Before starting a business you need to consider the franchise business structure to use that will best suit your individual circumstances. The following article will outline the advantages and disadvantages of each structure and share how most Cleantastic business owners structure their businesses.
The common options available are:
Sole Trader Franchise
Limited Liability Company Franchise
Franchise Ownership as a Sole Trader
This is when you trade under your own IRD number, there is only you in the franchise company and all profits or losses will flow through your name for income tax purposes. As you are the business there is no separation between yourself and your business when it comes to liability – if something unexpected goes wrong your personal assets are not protected from business creditors.
However if you trade well and pay your bills on time – there can be little chance of such things happening. This franchise business structure is good if you have minimal risk of things going wrong, it is just you in your business and you’re not really looking to employ staff. Note you can upgrade to another structure further down the track if you need to. There is no cost to setup as a sole trader, you will just need to get registered for GST with Inland Revenue if your sales turnover is going to be over $60,000 pa.
Business Franchise Partnership
The Partnership franchise structure is for when there are two or more people in your franchise business that wish to be owners. If you setup a partnership agreement from the start you can determine what percentage each partner is entitled to of the profits or losses that result from your franchise company. If no agreement is in place it will be a 50/50 arrangement. The partnership gets its own IRD number, profits or losses flow through to the individual partners for income tax purposes.
As with a sole trader there is no separation between yourself and your business when it comes to liability – so your personal assets will be at risk if business creditors are seeking to recover funds from you.
This structure is good if you are a couple who are each putting in the same amount of effort to earn the business income, you may or may not be looking to employ staff. You can upgrade to a Limited Liability Company if required.
There will likely be a cost to setup a franchise partnership relating to the application of an IRD number with Inland Revenue, maybe a partnership agreement and GST registration if your sales turnover is going to be over $60,000pa.
Franchise setup as a Limited Liability Company
This structure provides you as the business owner protection from the business creditors (people who you owe money) should things turn sour. Anything you personally guarantee though won’t be covered by this limited liability.
You can be the only owner or have multiple owners of the business and each owner has shares. The proportion of shares each person has determines their ownership percentage of the company. The company gets its own IRD number and there is the ability to be flexible when it comes to distributing profits (and losses in some cases).
You can also have a company name and no one else can have exactly the same name – this can be good for branding if that interests you.
This is the most robust structure and is great if you are going into business with your partner, spouse or someone not related to you. It also can save you income tax because of the ability to spread profits across different taxpayers.
The Most Popular Business Structure for Cleantastic Franchise Owners
We recommend all of our Franchise Owners receive advice about the best business structure for them from a firm like Kiwitax before making the decision. 76% of all Cleantastic Business Owners as at Dec 2014 chose the Limited Liability Structure as the most suitable for their needs.
There is a cost to setup a company – ranging from $160-$600 depending on how much you wish to do yourself. The company is registered with the Companies Office and then an IRD number and GST registration (if applicable) is applied for with Inland Revenue.
This overview is intended as a guide only and we would recommend you chatting to one of our team before you purchase or start a business to make sure you’re fully aware and comfortable with the best structure for your personal situation.