Scarinci Hollenbeck, LLC
The Firm
201-896-4100 info@sh-law.comFirm Insights
Author: Scarinci Hollenbeck, LLC
Date: August 2, 2016
The Firm
201-896-4100 info@sh-law.comSelecting the best legal structure is a major decision for new franchisees. Legal obligations and tax implications are only part of the challenge because the legal structure of a franchise can impact its operations and eventually, profits. Determining the proper legal entity is a key factor that needs to be designated well before signing a franchise agreement.
The most common legal structure options are S-corporations, C-corporations, sole proprietorships, general partnerships and limited liability companies. S-corps are becoming more popular in recent years among franchisees due to the tax benefits afforded to smaller businesses with fewer stakeholders.
However, there are pros and cons to each and so, information regarding the best legal structure for you is listed below.
These entities are not the best legal structure for franchisees. According to Oblivious Investor, while they offer benefits for small businesses for their tax structure, they do not offer protection from individual liability. The reason for this is sole proprietorships and general partnerships are not separate from a franchisee’s personal legal identity. Thus, any liabilities and claims brought against the franchise would be strictly the obligation of the franchisee.
While LLCs are used by franchisees for the protection offered against personal liability from claims, their flexibility as independent legal entities and the few statutory requirements governing them, do not offer much for a franchise with equity investors. Delaget found that franchises under LLCs run into challenges when issuing equity to investors because they are not distributed in the same structure as corporations. If a franchisee has multiple investors into a franchise, LLCs become more complex from a tax perspective.
With that said, there are tax advantages because LLCs can be designated as flow-through entities, which means no corporate income tax returns need to be filed – all net income is taxed at the individual level.
C-corps are more ideal for the franchisor than the franchisee, primarily for their equity distribution for investors. This legal structure is most commonly used for publicly traded companies with several equity investors and executive boards. They are also troublesome for franchisees because C-corps are taxed at both the corporate and individual levels. The goal of any C-corp structure is to position a business for future growth by soliciting additional capital investment from investors. So if a franchisee anticipates rapid growth at some point, C-corps could be an ideal structure to reduce tax costs. But for those just starting, this is not an ideal structure.
The S-corp has gained in popularity among franchisees because of its tax structure. No federal income tax returns are filed because all profits and losses fall down to shareholders. These shareholders then report this information on their personal tax returns with a Form K-1. This is an ideal legal structure for franchisees because they will have a limited number of shareholders, and those shareholders assume the tax liability whether they receive any income from profits or not.
By now, you have realized that selecting the best legal structure for your franchise is a major decision, which requires consultation from an experienced business law attorney. Strictly speaking, however, the S-corp is an ideal option for smaller franchisees due to its flexibility and ability to generate profits without tax liabilities at the individual franchisee level.
If you have any questions or if you would like to discuss the matter further, you can get in touch with one of our attorneys at 201-806-3364.
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Breach of contract disputes are the most common type of business litigation. Therefore, nearly all New York and New Jersey businesses will likely have to deal with a contract dispute at least once. Understanding when to file a breach of contract lawsuit and how long you have to sue for breach of contract is essential […]
Author: Brittany P. Tarabour
Closing your business can be a difficult and challenging task. For corporations, the process includes formal approval of the dissolution, winding up operations, resolving tax liabilities, and filing all required paperwork. Whether you need to understand how to dissolve a corporation in New York or New Jersey, it’s imperative to take all of the proper […]
Author: Christopher D. Warren
Commercial leases can take a variety of forms, which is often confusing for both landlords and tenants. Understanding the different types, especially the gross lease structure, is important when selecting the lease that best suits your needs. One key distinction between lease types is how rent is calculated and paid. This article addresses the two […]
Author: Robert L. Baker, Jr.
Over the past year, brick-and-mortar stores have closed their doors at a record pace. Fluctuating consumer preferences, the rise of online shopping platforms, and ongoing economic uncertainty continue to put pressure on the retail industry. When a retailer seeks bankruptcy protection, a myriad of other businesses are often impacted. Whether you are a supplier, customer, […]
Author: Brian D. Spector
Since his inauguration two months ago, Donald Trump’s administration and the Congress it controls have indicated important upcoming policy changes. These changes will impact financial services policies and priorities. The changes will particularly affect cryptocurrency, as well as banking rules and regulations. Key Regulatory Changes in Cryptocurrency For example, in the burgeoning cryptocurrency business environment, […]
Author: Dan Brecher
The retail sector has experienced a wave of bankruptcy filings over the last year. Brick-and-mortar businesses in financial distress include big-name brands like Big Lots, Party City, The Container Store, and Vitamin Shoppe. When large retailers seek bankruptcy protection, they are not the only businesses impacted. Landlords can be particularly hard hit. While commercial landlords […]
Author: Brian D. Spector
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!