If you’re looking to dive into the world of franchises, you might be pondering some questions. Is a franchise a business? Should I register my franchise? What business structure should I choose? This article is a quick guide, offering you insights into these questions and more. Let’s clarify that indeed, you will need to register your franchise. But the structure you opt for depends on several factors.
Understanding the Factors that Influence your Business Structure Decision
Before deciding on the structure of your franchise business, there are key factors you must consider:
- Budget – The resources you have at your disposal will largely influence your decision.
- Personal Liability – If you’re wary of having your personal assets at risk, your business structure decision would be swayed.
- Taxation – Different structures offer varying taxation benefits and liabilities.
Deciding on the right tax structure is critical for the management of your Franchise
Two Common Forms of Business Registration for Franchises
The most common ways to register your franchise are as a sole trader/partnership or as a private company.
Sole Trader/Partnership Franchise Registration
The most straightforward and cost-effective method to register your franchise is as a sole trader or in partnership. Although you’re utilizing the franchisor’s trading name, it’s compulsory to register an ABN (Australian Business Number) for taxation purposes.
However, bear in mind that your franchise’s trading name and ABN aren’t identical. While you’re utilizing the franchisor’s trading name and products, you remain a separate entity.
Tax Implications for Franchises as Sole Traders or Partnerships
The taxation rules for franchises operating as sole traders or partnerships can be summarized as follows:
- Personal earnings from the franchise are taxable.
- Deductions and exemptions can be claimed on royalties, franchisor training fees, and GST from payments to the franchisor.
- Sole traders or partners are personally liable for the franchise’s operation. Therefore, personal assets may be sold to recuperate debts.
Private Company Franchise Registration
Registering as a private company, although more complex and costlier than sole trading, can offer you personal liability protection. To establish a company, you must satisfy several requirements:
- Share capital
- At least one member/shareholder
- No more than 50 non-employee shareholders
- At least one director
A private company can own assets and sign contracts as an individual. The company itself is responsible for all debts, and only assets owned by the company can be targeted.
Tax Implications for Franchises as Private Companies
Private companies enjoy certain tax benefits unavailable to sole traders and partnerships. For instance:
- Companies making less than 50 million dollars annually, with 80% or less passive income, are taxed at the lower company rate of 27.5%.
- Companies earning more than 50 million are taxed at 30%. The tax will not exceed 30%.
- For sole traders and partnerships, the tax rate can escalate to a staggering 45%.
Other Potential Business Structures for Franchises
While sole trader/partnership and private company structures are popular, they’re not the only options. For instance, running your franchise through a Trust could offer significant tax advantages. To assess your situation and determine the best business structure, consulting with a commercial lawyer would be beneficial.
As you venture into the franchise world, remember that your franchise is indeed a business that must be registered. The business structure you choose carries significant implications, especially concerning personal liability and taxation. So, it’s crucial to make an informed decision.
