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Choosing the right business entity as a franchisee

| Jun 1, 2021 | Franchise Law

Purchasing a franchise can be the beginning of an exciting journey. You have the opportunity to invest in a proven brand while creating a business for yourself.

Becoming a franchisee is not without its complexities. Part of investing in a franchise is choosing the right type of business entity. From a liability perspective, it is important that you have a separate legal entity for each location of your business.

Here’s what you should consider as you decide what business entity is right for you and your franchise.

What should I know about my choices?

The decision of which entity to choose is nuanced. While there are some entities frequently chosen over others, the reasons to choose which one will depend on your franchise and your goals as a franchisee. The most common entities include:

  • C-Corporation (C-corp). A popular option that allows you to sell stock and have unlimited stockholders. One downside is that filing taxes can be more complex (and expensive) than with other choices.
  • S-Corporation (S-corp). Offers similar protections from liability as a C-corp but with different tax implications and limitations on shareholders. A disadvantage to this option is that there are legal formalities required (in both C-corps and S-corps.
  • Limited Liability Corporation (LLC). This is one of the least complex options for a business entity that shares similar protections with the S- and C-corps. This type of entity is more flexible and does not have the legal formalities that a corporation (S or C) would have. An LLC can be taxed as an s-corp or as a sole proprietor (one owner) or partnership (multiple owners).

There are many more additional details to these entities that you should consider as you decide which entity to choose for your franchise. The decision on your entity plays a crucial role in how your franchise proceeds. You should be prepared to consult with an experienced attorney and accountant to make your decision.

How much of a choice do I have?

As you are learning about the different business entity options, keep in mind that the franchise agreement may have certain criteria that will impact your decision.

You also need to consider factors such as specific tax laws for your state. How your state determines what you owe will depend on a variety of factors that could include:

  • Income
  • Gross assets
  • Taxable capital
  • Tangible property

As you consider this decision, you should talk to a skilled professional with experience helping franchisees choose the option that fits their needs and goals. An experienced professional will speak with you about how to weigh the different benefits to each entity.