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As your career changes, you may want to move on to a new business venture or method. One of the ways you could do this is through buying a franchise location. However, buying into a franchise may seem complicated and confusing. This article will detail the most common structures in New Zealand to help you choose the best business structure for your franchise.

Should I Structure My Franchise Business as a Sole Trader?

A sole trader is essentially an individual as a business. In the context of a franchise, this would be you, as an individual, purchasing the franchise location under your name. Although you will individually own the franchise location, you can hire staff under the sole trader business structure. 

There are no additional costs associated with the sole trader structure, as you are just purchasing the business yourself. However, this also means that there is no separation between your business and personal assets. That means if the franchise location gets into debt or legal trouble, so do you.

Should I Structure My Franchise Business as a Partnership?

A partnership is when two or more people form a business together. This business would then purchase a franchise location and become the franchisee. 

How you divide up the responsibilities and costs is up to you and your partner or partners. These divisions of profit, debts and obligations should be set out in a partnership agreement, to ensure that you know what you have to do to run your business and franchise location. 

You will share all the franchise costs between you and your partner(s). You also share debts across the partnership, which could put your personal assets at risk. 

Should I Structure My Franchise Business as a Company?

A company, or a limited liability company, is legally separate from its owner. The owner, or owners, of a company are called the shareholders. As a shareholder, you would start the company, and then the company would buy the franchise location and become the franchisee. 

As a shareholder, you will be entitled to a share in the company’s profits as a franchisee. You will only be liable for paying the company’s debts up to the value of the shares you own. This means that, for the most part, the company legally and financially protects you as a shareholder. This is known as limited liability and is one of the key benefits of the company business structure. 

Setting up a company is more complicated than other business structures. Companies are subject to different tax laws and must coordinate with the New Zealand Companies Office and Inland Revenue. 

Should I Structure My Franchise Business as a Trust?

Under the business structure of a trust, an individual (the trustee) will own the trust property (the franchise location), but can only use it for the benefit of you, the trust’s beneficiary. 

As the franchise owner, the trustee will absorb your liability for any debts or issues that the franchise location acquires. However, your trustee may negotiate a limitation of this liability. It is your right as a beneficiary to have your trustee act in good faith whilst dealing with the franchise location. This structure is beneficial if you would like to be more ‘hands-off’ as a franchisee. 

What Business Structure Is Best for a NZ Franchise?

The business structure you end up choosing to purchase will ultimately depend on you and the franchise you are looking to buy. The following are some key issues that you should consider when determining your preferred franchise business structure.

Personal Liability

Each business structure has differing degrees of personal liability. Under a partnership or as a sole trader, you will be personally liable for any costs or legal issues that the franchise location acquires. In contrast, a trustee will absorb your liability under the trust business structure. If you purchase the franchise as a company, you will only be liable for any debts to the extent of your shares’ value in the company.

Most franchise agreements will contain a guarantee clause. The franchisor incorporates this clause to ensure that the franchisee is personally guaranteeing the commitments they have agreed to in the franchise agreement. This means that, even if you purchase a franchise through a company or a trust, you may still have to take on some personal liability. However, the company or trust structure protects you and your personal assets better than buying a franchise as a sole trader, or in a partnership. 

Desired Start-Up Costs and Resources

Purchasing a franchise will always involve some costs. It is common practice to pay an initial franchise fee to ‘buy’ into the franchise. On top of this, most franchise agreements will outline a method of calculating franchise fees. Franchise fees are payments made to the franchisor regularly for the continued use of the franchisor’s intellectual property and franchise resources. 

If you wish to have fewer costs on top of these franchise fees, a sole trader or partnership business structure may be preferable. However, if you are content to pay more start-up costs to guarantee greater personal protection, a trust or company may be a better business structure for you as a franchisee. 

Requirements of the Franchise Agreement

Your franchise agreement may specify that you can only buy a franchise under a particular business structure. For example, some franchisors may only sell franchise locations to companies.

When reading through a franchise agreement, check to see if the franchisor has specified a particular business structure that you should buy the location under. 

Nature of the Franchise 

Although there may be no specific business structure specified in your franchise agreement, a particular structure may be common for that franchise and franchisor. For example, a franchise that emphasises being local and New Zealand-made may traditionally sell franchise locations to sole traders or partnerships. 

It is useful to discuss with your potential franchisor, the nature of the franchise you wish to buy into, to guide what business structure you should choose. 

Key Takeaways

If you are considering buying a franchise, you must figure out what franchise business structure is best for you. The most common structures in New Zealand are:

  • a sole trader;
  • a partnership;
  • setting up a company and remaining a shareholder; or
  • setting up a trust and becoming a beneficiary. 

What structure you choose will depend on the extent you want to be liable for the franchise’s debts, your desired start-up costs, and your particular franchise agreement’s requirements. If you are interested in buying a franchise location or franchising your business, LegalVision’s franchise lawyers can help. Contact us on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

What is a franchise business structure?

The franchise business structure is the business structure you use to buy a franchise location and become a franchisee.

What are the most common franchise business structures?

In New Zealand, the most common business structures are: sole trader; partnership; company; and trust.

What are the four types of franchising?

The four types of franchise businesses are: job or operator franchises;
management franchises; retail and fast food franchises; and investment franchises.

What business structure is best for a franchise?

The best business structure for a franchise will depend on various factors, including the extent of personal liability the franchisee wants to take on, the desired start-up costs, and each particular franchise agreement’s requirements.

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