By Nellie Akalp
The franchise model of doing business streamlines the entrepreneurial process. By operating as a franchisee, you possibly can change into a business owner without much of the preliminary groundwork involved in constructing an organization’s infrastructure and systems from scratch.
But though a franchise location is related to a bigger brand, its owners hold responsibility for forming a business entity and managing the entire operations and administration at their site.
In this text, I’ll discuss a number of the nuances of starting and operating a franchise entity.
Franchisee vs. franchisor: What’s the difference?
First, let’s make clear a number of the terminology I’ll check with throughout this post:
- What’s a franchisor? A franchisor is a business that sells the proper to others to open stores or sell services or products using its brand, expertise, and mental property.
- What’s a franchisee? A franchisee is a person or business entity licensed to operate their privately owned business (a franchise) under an agreement with a franchisor.
For instance, McDonald’s is a franchisor; the owner of the McDonald’s location in your town is a franchisee.
Franchising and forming a business entity
Forming a legal business entity supplies liability protection to business owners and will provide some tax benefits. The underlying purpose for establishing a franchisor’s entity is barely different from why it’s vital to establish an entity for a franchise location.
A franchisor forms an entity to sell rights to franchisees to open and operate a franchise location using the franchisor’s brand, mental property, and expertise. An independent legal and accounting entity, the franchisor entity protects its owners and the predominant business from the debts and legal liabilities of franchisees.
Consider this hypothetical example: Subway is a franchisor. Suppose someone desires to sue the business after slipping and falling on a wet floor at a franchisee’s location. The person would sue the local franchise business, and the predominant franchising entity can be protected.
Often, franchisors select the Limited Liability Company structure for his or her entity. Technically, a franchisor entity could be formed in any state. Nevertheless, it’s sensible for franchisors to debate their options with an attorney and tax skilled before deciding.
A franchisee entity is one arrange by a franchisee when purchasing the rights to operate an area franchise. Many franchisors would require the franchisee to establish their entity before drafting contracts or a Franchise Disclosure Document (FDD), so the paperwork could be put within the entity’s name. Franchisee entities are frequently LLCs. Many franchisors won’t allow a company to buy a franchise since the issuance of stock would have significant legal and tax implications.
A franchisee should almost at all times register its entity within the state where it has its physical presence, no matter whe re the owner’s residence is. The physical location of the franchise would require permits, licenses, lease agreements, etc., and due to this fact the business should be registered in that jurisdiction to acquire them.
Naming a franchise entity
Many franchisors create an entity under a reputation that means its purpose of selling franchises—for instance, Your Company Franchising Inc. or Your Company Franchise Sales, Inc. This makes it easy to distinguish entities.
As for franchisees, they might use the franchise’s brand name for marketing purposes by establishing a DBA (a fictitious name). Nevertheless, their legal entity’s name must not include the name of the franchise being purchased (since the franchisor has trademark rights to that entity name).
For instance, franchisees would avoid registering their legal entities as Smith Subway, LLC or Smith’s Burger King, but might as an alternative arrange DBAs like “Subway Store #1234” or “Burger King Woodland Hills.” Franchisors often have a selected way franchisees should format their DBAs.
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What about multi-unit franchises?
A multi-unit franchise is when one franchisee purchases multiple locations. Typically, the franchisor will want each unit arrange as its own separate legal entity with separate DBAs and permits.
In some cases, franchisees can start a parent company that holds all their entities beneath it to maintain things easy. Nevertheless, this only works if the franchises are all owned by the identical people.
Entity requirements for franchised businesses
Along with the contractual obligations to franchisors, franchisees must comply with federal, state, and native requirements when establishing their business entity:
- File formation paperwork with the state to ascertain the LLC or corporation.
- Obtain an EIN (employer identification number).
- File a DBA (doing business as) to ascertain a fictitious name for the franchise location.
- Create an LLC operating agreement (or corporate bylaws).
- Register for payroll tax and other employment-related taxes.
- Complete sales tax registration (often doesn’t apply to service-based franchises).
- Filing for any required business licenses and permits to operate legally at their location.
Becoming a franchisee
Are you interested in what it takes to start out and operate a franchise? Listed here are resources to assist as you assess the feasibility and explore the probabilities:
Starting a franchise business allows you to enter the world of entrepreneurship with built-in brand awareness and established systems and processes. That doesn’t mean it’s entirely “plug and play,” though! Make sure that you get the legal and accounting guidance it’s essential to ensure it’s the proper fit for you.
In regards to the Creator
Nellie Akalp is a passionate entrepreneur, business expert, skilled speaker, creator, and mother of 4. She is the founder and CEO of CorpNet.com, a trusted resource and repair provider for business incorporation, LLC filings, and company compliance services in all 50 states.