If your thinking about buying a franchise, you, undoubtedly, have a lot on your mind – and incorporation should be one of those things.
When you incorporate your new company, the business will become a legal entity and have its own identity. Just as though the business were a different person from you, you are responsible for what you do and the corporation will be responsible for what it does.
Why legally incorporate your new business? We don’t like to think about the worst case scenario when we’re beginning an exciting new venture, but doing so can actually make for a better start. Incorporating your new franchise business protects you in case the business fails, and also can shield your personal assets in case you are sued. There may also be tax advantages, depending on your state and your situation.
Some franchisors will ask you to incorporate before signing the franchise agreement. They encourage this not only for their protection – and yours – but because a corporation can seem more credible and more serious than an individual. The commitment involved in incorporating can make you seem like a more established business.
Some franchisors, on the other hand, may require you to pledge personal responsibility, whether you’re incorporated or not. This is a conversation you should have when you’re talking with different franchises and making your decision among the various franchise opportunities available to you.
Another factor that can influence your decision is where you’re getting the funds for your initial investment and your expenses until your franchise starts making money. That can be longer than you think. If you’re paying for everything yourself, you could lose your whole nest egg if your franchise went under. If you have investors, working out the legal details at the beginning will help protect both you and your investors.
Incorporating can also help you raise funds and find investors. Particularly in cases such as wellness franchise businesses or those involving children, where people might be more likely to bring legal claims against you, the legal protection of incorporation can make your company a more attractive investment.
Incorporating does have costs associated with it. You may want to talk with your CPA or other financial advisor about the costs and benefits of incorporating in your particular circumstances. Since these depend on the state you live in, the state where your franchise business operates (and many franchisees have locations in more than one state), the type of business you’re starting, and your personal financial situation, it’s impossible to make a general statement about the costs and benefits. In one case, incorporating might have tax advantages and in another it might increase your tax liabilities. There might also be advantages that would be small enough that they wouldn’t offset the extra costs and paperwork.
Discovering these costs and benefits and making a decision on incorporating should be part of your early planning.
Incorporation can be a relatively simple and easy process or it can be very complex, depending on your state’s rules and requirements and what type of company you’d like to start. The best way to start a company without running into any troubles down the line is to consult an attorney. Consulting an attorney who specializes in franchise law is an especially good move towards protecting yourself and your investment.