Franchise Limited or Unlimited Liability
Franchise limited or unlimited liability are issues that could arise for a franchise owner.3 min read
Franchise limited or unlimited liability are issues that could arise for a franchise owner. When any person forms a business, he or she must keep in mind the type of business structure that is being established to be able to identify if the law protects that owner from liability over the company’s outstanding debts.
Franchise: An Overview
A franchise is a type of ownership that allows the franchisee to borrow the franchisor’s business model and brand for a period of time during the franchise operations.
Such franchises are set up through a licensing agreement with the franchisor. The contractual relationship itself will identify how the franchisee must run the business, what items must be sold, the pricing points, among several other items.
Generally, franchises are quite popular, as a lot of restaurants you see today are in fact franchises. Some examples of franchises include fast food restaurants, such as Burger King, McDonalds, Dairy Queen, Wendy’s, and others. Owning a franchise allows you to own a well-known brand, which will help you quickly overcome any issues that most owners have running their own business, particularly, if it’s a brand-new business that isn’t already well established and known by the public.
How the Franchisor Helps
The franchisor helps the franchisee in the following ways:
1.Finds the premise for the franchisee
2.Assists in constructing and/or refurbishing the premises
3.Helps obtain planning approvals, business permits, etc.
4.Helps with purchasing of inventory
5.Provides training on how to operate the franchise
6.Provides the necessary systems and other technologies required for daily operations
7.Trains you on how to market and advertise what you are selling
8.Provides a list of other franchisees that own and operate the same type of franchise, i.e., fast food restaurant
The franchisor also provides managerial advice and guidance to the owner and manager in how to own and operate a business, and overcome any issues that they might face with customers or employees.
Disadvantages of a Franchise
While there are several benefits to owning a franchise, there might be some disadvantages, too, including:
2.Restrictions on managing the business
While the franchisee owns the franchise, the franchisor still has a lot of control over how the franchise will be maintained. Therefore, all franchisees operating under the franchisor will need to abide by the requirements set forth by the franchisor. Furthermore, the franchisee has little control over which suppliers they can purchase from. Even if the franchisee can purchase supplies at a cheaper cost elsewhere, they might be required to spend more money if the supplier they want to use isn’t on the list. What’s more, the franchisor can, at any time, modify the operating agreement, requiring that the franchisee significantly alter their way of operating, even if that means spending more money. If the franchisee eventually wants to sell the franchise, the franchisor must approve the sale, along with the buyer.
Franchises offer limited liability for the franchisee from any legal suits brought by customers or employees. This means that the franchise owner’s personal assets cannot be affected by the outstanding debts of the franchise.
Role & Responsibilities of a Franchisee
Once you are ready to purchase a franchise, you will need to submit an application and show proof that you can meet the financial responsibilities of owning a franchise. If accepted, you will likely need to meet with a representative of the franchisor to discuss your goals. This meeting is essentially an interview wherein you can ask any questions you might have pertaining to the franchise, while the representative can evaluate your qualifications and understanding of what it takes to manage a franchise.
If both parties choose to continue, a second meeting will be held to formalize the agreement. Before doing so, you might want to speak to a qualified attorney who can assist you throughout the process. In addition to the initial fee for purchasing the franchise, there will be ongoing fees and royalties.
As previously noted, you will need to evidence that you are financially stable enough to manage the franchise. If you don’t have enough money to initially purchase the franchise, then the franchisor will not approve your application. But even if you have enough funds, you must show that you have additional funds to be able to afford other costs associated with the franchise, including purchasing/leasing a location along with marketing and advertising materials.
If you need help with learning about limited liability protection of a franchise, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.