We’re here to talk about the different types of business ownerships that are out there for franchisees to choose from.
We’ll go over the different ways that you can be involved with a business, how that relates to franchisees, and, of course, how we can help you set and meet your own personal goals throughout the process.
Business Formats
Keep in mind that a franchised business is an independently owned business that can be structured however the owner wants. As a franchisee, you sign an agreement to use trademarks and other proprietary information and products in exchange for royalty fees and an initial franchise fee. But as the independent owner of your franchise location, the business structure is for you to decide.
That’s what makes the franchise model unique. As a franchise owner, you benefit from the resources and experience of the franchisor while still maintaining that small business feel. While there are rules and guidelines you will need to follow to maintain brand standards, you get to call the shots when it comes to running your business.
To learn more about how to get started with franchising, contact us or pre-register for or upcoming Franchise University. In the meantime, let’s dive into the different forms of business ownership and break down each one’s essential features.
Sole Proprietorship
This is where you, and just you, are the sole owner and operator (fairly self-explanatory). When it comes to business profits, the sole proprietor keeps the money made, and it is considered his or her income. As a sole proprietor, you may still choose to maintain separate records of business transactions and personal ones, but there will be no legal difference between the two.
Sole proprietorships are best for low-risk or informal businesses (such as a dog-walking service or selling handmade goods).
Pros
Low start-up costs
Less regulation
No extra filing
No separate business bank account needed
No additional federal taxes
Cons
More difficulty achieving funding
Unlimited liability
Limited equity
The business is tied to an individual
Self-employment tax
General Partnership
Also known as joint ownership, a general partnership is when two or more people go into business together. Like a sole proprietorship, this is a fairly informal business structure. It does, however, increase your starting capital and typically improves your overall chances of success.
Pros
Little regulation
No need to file
More capital
Easier access to funding than a sole proprietorship
No additional federal taxes
Cons
Personal liability (unless formed as a limited liability partnership)
Potential disagreements between partners
Self-employment tax
Limited Liability Company
A Limited Liability Company, or LLC, gets a touch more complicated and requires specific filing to maintain and establish your business. In an LLC, the company and the owner are separate entities. As the business owner, your personal assets are protected in the case of any litigation against your company.
The LLC is a popular business structure for small businesses due to its tax benefits and freedom from personal liability. You’ll need to choose a unique name when registering your LLC. If you are franchising, you will also need to register a DBA, or “doing business as” name. LLCs are filed through the state you live in, so if you change locations you will need to re-file.
Pros
Protection from liability
No additional federal taxes
Simpler than a corporation
Cons
Annual filing fees
Self-employment tax
May need to refile if you relocate to another state
Corporation
Last but not least, “corporation” is a reasonably broad umbrella term. We’ll break this down a bit further into C corporations, S corporations, B corporations, and nonprofits. For now, here’s a basic overview of the pros and cons of forming a corporation.
Like an LLC, a corporation is a separate legal entity. This takes away all personal liability of the business owners but comes at a cost.
Pros
More financing options
No personal liability
Easy to sell or transfer ownership
Cons
Expensive to start and operate
Heavily taxed, often “double taxed”
More complicated filing and record-keeping
C Corporation
A C corporation must pay income tax on any monetary gains. In many cases, profits are taxed again when distributed to shareholders.
C corporations do have some advantages, however. It is easy to raise funds for a C corporation through stock sales, and they also offer a high level of protection against personal liability. This structure is a good option for medium and high-risk businesses or businesses to be sold later on. The C corporation structure ensures the continuity of the company even if the owner does not remain involved.
The C corporation is also the only business structure that allows a rollover for a business start-up to fund your business.
S Corporation
As an S corporation, your business will have to file a special election. If approved, your business is no longer taxed on profits. This offers significant tax advantages over a C corporation. Profits can also be passed through the business owner’s income to avoid double taxation.
But not every owner and business can become an S corporation; there are restrictions to this business format. If you have more than one hundred stockholders or any of those stakeholders live outside of the country, you cannot file as an S corporation.
B Corporation
A B corporation, or benefit corporation, is a for-profit corporation that contributes to the public good. B corporations must submit a yearly benefit report to maintain their status.
A “close corporation” is similar to a B corporation but with less structure. These organizations are not available for public trading.
Nonprofit
You can apply for tax-exempt status from the IRS if your organization provides some sort of public benefit, making your corporation a non-profit. Profits cannot be distributed to members or used for political campaign contributions.
You may also see nonprofits referred to as 501(c)(3) corporations.
"The business structure you choose influences everything from day-to-day operations to taxes, to how much of your personal assets are at risk. You should choose a business structure that gives you the right balance of legal protections and benefits." - The U.S. Small Business Association.
Different Strokes for Different Folks, as They Say
There is no single business format that is necessarily better than the rest. It all comes down to what works best for your business and plans.
It does also get a bit more complicated than what we touched on here. For example, you can have a business filed as an LLC taxed as an S Corporation. Consider visiting your local Small Business Administration for advice on forming your business and which business and tax formats will work best for you.
“The business structure you choose influences everything from day-to-day operations to taxes, to how much of your personal assets are at risk. You should choose a business structure that gives you the right balance of legal protections and benefits.”
The US Small Business Administration
Your local Small Business Administration can also help you register your business, obtain necessary licenses and tax ID numbers, open a business bank account, etc.
Let Us Help!
If you are just starting in the franchise world and need some guidance, we have you covered. At Franchise123, we know there’s a lot of information out there to process. We’re here to guide you towards your goal of business ownership.
We want to make sure that you have all the information you need to make informed decisions. If you want to learn more about buying a franchise, we can help make that a reality! We’ll help you find the franchise opportunity that is right for you.
