Franchisors should not allow their franchisees to use the tradename in the franchisee's corporate name. This dilutes the trademark and the value of the brand and mark.
So how should franchisees handle this? I always recommend that my franchisee clients form a separate legal entity to avoid personal liability. Whether that entity is a corporation or a limited liability company, will vary depending on differences based on the state in which the client's territory will be located (we represent potential franchisees nationwide). Many states in the country require that a business that is operating under a name that is different from its legal name register that trade name with the state as a fictitious name. For example if XYZ, Inc. is doing business as KL Franchising, then XYZ, Inc. would file the fictitious name registration with the state registering that it is doing business as KL Franchising. What a lot of franchisors prefer, is that the fictitious name have their trade name with the locale of the territory associated with it. For example, XYZ, Inc., d/b/a KL Franchising of Philadelphia. This protects their trademark while at the same time allows the franchisee to comply with state law. Therefore, in my opinion, a franchisor should allow/prefer a franchisee to comply with their state's laws and file a fictitious name registration when required by that state. Filing with the local addition protects their trademark while complying with state law.