Entrepreneurs whose business model involves developing then commercializing a Franchise Prototype model can benefit enormously from Offshore (tax free) Incorporation.
Typically how it works is you set up (i) a nil tax Master Franchise Company and (ii) a nil tax IP Holding Company Offshore. But more on that later, first up let’s look at the concept of a Franchise…
What is a Franchise?
A successful small business is typically one comprised of a series of demonstrable (usually documented) interconnected systems. Once formulated and documented/recorded these business systems can form the basis of a Franchise prototype. For someone looking to set up a small business it’s often though less risky to buy a Franchise because the systems have been successfully deployed already.
The most successful franchise-based business model is McDonalds Hamburgers.
McDonalds for example have written documented systems which explain, in fairly simple terms, to staff members:
- How to greet a customer
- How to put together a burger (ie stages of production and who does what)
- How to make a coffee
- How to pour an ice cream Sundae
- How to cook chips
- How to deal with a disgruntled customer
- Etc etc etc
All these things are inventions of the mind ie Intellectual Property (“IP”).
In addition, Franchisees are given the inalienable right to be part of the McDonalds advertising/marketing system. The (successfully developed over many long years) know-how behind this marketing system (a unique commercial upper hand which sets McDonalds apart from its competitors) is at its heart also an invention of the mind ie IP.
Further the Franchisee also gets to use and benefit from the inimitable McDonalds (guaranteed to bring in customers of itself) Laughing Clown/Golden arches etc logos. These too are IP.
The Franchisor/Franchisee Relationship – Typical
In the above scenario the Franchisor typically supplies the Franchisee with 4 things:
- A Manual which enables the Franchisee to run the business (using just teenager labor in McDonalds’s case), ie Intellectual Property (“IP”)
- Exclusive Products (ie products with unique, well-known brand names such as “BigMac” & “Quarter Pounder” etc) which are guaranteed to bring in value ie attract customers, ie IP
- An advertising/marketing program/system guaranteed to, at all times, bring customers through the Franchisee’s door, ie IP
- The right to use the Franchisor’s Trademarks (these trademarks are also IP)
Usually what happens here is:
- The IP is held by one Company. (The “IP” Company). This Company is usually based in a zero-tax jurisdiction
- The IP Company provides an exclusive use License to a/the Master Franchise Company (which is usually also incorporated in a zero tax or low tax jurisdiction) providing the Master Franchise Company with the right to market/commercialize this IP
- The Master Franchise Company (ie the “Franchisor”) sells a Franchise to a Franchisee and collects an up- front payment plus a percentage of profit or revenue moving forward. In return for these payments the Franchise owner (ie the Franchisee) is entitled to use the Franchisor’s IP
- The payments made to the Master Franchise Company are usually received in a nil tax or low tax environment
- In return for having the exclusive right to use/commercialize the IP the Master Franchisor Company pays royalties or license fees to the IP Company.
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