(This is a guest post from Nellie Akalp, Founder and CEO of Corpnet)
Buying a franchise, whether it’s a restaurant or a direct mail marketing business, franchising is one of the most popular and fastest ways to start a business. Buying a franchise gets you up and running with a proven model, support from the franchisor, and a clear-cut marketing plan to bring in new customers.
But along with the excitement of becoming a franchisee, there are a few risks as well. When you start as a franchisee, you need to make sure to protect yourself from the potential liabilities that go with running a franchise.
As the CEO of CorpNet, an online incorporation service, I have helped thousands of franchisees start a business, incorporate a company and manage business filings online. Here are a few considerations to keep in mind as you start your journey as a franchise owner:
A gentle tip from The Franchise King®:
Do not buy a franchise until you know EXACTLY how to do thorough research.
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- Incorporate early: Most franchisors prefer to have their franchisees incorporate a new business to represent the franchise, even before the franchisee signs the franchise agreement. Franchisors often prefer to sign contracts with established companies, rather than sole proprietors – and good franchisors will often encourage franchisees to incorporate as a way to reduce the franchisee’s liability and bolster the credibility of the larger franchise company.
- Cover all of your locations: Do you have multiple units of the same franchise business operating in multiple locations? If so, there might be legal complexities that are best prevented by properly incorporating your company. For example, one of CorpNet’s clients runs a popular chain of restaurants, with three locations. They decided to incorporate each of their three restaurants as a separate corporate entity, with a management corporation over all three locations.
- Different states have different requirements: Are you franchising a business in a different state than the parent company? If so, you need to pay attention to the state-specific incorporation requirements for your own state, as well as the state where the franchise’s parent company is headquartered. You can’t assume that your franchisor will be able to provide this information to you – it’s your responsibility as the franchisee to be accountable for the proper incorporation of your business in your state, which means you need to meet the filing deadlines, pay any necessary fees and taxes, and do everything else to remain in good standing with your state regulatory authorities.
- Expect the best, but prepare for the worst: Every franchisor is confident in their business model and enthusiastic to grow their companies by partnering with franchisees. Every new franchisee is hopeful that the business will succeed. Franchising is often an effective way for people to start a business and for existing companies to grow. However, even though you should feel confident and optimistic about your choice to start a franchise business, you need to keep in mind that not all businesses succeed. Sometimes even the best-planned, best-intentioned businesses can lead to financial losses or (in the worst-case scenario) lawsuits. Protect yourself – and protect your family’s financial future – by properly incorporating your franchise as a corporate entity to protect your personal assets against the potential liabilities of your business.
- Get help: CorpNet is an online business filing service that help you incorporate a franchise – but we do not offer legal advice. If your business has more complex needs, or if you have specific legal concerns about the franchise agreement, or how to set up and start your franchise business, then we strongly encourage you to speak with an attorney. Attorneys are experts in helping franchisees understand the legal implications of the contracts that they sign. They can help you understand your rights and protect your interests. CorpNet is there to help you manage your business filings and get your business started by incorporating online.
CorpNet offers a *free business consultation to help you understand your options for incorporating a business. Feel free to contact us for a free, no obligation conversation.
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Nellie Akalp is a serial entrepreneur and CEO of CorpNet, an online business filing service that helps franchisees and other entrepreneurs start a business and incorporate online. Follow Nellie Akalp on Twitter or at the CorpNet blog.