Because many franchisors require a formal business legal structure before granting a license to own one of their franchise operations--and because it's smart to protect yourself from liability --it makes sense to consider one for your franchise. Each structure has its advantages and drawbacks, so you need to do your homework and think plenty before you make a decision.
Limited Liability Company (LLC), S-corporation, or C-corporation? Which should you choose?
Many considerations come into play, and it's important to consult with both legal and accounting professionals for guidance to make sure you understand all the pros and cons.
Asking yourself these questions might also help franchise businesses determine the best option that suits their individual needs:
DOES THE FRANCHISOR REQUIRE A SPECIFIC STRUCTURE?
If the franchise agreement states you have to set up your business a certain way to purchase and run the franchise, then your decision will be an easy one.
HOW MUCH INSULATION AGAINST LIABILITY DO YOU NEED?
Both LLC and S-corporation protect your personal assets because you are considered separate from your business entity. With an LLC, yours and any other members' personal assets will be protected against debts, losses, and court rulings against your business. With an S-corporation, personal assets are typically protected and usually only money invested into your business by you and any other shareholders is at risk. C-corporations offer a higher degree of limitation on liability, applicable to directors, officers, shareholders and employees.
HOW WILL EACH STRUCTURE AFFECT YOUR TAXES?
One of the most appealing aspects of the LLC is its "flow through taxation." In other words, profits are taxed at the individual level, on members' personal income tax forms. With C-corporations, business profits are double-taxed (taxed at the business tax rate when they're earned and taxed again when distributed as shareholders' dividends). Also, income and loss gets reported at the corporate entity level, so you and other shareholders can't deduct any of your business's losses on your personal income tax returns. S-corporations offer the most flexibility; you can either opt to be taxed like an LLC (with flow through taxation) or as a C-corporation.
WHAT LEVEL OF COMPLEXITY DO YOU WANT TO DEAL WITH?
Setting up and operating as an LLC offers simplicity. You'll have less formation paperwork and compliance requirements than with an...