As a franchisee, choosing the best legal structure is critical. However, when it comes to the typical ownership structure of franchises, the number of options can make the process confusing. Even so, the legal structure of your business can have monumental implications for taxes, legal obligations, as well as profitability. Because of the weight levied on the ownership structure of franchises, it's imperative you get it right.
At MB Group, we offer decades of experience helping franchisees navigate the complex and confusing landscape of choosing an ownership structure. Let's take a closer look at the most typical ownership structures of franchises as well as the pros and cons of each. And for a more tailored approach, don't hesitate to reach out to the MB Group today.
Sole Proprietorships & General Partnership
While sole proprietorships and general partnerships may be the easiest to form, they rank near the bottom of the list when it comes to the best ownership structures for franchises. These types of ownership structures do offer attractive small business benefits in terms of the tax structure. However, they fail to offer you the types of liability protection most franchisees desire.
For instance, with sole proprietorships and general partnerships, your personal assets are not viewed separately from the franchise. And this means any claims brought against the business or liabilities incurred by the franchise could impact the business owner's personal assets.
Limited Liability Company
Although sole proprietorships and general partnerships fail to offer franchisees liability protection, the Limited Liability Company (LLC) provides business owners protection against personal liability from claims. However, it's important to understand the flexibility of LLCs as independent legal entities and the laws governing them do not offer equal protections for equity investors of a franchise. In fact, franchises under LLCs can face challenges when equity is issued to investors because they are not distributed in the same manner as corporations. And when the franchise has multiple investors, LLCs can become a much more complex tax story.
With that being explained, LLCs do offer distinct tax advantages. They can be designed as a flow-through or pass-through entity. This means that no corporate income tax will need to be filed. Instead, all net income can be taxed at the individual level.
C-Corporations are a much more ideal type of ownership structure for the franchisor than the franchisee. This type of structure can render ample benefits for the franchisor primarily due to the equity distribution for investors. The C-Corp legal structure is used for companies that are publicly traded with several executive boards and equity investors.
For franchisees, they can be troublesome because they can be taxed at both the individual and corporate level. The overarching goal of any C-Corp is to position the business for future growth by soliciting extra capital investment from investors. As a result, if you're a franchisee who anticipates accelerated growth, you could be able to use the C-Corp ownership structure to reduce those costs. However, if you're just starting, the C-Corp may not be the most ideal or typical ownership structure of franchises.
S-Corporation Are Usually the Best Structure of Franchises
The S-Corporation structure has gained significant popularity among franchisees because of its favorable tax structure. With S-Corps, no federal income tax returns are filed because any losses or profits are passed on to the shareholders. The shareholders then will use Form K-1 to report the losses or profits on their personal tax returns.
The S-Corp structure is arguably the most ideal ownership structure of franchises. And these shareholders will individually take on the tax liability — whether they receive any income from profits shareholders or not.
Contact MB Group Help Choosing the Ideal Ownership Structure for Franchises
By now, it should be clear that choosing the best legal structure for your franchise is a significant decision that shouldn't be taken lightly. Instead, it's best to partner with the experienced accounting and tax professionals at the MB Group for personalized guidance. Contact the MB Group today for personalized guidance on choosing the best ownership structure for your franchise.