When you invest in a franchise with a partner any decision you make needs to be based on your individual needs and expectations and those of your partner. If your partner is your spouse, a family member or close friend, dealing with some of the issues discussed below may be difficult but it is essential to consider these to prevent disputes down the track.

Structure
There are several business structures to consider when you are going into business with a partner:

Partnership: These are relatively simple to establish but provide little protection to partners should the business fail. Partners are jointly and severally liable for debts of the business; this means that where one partner cannot pay, the other can be required to cover all of the debt. Income, capital gains and losses are all taxed in the hands of the individual partners at their relevant tax rates.

You will need a Partnership Agreement which should cover payment of partnership debts, capital contributions to the partnership, how profits/losses are to be shared, exit strategies and entry of new partners. Without this, your state’s partnership legislation will govern your relationship and this generally provides for equal partnerships.

Private company: A company is a separate legal entity, which provides individuals with more protection if the business fails. Shareholders have limited liability for company debts, unless personal guarantees are given. However, this structure is not without its own risks and responsibilities. The company must notify ASIC of certain changes and lodge annual returns, and directors have statutory duties which they must comply with.

The company is taxed 30 per cent on all income and capital gains, while shareholders are only taxed when dividends are declared or deemed to have been paid.

Parties using this structure should put in place a Shareholders Agreement to deal with shareholders’ duties, rights and obligations and exit strategies.

Trusts: A Trust provides extra asset protection and potentially favourable tax treatment for its beneficiaries. Trusts are established by a Trust Deed and this sets out the powers of the trustee, who the beneficiaries are, and how money is to be distributed and invested.

It is important to discuss your particular situation with your accountant or lawyer to determine which structure will suit you best. It is important that your accountant and lawyer liaise with one another.

Exit strategies
Whatever structure you choose, it is important to consider what you will do when the term of your agreement ends, if your partner decides to leave the business, dies or becomes infirm, or if the business fails. A well drafted Partnership or Shareholders Agreement should deal with these issues.

Problem areas
A common problem area for a new business is the lack of communication between partners. It is important to hold regular meetings to discuss goals, concerns and frustrations, and evaluate the business.

Another problem area is the lack of clear position descriptions and responsibilities. Often businesses start and partners just do what is required to keep the business running, however, the longer a business goes without the partners having clear positions and responsibilities, the more likely there will be a conflict or duplication of effort. So it is important to discuss early what each partner’s responsibilities are and what their role is within the franchise.

This article was written by Raynia Theodore, corporate & franchising team at Mason Sier Turnbull.