Starting a franchise is an exciting endeavor. However, before you open your doors, you’ll need to make sure that you don’t leave yourself open to any legal scrutiny or government penalties.
Thus, there are very specific steps you will need to take from a legal standpoint. Here is what you need to keep in mind:
*Disclaimer: This may be obvious, but we here at Bin There Dump That are not qualified to give legal advice nor is this blog post meant to be taken as legal advice. We strongly urge everyone to consult an attorney and an accountant when setting up a small business.
Determine The Legal Structure Of Your Business
One of the very first legal decisions you will need to make is determining your business structure. Here are the different options you might consider:
Select this structure if you plan to operate the franchise on your own under a business name or your own name. Taxes for sole proprietorships are paid through personal income tax returns of the owner, and you are personally responsible for your business’s debts. As a result, many franchisors do not allow franchisees to operate as sole proprietors due to the financial and legal risks associated.
If you have one or more partners, than establishing a legal partnership may be prudent. However, the financial risks are similar to those associated with sole proprietorships.
- C-Corporation: A C-corporation is a separate legal entity owned by multiple shareholders. C-corporations limit each shareholder’s personal liability for the company’s debts to the amount they invested.
- S-Corporation: In the U.S., an S-corporation receives special tax status with the IRS that eliminates the possibility of having to pay the same taxes twice (as a corporation and as an individual). The major difference between a C-corporation and an S-corporation is the fact that the former can have an unlimited number of shareholders while the latter is limited to 100 stakeholders.
- Limited Liability Company: A limited liability company (LLC) offers a hybrid of a partnership and corporation.
There are many different business structures to choose from, and understanding the legal, tax and regulatory nuances of each can be difficult — but essential. That’s why we recommend working with an attorney who has experience in franchising.
Register Your Franchise Business’s Name
As a franchise operator, you will operate a business under a name other than your own. As a result, you will need to register the franchise’s name in order to apply for loans, receive funding, fill out paperwork and achieve the necessary licenses and permits.
The registration process varies depending upon your country, state and possible even city or village. Therefore, you will need to understand what is expected of you and, once again, we highly suggest consulting an attorney.
Obtain Your Employer Identification Number Or Business Number
An Employer Identification Number (United States) or Business Number (Canada) is required for collecting, withholding and remitting taxes to the government, and they are required for companies that hire employees. You can apply for an EIN online with the Internal Revenue Service and a BN with the Canada Revenue Agency.
Apply For Licenses And Permits
Along with obtaining an EIN or BN, you may be required to hold specific licenses and permits in order to conduct business. Licensing and permit requirements will vary according to your industry and location. A representative of the franchise may be able to provide guidance and ensure you have the documentation you need.
Purchase The Right Insurance
Even if you do everything right, things can unfortunately go wrong. Therefore, it is important to understand and obtain the right insurance for your franchise.
Where To Start? Get Your Finances In Order First
Even before you take these legal matters into account, you’ll need to make sure you have the right funds in your bank account. That’s because, getting your finances in order is essential to showing that you are a serious franchisee.
However, the financial aspect of operating a franchise can be just as confusing as the legal aspect. In order to clear things up, we’ve put together The Complete Financial Guide To Operating A Franchise. Download our free e-book now for valuable insight and practical recommendations.