Most people don’t walk into their favorite fast food restaurant thinking about whether or not it’s a corporation or a franchise. In fact, customers might not even notice the difference because they often deliver similar products and services. If you’re considering business ownership, there are several key distinctions to be aware of when deciding which type of business structure to pursue.
Franchise – A franchise is a business arrangement in which a franchisor has an established company and grants a franchisee the rights to open and operate a business location using the franchisor’s trademarks, products, and business methods in exchange for certain fees. There are various types of franchises that you can buy, but a few well-known examples include: McDonald’s, Subway, and Taco Bell.
Corporation – A corporation is a distinct legal entity that is owned by its shareholders and managed by a board of directors. The board makes major business decisions, sets company policy, and oversees the corporation’s officers. Unlike a franchise, a corporation runs all of its business outlets. Examples of corporate-owned restaurants include: Shake Shack, Chipotle Mexican Grill, and Starbucks.
12 Key Differences Between Franchises and Corporations
When looking to expand a business beyond a single entity, an owner has to decide whether to do that as a corporation or a franchise. It’s important to consider all of the differences between a franchise and corporation to see which option is the best fit.
A franchise is owned by the various franchisees who buy and operate their own branches of the business.
On the other hand, a corporation is owned by shareholders who share in the profits and risks of the business. Hired managers will operate additional locations that open, but the corporation retains full ownership.
Generally, franchise owners are more involved in the day-to-day operations of their business because they are personally and financially invested in the success of the business. Not only did they make a financial investment to buy the franchise, but they will continue to pay ongoing royalty fees to the franchisor. While each franchise model lends itself to different levels of involvement, franchisees are motivated to have a hands-on approach when running their business.
Corporate location managers will certainly want to succeed in their role, but they may not be involved in the nitty gritty details to the same extent as a franchisee. This is simply because they are not as financially invested in the success of the business.
Franchise owners are required to follow the franchise’s system, but they usually have some flexibility in managing and operating their business. The exact stipulations will differ from franchise to franchise, but everything will be laid out in the franchise agreement. For a franchisee, this gives them an opportunity to own and run a business model already proven to succeed while also having the freedom as a business owner to make strategic decisions particular to their location.
Managers of corporate-owned stores don’t have control over business decisions. Rather, a corporation’s board of directors make decisions about the business, which are then uniformly applied across all locations.
On one hand, the legal relationship between a franchisor and franchisee is relatively straightforward. Both parties will sign the franchise agreement and their roles and responsibilities will be clearly laid out. While things might come up that need to be addressed, the business will run smoothly as long as both parties hold up their end of the deal. On the other hand, legal disagreements between the franchisor and franchisee can be complicated and often end up in federal court.
The legal process for setting up a corporation is complex and will definitely require legal assistance. However, if a store manager or employee violates their terms of employment, then the firing process is more straightforward compared to franchise related lawsuits.
Both franchise and corporate businesses often have several locations. The main difference between both systems is in management and operation.
With franchises, each location has an independent owner called the franchisee. The franchisee typically pays an initial franchise fee and recurring royalty fees, and in exchange, receives ongoing support and training from the franchisor. In this relationship, the franchisee is able to own a business with the security and support of a proven business model, and the franchisor is able to efficiently expand and grow their business.
Corporate business locations are more integrated with the parent company. The store managers do not independently own the business, rather they follow corporate’s direction regarding location, products, employee hiring and onboarding, taxes, and more.
Hiring and Staffing
Franchisees typically have flexibility when it comes to hiring decisions as they are the ones on the ground operating the business and its finances. The franchisor may provide standardized checklists for new hires, but they won’t be hands-on involved in the day-to-day process of employee management.
Corporations take responsibility for staffing a store with managers and employees. They generally have a corporate HR department that provides detailed information, support, and resources that store managers utilize when making new hires.
Growth and Scalability
The franchise system typically allows for faster growth than a corporation. Instead of needing substantial capital to open new locations, a franchisor gives other entrepreneurs the opportunity to invest in the brand and run their own locations, which is a win-win for both parties.
Corporate expansion generally moves more slowly since the corporation needs to fund opening and operating each new business location.
A franchisor bears more legal liabilities than a corporation, often needing to get involved in franchisee legal disputes. If franchisees do not adhere to the rules and operating procedures outlined in franchise agreements, it could negatively affect the entire brand.
A corporation’s structure protects its shareholders from legal trouble as long as bankruptcy is not involved. Since they have limited liability, their assets are not directly affected in case of a legal dispute.
Marketing & Advertising
One thing that franchises and corporations have in common is their uniform and brand-centric marketing efforts.
Franchisees benefit greatly from the franchisor’s marketing strategies and support. Franchisees might have some freedom to implement their own localized marketing efforts, but they will usually need the franchisor’s permission.
A corporation typically provides marketing materials to their stores, and the individual store managers have limited control over the implementation of the brand’s marketing campaigns.
Inventory Management and Accounting
Franchisees typically have a hands-on approach to managing inventory and purchasing at their location, but the franchisor often provides fixed suppliers. Furthermore, the franchise will provide a manual with guidelines on how each franchise location should handle product purchasing, inventory management, and store accounting.
Corporate store managers will also take part in keeping their shelves stocked, but the size of the store will determine how involved they need to be. Smaller stores might manually submit product orders while larger stores could have a centralized system. Accounting for corporate stores is handled at headquarters, so the store must keep the company account system updated on a daily basis.
Audits are important to both franchised and corporate locations. They are key to ensuring that each location is properly implementing the company’s programs and policies.
In the case of a franchise, the franchisor will often provide the franchisee instructions for conducting an audit.
Corporate stores will follow the audit schedule and processes that the parent company lays out. This may include follow-up audits should a previous audit uncover any issues.
Relationship development is essential to both franchises and corporations. A strong relationship is important between franchisor and franchisee, as well as the relationship between corporate headquarters and individual branches. The dynamics of each relationship might look different, but both require open communication and regular check-ins.
Since franchisees own their business, they act with more autonomy than a corporate store manager. The franchisor may need to be intentional to make sure each franchisee feels that they are a part of the franchise family. At the same time, communication is often easier with franchisees since they have a more hands-on approach to the business.
Corporations will likely have a more formal way of interacting with their location managers. They will have effective ways of communicating, but the relationship won’t be as familial as a franchise relationship.
Are You Ready For Business Ownership
It’s not necessary to know how to distinguish a franchise from a corporation as a customer, but it is important that prospective business owners understand each business structure. While there are some similarities, the differences directly impact the way the business operates, grows, and handles legal issues.
Franchising is a great opportunity if you’re looking to run your own business. Ready to get started? FranNet can help you explore your options. At no cost to you, a franchise consultant will provide you with the resources and guidance to make the best decision possible. Schedule a free consultation to learn more!