Best Business Entity Choices for Franchisees

A person interested in starting a franchise business would be wise to research the legal options for formalizing their business entity. Not only do most franchise operators require a legally registered business entity, certain business entities can also limit the liability of the business and provide certain tax benefits to the owner or operator. The best business entity for a franchise will largely depend on the business owners appetite for risk, preferred tax structure, and interest in attracting investment and growth.

Business Factors In Making Your Decision:

Here is a brief breakdown on how these three factors affect each business entity, especially starting one in the Bay Area of California:

• Certain business forms can shield the owner or operator from the liabilities incurred by the business. For these business entities, such as limited liability companies (LLC) or corporations, if money is loaned to the business or a lawsuit is filed against the business, the owner will not be liable in the event the franchise is unable to meet its obligations. On the other hand, some business entities will allow for debtors to seek restitution from the business owners. These business forms include sole proprietorships and partnerships and should be avoided in most circumstances. 

• In short, there are two types of business entity taxation. A person looking to start a franchise business can either choose “pass-through” taxation, where income is taxed at the personal level or “double-taxation” where income is taxed to the entity when the business earns the money and then taxed again upon distributing the money. For most franchise operations, “pass-through” taxation may be the preferred option. This is because, in addition to avoiding a “double-tax,” the Tax Reform and Jobs Act now allows Americans to deduct 20 percent of all income derived from many pass-through business entities – meaning, a business with “pass-through” taxation will only pay taxes for 80 percent of its profits. With the exception of entities taxed as “C” corporations, all business entities utilize pass-through taxation.

• Future Growth. “C” corporation taxation is required by some types of investors. And larger companies with lots of shareholders are usually taxed as “C” corporations. Businesses listed on a stock exchange are taxed as “C” corporations.  So if a company needs to raise large sums of capital, the company should probably be taxed as a “C” corporation. Because franchisees do not typically require large outside investments, it is unlikely that a franchise business would require to be taxed as a “C” corporation.

To learn more about the best business entity form for your specific franchise plans, contact the knowledgeable attorneys at JGPC Business Law.   JGPC Business Law provides legal services to businesses in the Pleasanton, Livermore, Oakland and Fremont CA areas.