Business Legal Structures – Buying a Franchise

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Dear M & M:

I am starting a new business and don’t know if I should be an LLC, Sole proprietor, or some other form of a corporation. What should I do?

-Rachel

Dear Rachel:

When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is another popular business structure allowed by Arizona state statute. Some areas one should consider when deciding what legal entity you should become are; Taxation, Liability, Control & Risk, Continuity of Existence, Transferability, Expense and Formality. It is strongly advised you seek professional help from an attorney and a tax professional. Legal and tax considerations need to be understood and considered before you enter into selecting a business structure for your company. Obtaining the correct advice from professionals that understand and know what they are doing is the best advice we can give anyone. Seeking help in this area is the key to enable everyone to make the best decision to find the best fit for your organization. http://www.sba.gov/ has some great information about the various types of legal structures. One can search each legal entity online to find out more about each of the various types of legal structure available.

-M&M

 

Dear M & M:

I am considering buying a franchise. What are some things I should look into?

–Dawn

Dear Dawn:

Want to be your own boss, but not willing to take on the risk of starting your own business from scratch? Franchising can be a great alternative if you want to have some guidance in the start-up phase of the business. A franchise is a business model that involves one business owner licensing trademarks and methods to an independent entrepreneur. Sometimes, franchises are referred to as chains. There are two primary forms of franchising: Product/trade name franchising – Franchisor owns the right to the name or trademark and sells that right to a franchisee. Business format franchising – Franchisor and franchisee have an ongoing relationship, and the franchisor often provides a full range of services, including site selection, training, product supply, marketing plans and even assistance in obtaining financing. Before you decide to franchise, you need to do your research. You could lose a significant amount of money if you do not investigate a business carefully before you buy. By law, franchise sellers must disclose certain information about their business to potential buyers. Make sure you get all the information you need first before entering into this form of business. To learn more about franchising opportunities, visit Federal Trade Commission Bureau of Consumer Protection. Be a Detective – In addition to the routine investigation that should be conducted prior to any business purchase, you should be able to contact other franchisees before deciding to invest. You can obtain a Uniform Franchise Offering Circular (UFOC), which contains vital details about the franchise’s legal, financial, and personnel history, before you sign a contract. Know What You are Getting Into – Before entering into any contract as a franchisee, you should make sure that you would have the right to use the franchise name and trademark, receive training and management assistance from the franchisor, use the franchisor’s expertise in marketing, advertising, facility design, layouts, displays and fixtures and do business in an area protected from other competing franchisees. Watch Out for Possible Pitfalls – The contract between the two parties usually benefits the franchisor far more than the franchisee. The franchisee is generally subject to meeting sales quotas and is required to purchase equipment, supplies and inventory exclusively from the franchisor. Seek Professional Help – The tax rules surrounding franchises are often complex, and an attorney, preferably a specialist in franchise law, should assist you to evaluate the franchise package and tax considerations. An accountant may be needed to determine the full costs of purchasing and operating the business as well as to assess the potential profit to the franchisee.-SBA

 -M&M

 

To ask your questions: Call the Small Business Development Center(SBDC) at Cochise College (520)-515-5478 or email schmittm@cochise.edu or contact the Sierra Vista Economic Development Foundation(EDF) at 520-458-6948 or email  hollism@svedf.org

 

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