For many a budding entrepreneur, choosing the perfect franchise concept is likely going to be the fun part of your journey. You get to review different business models, some of which will be of great interest to you—while others may not be just yet. Weighing the pros and cons as several franchise concepts get narrowed down to just one or two can be an exhilarating exercise. But when you finally do decide, here’s a newsflash. You still may have a crucial decision to make. Here’s a primer on choosing a business structure for your franchise.
Before you had the opportunity to become your own boss, you may have heard a few business structure discussions. Should you start an LLC, file as a C-Corp or S-Corporation? Hey, what do those acronyms really mean anyway? Don’t worry—we’ll get to that. But before we do, here are two important factors to consider right off the bat:
- Many franchisors already have this decision made for you. It may be a requirement to choose the business structure path they have recommended. So be sure to ask if you’re unclear.
- If the business structure decision is up to you, this isn’t a rock-paper-scissors exercise. How you structure your business will have implications on how you pay taxes (both state and federal) and what your personal liability may be. You will need professional legal and/or accounting counsel.
Let’s look at the three most common business structures:
LLCs
Limited Liability Corporations (LLCs) are among the easiest of business structure choices to employ. Setting your franchise up as an LLC offers operating simplicity, with less paperwork and requirements for compliance than the other two options. And with LLCs, you and any other LLC members’ personal assets are protected against debts, losses, and court rulings against the business. With an LLC, there is no issuance of stock, so shareholders aren’t a source for generating income for expanding your business. While it’s advisable to have professional guidance while setting up the LLC, many states have websites which will effectively walk you through the process.
C-Corporations
C-Corporations are the most common type of business structures in the U.S. They offer unlimited growth potential, all through the issuance and sale of stocks in the corporation. The number of investors can be unlimited—as well as their contributions. Some business expenses are tax-deductible under this arrangement and the C-Corporation’s status is often attractive to vendors and partners for your operation. There is, however, the ‘double’ taxation, where revenue is taxed at the company level and again if dividends are awarded to shareholders.
S-Corporations
Many people like to think of S-Corporations as a ‘Lite’ version of the C-Corporations. And there are similarities, such as the limited liability protection afforded the ownership team. Both can have shareholders, directors, and officers. The major difference in the two does come down to taxation. S-Corporations are set up to operate as pass-through tax entities, whereas the business can avoid being taxed at the corporate level and once again on shareholders’ personal income taxes. S-Corporations are also capped at 100 shareholders—hence, the ‘Lite’ version explained.
While these three business structures are the most commonly used articles of incorporation for new businesses and franchises, we at FranNet stress again the need for professional counsel and guidance prior to filing any paperwork with state and local governments. We’re happy to help with resources, connections, networking or just pointing you in the right direction. But our core competency is navigating you through the franchise investigative process.
If you’d like to see our expertise on display, make a no-cost, no-obligation appointment with one of our qualified FranNet representatives. We’ll be happy to share all the knowledge we can about setting up a franchise business of your own.
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