The Start Up Blog

Choosing A Legal Entity Structure For Your Franchise

Franchise Business Entity Structure“PIC”, “LLC”, “S”…this alphabet soup of legal entity structures can be very confusing to start-up franchises. It is important to understand basic accounting and insurance concepts, however, in order to make an informed judgment about the best legal structure for your particular franchise operation. You should especially focus on legal liability and tax reduction when forming a legal corporate entity. Don’t lose money on frivolous lawsuits or avoidable tax deductions.

Factors such as tax impact and owner liability vary between different legal entity structures for a franchise

Most franchises establish “S” corporations because they are simple and efficient to file as part of the owner’s personal IRS return. With this legal entity structure, gains and losses are then netted against the owner’s personal income from all other sources. This is helpful during the start-up phase of the franchise because some of the early expenses can help reduce your overall tax bill almost instantly.

The Limited Liability Company (LLC) is an incorporated entity that does not offer share certificates to its owners. Instead, this legal entity structure provides a “Certificate of Formation” which is used as a blank template for the owners to formally outline how the LLC is to be divided and managed by its owners and directors. This is a popular legal form for franchisees that own the real estate that is being leased by their franchise. It is also popular with offshore investors who purchase franchises in the United States because LLC owners are not required to own a social security card in this country.

 

The Passive Investment Company (PIC) is a holding company strategy that can be deployed by larger franchise operators for the management and maintenance of their passive assets. It can be used to hold, for example, franchise licenses and inter-company debt. Larger franchisees are encouraged to contact A. David Vande Poele or Anthony Shippam at Stewart Management Company (www.smcglobal.net) in Wilmington, Delaware to learn more about how to establish a legal, tax friendly PIC in Delaware, Nevada, or the Cayman Islands.

 

Franchise Corporate KitForming a corporate entity is a simple and inexpensive process if you work with a professional service company like Inc. Plan (USA).  Once the entity is formed, you can begin organizing your company records in a corporate kit that is customized to your company’s specific needs. This kit should include minutes, bylaws, and share certificates that will be distributed to the owners of the franchise. It should also include an official corporate seal used to validate official company documents and to open a bank account for the business.

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