Legal structures for businesses - an overview

A franchise is not a legal structure but is a business model that can operate under one of the legal structures, ie as a sole trader, or type of partnership or limited company - see:

• set up as a sole trader
• set up a business partnership
• set up a limited company
• working for yourself

Buying a franchise is a way of taking advantage of the success of an established business. As the 'franchisee', you buy a licence to use the name, products and services of the 'franchisor' business. This licence normally covers a particular geographical area and runs for a limited time, after which it should be renewable as long as you meet the terms of the franchise agreement.

Franchise agreements usually set out how the franchised business should be run, although they may allow some flexibility. As there is no specific legislation or regulation for franchising, the franchise agreement becomes all-important in determining the rights and obligations of the franchisor and the franchisee as well as the relationship between them.

Don't sign any agreement, or pay any fees or deposit, until you have taken legal advice.

The way you pay for the franchise may be through an initial fee, ongoing management fees, a percentage of your turnover, purchases of goods from the franchisor, or a combination of these.

You often pay a percentage of your turnover to the franchisor, which reduces your overall profits.

For further information see how to buy a franchise.