A critical decision: choosing the best legal structure for your franchise
Selecting 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.
The pros & cons of each legal structure
Sole proprietorships and general partnerships
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.
Limited Liability Company
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-Corporations
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.
S-Corporations
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.
Bottom line
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 questions, please contact us
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.
Non-disclosure agreements (NDAs) remain a critical tool for protecting sensitive business information. However, New York NDA requirements have evolved, and businesses must ensure these agreements are carefully drafted to remain enforceable. In a competitive market like New York City, NDAs are commonly used to protect proprietary information, client relationships, and strategic plans. At the same […]
How Courts Evaluate Testamentary Capacity and Undue Influence Will contests in New Jersey are difficult to win, given the strong presumption that a properly executed will reflects the testator’s intent. However, challenges based on lack of testamentary capacity and undue influence remain common, particularly where there are concerns about mental capacity or the involvement of […]
Bringing on outside investors can provide the capital and strategic support a business needs to grow. However, raising capital also introduces important legal, financial, and operational considerations. Before bringing on investors, businesses should address key legal issues to reduce risk, streamline investor due diligence, and position the company for long-term success. Early preparation signals that […]
How the Updated Law Shapes Retirement and Estate Planning The SECURE 2.0 Act of 2022 materially reshapes the required minimum distribution (RMD) landscape, extending tax deferral opportunities while accelerating distribution requirements for many beneficiaries. For high-net-worth individuals and families, these changes are not merely technical. They require a reassessment of retirement income strategies, beneficiary planning, […]
Buying Commercial Property in New Jersey: Legal Guide for Small Businesses
Small businesses considering buying commercial property in New Jersey must evaluate a range of legal, financial, and operational factors. While ownership can offer long-term value and control, it also introduces significant risks if not properly structured. This guide outlines key considerations to help New Jersey business owners make informed decisions, minimize legal exposure, and successfully […]
The SEC’s Latest Guidance on Applying Federal Securities Laws to Tokenized Securities
On January 28, 2026, staff of the U.S. Securities and Exchange Commission’s Divisions of Corporation Finance, Investment Management, and Trading and Markets issued a joint statement clarifying how existing federal securities laws apply to tokenized securities. The SEC’s “Statement on Tokenized Securities” does not establish new law, but it does provide greater clarity on the […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
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!
