It is recommended to speak with a certified CPA to review your goals and financial obligations before deciding on what type of business entity a franchisor and/or franchisee should establish. Each will have their own pros and cons as it pertains to taxes and liabilities. When it comes to the entity being for the use of anything franchise related, it is best to have the entity only connected to the franchise and no other types of businesses or responsibilities, keeping the entity cleaner, more organized and more protected.
This is a business run by one individual for his or her own benefit. It is the simplest form of business organization. Proprietorships have no existence apart from the owners. The liabilities associated with the business are the personal liabilities of the owner, and the business terminates upon the proprietor’s death. The proprietor undertakes the risks of the business to the extent of his/her assets, whether used in the business or personally owned.
Single proprietors include professional people, service providers, and retailers who are “in business for themselves.” Although a sole proprietorship is not a separate legal entity from its owner, it is a separate entity for accounting purposes. Financial activities of the busines
(e.g., receipt of fees) are maintained separately from the person’s personal financial activities (e.g., house payment).
Partnerships – General and Limited
A general partnership is an agreement, expressed or implied, between two or more persons who join together to carry on a business venture for profit. Each partner contributes money, property, labor, or skill; each share in the profits and losses of the business; and each has unlimited personal liability for the debts of the business.
Limited partnerships limit the personal liability of individual partners for the debts of the business according to the amount they have invested. Partners must file a certificate of limited partnership with state authorities.
Limited Liability Company (LLC)
An LLC is a hybrid between a partnership and a corporation. Members of an LLC have operational flexibility and income benefits similar to a partnership but also have limited liability exposure. While this seems very similar to a limited partnership, there are significant legal and statutory differences. Consultation with an attorney to determine the best entity is recommended.
A corporation is a legal entity, operating under state law, whose scope of activity and name are restricted by its charter. Articles of incorporation must be filed with the state to establish a corporation. Stockholders are protected from liability and those stockholders who are also employees may be able to take advantage of some tax-free benefits, such as health insurance. There is double taxation with a C corporation, first through taxes on profits and second on taxes on stockholder dividends (as capital gains).
Small Business Corporation (S-Corporation)
Subchapter S-corporations are special closed corporations (limits exist on the number of members) created to provide small corporations with a tax advantage, if IRS Code requirements are met. Corporate taxes are waived and reported by the owners on their individual federal income tax returns, avoiding the “double taxation” of regular corporations.