Is a Franchise a Corporation: Everything You Need to Know
Is a franchise a corporation? It can be, but a franchise can also be another type of business structure such as a sole proprietorship or LLC.3 min read
Is a franchise a corporation? It can be, but a franchise can also be another type of business structure such as a sole proprietorship or limited liability company.
About Franchises and Corporations
A franchise is a small business. The franchise owner pays the parent company a fee along with ongoing royalties to operate under the parent company. Owners benefit from the parent company's reputation and advertising, as well as ongoing training that helps them start and grow their own franchise locations.
Franchises exist for nearly everything, from home remodeling to gardening to education. Many business owners are excited to operate their own franchise, particularly when it matches their skills.
The cost of running a franchise varies widely, so conduct adequate research to understand what your financial obligations are likely to be.
A franchise and a corporation may be the same type of business but with different growth strategies. A franchise is owned and operated by an entity, but it operates under license from the parent company. A corporation runs all of its business locations; it doesn't bring in other companies.
A franchise that's incorporated enjoys the same legal protections as any incorporated business.
Differences Between Franchises and Corporations
Common franchise businesses include the following:
- Retail stores
- Chain restaurants
A franchise may be any of the following business types:
- Sole proprietorship
- Limited liability company
- Other business type
An individual or company enters into a franchise agreement to run a local business under a parent company's larger brand. The parent company gives permission to a local owner to use its name and products.
The local party may be required to meet certain standards that the parent company sets. It may also have to purchase products from the parent company. All of this depends on the terms in the franchise agreement.
For instance, a local fast food restaurant may be owned by a regional parent company. The local restaurant operates under a franchise arrangement with a larger franchisor that owns rights to the franchise's features, which may include the following:
- Employee uniforms
- Operation manuals
A corporation offers its owners — its shareholders — liability protection. Corporations are required to file annual reports with the state in which they operate. They must also keep certain records and hold regular shareholder meetings.
Business Growth Patterns
Both corporations and franchises seek continual growth.
Corporations achieve growth by acquiring capital and having successful sales, marketing, and product development strategies. A corporation that operates as a franchise seeks to grow using private investors and other companies that purchase franchise locations.
The parent company profits by collecting franchise fees from the various locations, while also using its locations to promote its brand. By opening more franchise locations, the parent corporation expands and enjoys a larger share of profits.
Advantages and Disadvantages of Franchises
The advantages of franchises include the following:
- It's often easier to secure a loan to buy a franchise compared to a new business since banks understand the financial risks of franchises and appreciate their proven model.
- You often have a lower risk of failure with a franchise, in part due to their proven business model.
- Franchise owners aren't responsible for all of the business advertising because most national franchises are well-established and invest in national advertising campaigns that make it easier for new owners to compete.
- You have the chance to expand your franchise if you do well. Expansion may include your local area or beyond it.
Disadvantages of franchises include the following:
- You may find it frustrating to pay ongoing fees and royalties, particularly if you feel you're primarily responsible for your success.
- You might not enjoy the feeling of working for a boss if professional freedom was one of the driving factors toward you being an entrepreneur.
- You'll probably have to wait until your legal agreement with the parent company ends before you can move on, even if your business fails.
- You may work long hours as a franchise owner, especially if you have a hard time finding reliable workers.
- Depending on the franchise, you may experience high employee turnover rates.
Being a franchise owner is desirable for many people who want to run a business but don't want to create a new company from scratch. Proper research is essential so that you know exactly what you're getting into.
If you need help understanding franchises and corporations, 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.