business structure. This is because it can be difficult to change after a structure has been implemented. Additionally, your legal rights and responsibilities will change depending on the structure you choose. The franchise agreement is also essential to your legal considerations as it will determine what you can and cannot do during and after your franchising term. If you need any legal assistance with franchising your business or with any disputes, contact LegalVision’s franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Do I have to set up my business as a company?

No, you do not have to set up your business as a company. However, it is the most popular choice for new franchisees.

Am I still liable for the business under a company?

If you are a director of a company, you may still be personally liable for breaches of the law. However, your personal assets will not be taken in the case of insolvency.

What is the cooling-off period?

The cooling-off period allows you to withdraw from the franchise agreement within a certain amount of days of signing.

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