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The franchise model of doing business streamlines the entrepreneurial process.<\/p>\n
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By Nellie Akalp<\/em><\/strong><\/p>\n The franchise model of doing business streamlines the entrepreneurial process. By operating as a franchisee, you can become a business owner without much of the preliminary groundwork involved in building a company\u2019s infrastructure and systems from scratch.<\/p>\n But even though a franchise location is associated with a larger brand, its owners hold responsibility for forming a business entity and managing all of the operations and administration at their site.<\/p>\n In this article, I\u2019ll discuss some of the nuances of starting and operating a franchise entity.<\/p>\n First, let\u2019s clarify some of the terminology I\u2019ll refer to throughout this post:<\/p>\n For example, McDonald’s is a franchisor;<\/em> the owner of the McDonald\u2019s location in your town is a franchisee<\/em>.<\/p>\n Forming a legal business entity supplies liability protection to business owners and may provide some tax advantages. The underlying purpose for setting up a franchisor\u2019s entity is slightly different from why it\u2019s important to set up an entity for a franchise location.<\/p>\n A franchisor forms an entity to sell rights to franchisees to open and operate a franchise location using the franchisor\u2019s brand, intellectual property, and expertise. An independent legal and accounting entity, the franchisor entity protects its owners and the main business from the debts and legal liabilities of franchisees.<\/p>\n Consider this hypothetical example: Subway is a franchisor. Suppose someone wants to sue the business after slipping and falling on a wet floor at a franchisee\u2019s location. The individual would sue the local franchise business, and the main franchising entity would be protected.<\/p>\n Often, franchisors choose the Limited Liability Company structure for their entity. Technically, a franchisor entity can be formed in any state. However, it\u2019s wise for franchisors to discuss their options with an attorney and tax professional before deciding.<\/p>\n A franchisee entity is one set up by a franchisee when purchasing the rights to operate a local franchise. Many franchisors will require the franchisee to set up their entity before drafting contracts or a Franchise Disclosure Document<\/a> (FDD), so the paperwork can be put in the entity’s name. Franchisee entities are usually LLCs. Many franchisors will not allow a corporation to purchase a franchise because the issuance of stock would have significant legal and tax implications.<\/p>\n A franchisee should almost always register its entity in the state where it has its physical presence, regardless of whe re the owner\u2019s residence is. The physical location of the franchise will require permits, licenses, lease agreements, etc., and therefore the business must be registered in that jurisdiction to obtain them.<\/p>\n Many franchisors create an entity under a name that implies its purpose of selling franchises\u2014for example, Your Company Franchising Inc. or Your Company Franchise Sales, Inc. This makes it easy to differentiate entities.<\/p>\n As for franchisees, they may use the franchise\u2019s brand name for marketing purposes by establishing a DBA (a fictitious name). However, their legal entity\u2019s name must not include the name of the franchise being purchased (because the franchisor has trademark rights to that entity name).<\/p>\n For example, franchisees would avoid registering their legal entities as Smith Subway, LLC or Smith\u2019s Burger King, but might instead set up DBAs like \u201cSubway Store #1234\u201d or \u201cBurger King Woodland Hills.\u201d Franchisors usually have a specific way franchisees should format their DBAs.<\/p>\n More from <\/strong>AllBusiness.com<\/strong><\/a>:<\/strong><\/p>\n A multi-unit franchise is when one franchisee purchases multiple locations. Typically, the franchisor will want each unit set up as its own separate legal entity with separate DBAs and permits.<\/p>\n In some cases, franchisees can start a parent company that holds all their entities beneath it to keep things simple. However, this only works if the franchises are all owned by the same people.<\/p>\n In addition to the contractual obligations to franchisors, franchisees must comply with federal, state, and local requirements when setting up their business entity:<\/p>\n Are you curious about what it takes to start and operate a franchise? Here are resources to help as you assess the feasibility and explore the possibilities:<\/p>\n Starting a franchise business lets you enter the world of entrepreneurship with built-in brand awareness and established systems and processes. That doesn\u2019t mean it\u2019s entirely \u201cplug and play,\u201d though! Make sure you get the legal and accounting guidance you need to ensure it\u2019s the right fit for you.<\/p>\n About the Author<\/strong><\/p>\n Nellie Akalp is a passionate entrepreneur, business expert, professional speaker, author, and mother of four. She is the founder and CEO of <\/em>CorpNet.com<\/em><\/a>, a trusted resource and service provider for business incorporation, LLC filings, and corporate compliance services in all 50 states.<\/em><\/p>\n<\/div>\nFranchisee vs. franchisor: What\u2019s the difference?<\/strong><\/h2>\n
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Franchising and forming a business entity<\/strong><\/h2>\n
Franchisor entity<\/strong><\/h3>\n
Franchisee entity<\/strong><\/h3>\n
Naming a franchise entity<\/strong><\/h2>\n
What about multi-unit franchises?<\/strong><\/h2>\n
Entity requirements for franchised businesses<\/strong><\/h2>\n
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Becoming a franchisee<\/strong><\/h2>\n