One of the most common questions that comes up when purchasing a franchise is whether or not one should set up a company to make the purchase. Setting up a company to buy a franchise is almost always the preferred method as it is relatively inexpensive and provides many benefits for you as a franchise purchaser (franchisee). One of the main benefits of setting up a company to purchase the franchise is to protect your personal assets. By using a company, the company is what incurs the debts and liabilities of the business and, as long as it is set up and ran correctly, your personal assets may not be used to satisfy any debts of, or judgments against, the business entity.
The two most common types of companies used to purchase a franchise, and in general, are a corporation which uses the designation “Inc.” and a limited liability company, or LLC. Both types of companies protect your personal assets from liability of the business, but they do contain some differences which are described below.
A corporation is a business structure where the business is a solely independent entity, separate from its owners and directors for taxation purposes. Since the corporation is an independent legal entity, the business itself can enter into contracts, incur debts and tax liability, and can issue stock in order to raise capital for the business.
Limited Liability Company (“LLC”)
A LLC is a business structure that combines the tax benefits of a partnership/sole proprietorship with the limited liability benefits of a corporation. Similar to a partnership or sole proprietorship, a LLC employs pass-through taxation which means that the owner of the LLC reports business profits and losses on their personal income tax returns and the LLC is not taxed as an independent entity. However, like a corporation, the owners of a LLC are protected by limited liability so that their personal assets may not be used to satisfy any debts of, or judgments against, the business entity.
The information provided above describes the basic characteristics and differences of a corporation and LLC but there are many more aspects to consider before deciding which business structure is right for you. Both options provide their own benefits and disadvantages and the pros and cons of each should be weighed accordingly in order to determine which option is best for you. Regardless, setting up a business to purchase your franchise is ALWAYS a wise decision.