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Franchises Part 3: Fee structures and opening

Franchises are a shortcut to becoming a small business owner, in that it provides structure, a business plan and a marketing system. While you will be a part of a more extensive system, you will also be a business owner, and that means opening will require a great deal of planning on your part.

What kind of entity structure should you create?

Creating an entity structure for your business helps to protect you from liability. Many franchisors recommend and require their franchisees to form a legal entity. There are a few possible structures for your business, such as:

  • Corporation: Many franchisees avoid corporations because they can be structured with two layers of tax (at the entity and shareholder levels). Shareholders can make subchapter S elections for corporations to cause them to be taxed as flow-through entities.
  • Limited Liability Company (LLC): LLCs are a commonly used type of entity structure. They can be taxed as flow through entities and provide more flexibility for equity structures than subchapter S corporations.
  • Proprietorship or General Partnerships: These structures are less common because they do not provide liability protection for the owners of the business. They are, however, the simplest and cheapest to start.

The structure of your business will make an enormous impact on your success and concerns in the future.

Finding the right spot

If you are investing in a franchise, chances are you will need a strong location. Once more, your franchisor might have a spot and mind and can help you to secure it. If that is not the case, you will have to rely on your resources to find a proper location.

Whether you buy property outright or rent from a landlord, you will find that your path forward could be best helped with the assistance of a commercial real estate attorney.

Franchise fees

Unique to opening a franchise location is the franchise fees and costs. Such fees are often a part of your initial costs, but ongoing fees will be a reality while running this business. Fees run the gamut from $10,000 to upwards of $100,000 for initial costs and include periodic fees for things such as royalties, licensing, software, advertising and more.

Remaining profitable for the future

The goal of your business is financial independence and security for you. We will look at the ongoing life of your franchise in the final post in this series next time.

Read part 1 and part 2, and part 4.

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