Thinking of starting a franchise? A lot of new franchisees expect that absolutely everything will be taken care of by the franchisor. While yes, a lot of processes, supplier relationships, et cetera, will be handed down to you by your franchisor, there are some decisions you’ll have to make, such as what business structure your franchise will use.
Now that you know you’ve got a big decision, you likely have questions. Here, I’ll answer some of the more common questions from franchisees about business structures.
Which Business Structure is Right for Me?
While there’s no one-size-fits-all answer to this question, generally the answer falls into one of two camps:
Both of these business structures provide protection of your franchise, as well as your personal assets. If you choose no business structure, you’ll operate as a sole proprietor, and you’ll put yourself at risk. If your franchise is ever sued, your personal assets can be taken to cover costs.
On the other hand, with both the S Corporation and the LLC, your personal assets can’t be touched, because you’re considered separate from your business entity.
What are the Differences Between the S Corp vs the LLC?
While there are a lot of similarities between these two business structures, including pass-through tax treatment, protection of personal assets, and unlimited duration, there are a few key differences.
The S Corporation tends to require more rigid paperwork and processes. You’ll need to assign a Board and meet with them annually, as well as file an Annual Report. The LLC requires less formality.
Also when it comes to owners, the S Corp only allows US citizens or residents to be owners, and limits shareholders to 100. An LLC may be owned by other LLCs or corporations, and the owners do not have to be US citizens or residents. You can have an unlimited number of owners in an LLC.
Where is the Best Place to Incorporate or File as an LLC?
You may hear that certain states are better to form a business structure in, even if you don’t do business there. Yes, some states have low or zero state tax, but that doesn’t make them the best place to form a business entity.
My advice is to form your corporation or LLC in the state you plan on running your franchise. Otherwise you may have to file additional forms and pay extra fees to register in a state other than where you do business, and in my mind, it’s not worth the hassle.
How Hard is it to Incorporate or File an LLC?
You’ve got several options here. If you’re all about DIY and don’t mind a little paperwork, you can download the appropriate form for your business structure from your state’s Secretary of State website. Some site even let you file online. You’ll need to provide basic information about your business including contact information, officers’ names, and the nature of your business. You’ll pay your incorporation or filing fee, which is usually between $100 and $300.
If you’d rather let someone else handle the work, you can employ a business filing services company that will take care of the paperwork on your behalf.
Depending on how busy your Secretary of State’s office is, you can expect to get your business structure approved in a month or two. If you work with a filing service, you can expedite the process to get it approved within a matter of days.
Want help moving forward with incorporating or forming an LLC for your franchise? Give us a call for a free business consultation and we would love to help! 888.449.2638