When starting a franchise in the UK, one of the most important early decisions is choosing the right legal structure. While franchising offers the benefit of operating under a proven brand and business model, the way your franchise is legally set up will have significant consequences for tax, liability, and day-to-day management. Making the right choice at the beginning can protect your investment and set the foundation for long-term success.
Why Legal Structure Matters
The legal structure of your franchise determines how your business is recognised in law, how you are taxed, and the level of personal risk you carry. It also affects how profits are distributed and how easy it is to raise finance or bring in additional partners. Although your franchisor may provide guidance, the decision ultimately rests with you as the franchisee, and it is vital to weigh the advantages and disadvantages of each option.
Sole Trader Franchisees
Operating as a sole trader is the simplest way to run a franchise. In this model, you and the business are legally the same entity. It is easy to set up and requires minimal paperwork. Profits are taxed as personal income, and accounting obligations are relatively straightforward.
However, the major drawback is unlimited liability. This means that if the franchise runs into financial difficulty, your personal assets—such as your home or savings—could be at risk. For small, home-based franchises, some franchisees do start as sole traders, but many move on to other structures as their business grows.
Partnership Model
A partnership is similar to being a sole trader but involves two or more people running the franchise together. This arrangement can work well when family members or business partners wish to share responsibility and investment. Like sole traders, partners are personally liable for debts, unless they set up a limited liability partnership (LLP).
In an LLP, liability is limited to the amount each partner invests, offering greater protection. Partnerships can be attractive in cases where multiple franchisees want to combine resources, but they also require a clear legal agreement to avoid disputes over roles, responsibilities, and profit-sharing.
Limited Company Structure
Many UK franchisees choose to operate through a limited company. This creates a separate legal entity, which means the company is responsible for its debts, not the individual owners. Personal liability is limited, usually to the value of shares held in the business.
The limited company structure is often seen as more professional and can make it easier to secure finance from banks and investors. It also offers tax advantages, as profits can be drawn as dividends in addition to salaries. However, it involves more administrative work, such as filing annual accounts and meeting Companies House requirements. For franchisees planning to grow their operation, this structure provides flexibility and protection.
Factors to Consider
When deciding on a legal structure, franchisees should think carefully about their long-term goals, financial position, and appetite for risk. Sole traders and partnerships may suit smaller, lower-risk ventures, while limited companies or LLPs provide more protection for larger investments. It is also worth considering how each structure affects tax efficiency, succession planning, and the ability to bring in outside investors.
Seeking advice from a solicitor or accountant with experience in franchising is strongly recommended. While franchisors can provide general guidance, independent professional advice ensures that the chosen structure meets your personal circumstances.
Summary
Choosing the right legal structure for your franchise in the UK is not a decision to take lightly. It shapes how your business operates, how profits are taxed, and the level of personal risk you face. Sole trader, partnership, LLP, and limited company structures all offer distinct advantages and disadvantages, and the best choice will depend on your goals and resources. By taking the time to understand your options and seeking professional advice, you can ensure that your franchise is built on a solid and secure legal foundation.