Selecting the Appropriate Legal Structure for Your Franchise

The entrepreneurial process can be streamlined by operating as a franchisee. This model allows individuals to become business owners without the upfront work of building a business infrastructure and systems from scratch. However, even though a franchise is associated with a larger brand, the franchise owner is responsible for managing all operations and administration at the location.

To understand the terms used in the franchise model, it is important to clarify the difference between a franchisor and a franchisee. A franchisor is a business that sells the right to open stores or sell products and services using its brand, expertise, and intellectual property. A franchisee is an individual or business entity licensed to operate a privately owned business (franchise) under an agreement with a franchisor.

Franchise and business entity formation are key steps in the process. Forming a corporation provides liability protection for the business owner and may provide tax benefits. When a franchisor forms an entity, they sell the rights to open and operate franchised locations using their brand, intellectual property, and expertise. A franchisor is an independent legal accounting entity that protects its owners and principal business from the franchisee’s liabilities and liabilities.

However, when a franchisee purchases the right to operate their franchise locally, they are required to establish a franchisee entity. This entity is typically an LLC and is required to register in the state where the franchise is physically located, regardless of where the owner resides.

Naming franchise entities is also important. Many franchisors create entities with names that connote the purpose of the franchise sale. For franchisees, establishing a DBA (fictitious name) allows them to use the franchise’s brand name for marketing purposes. However, the legal entity name cannot include the name of the franchise being purchased, as the franchisor has trademark rights to that entity name.

Multi-unit franchising is the purchase of multiple stores by one franchisee. Usually, the franchisor wants each unit to be set up as its own legal entity with a separate DBA and permits. Franchisees must comply with federal, state, and local requirements when forming a business entity and complete necessary registrations, such as an EIN, DBA, LLC Operating Agreement, and sales tax registration.

Starting a franchise business offers built-in brand awareness and established systems and processes, but it is not completely “plug and play.” It is important to get the legal and accounting guidance needed and make sure the franchise model is the right fit.

Nellie Akalp is a passionate entrepreneur and CEO of CorpNet.com, a trusted resource and service provider for corporate formation, LLC filing, and corporate compliance services in all 50 states. AllBusiness.com is a resource for small businesses, providing essential tools and resources to start, grow, and manage your business.

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