In 2025, the U.S. franchise industry is on track to generate over $936 billion in economic output, with employment exceeding 9 million workers. Franchising offers a proven business model, enabling individuals to operate under an established brand with a ready-made product, marketing strategy, and business plan.
However, before diving in, you must choose the proper business structure. Your decision will influence your responsibility, taxes, and daily operational freedom, whether you choose a corporation or a Limited Liability Company (LLC). Your objectives and your expansion strategy will determine the greatest fit.
Not sure where to start? Let’s break down the essentials in this article so you know exactly what you’re getting into.
Understanding the basics of LLCs and corporations
Before you move forward with your franchise, it’s important to understand how LLCs and corporations work and what makes each unique.
What is an LLC?
An LLC (Limited Liability Company) limits your personal liability to the value of your business. That means if your franchise faces a lawsuit or bankruptcy, your personal assets stay protected. This structure appeals to franchise owners who want protection without too much complexity.
To start an LLC, you’ll need to register your franchise with your state and pay a filing fee. You’ll also draft an operating agreement outlining how the business runs and what each owner, called a member, can do. Members can have different voting rights, profit shares, and responsibilities.
Tax laws treat single-member LLCs like sole proprietorships. Profits and losses pass through to your personal return. Multi-member LLCs can be taxable as S corporations or C corporations, depending on what’s more favorable for your situation.
LLCs are ideal when working with a small group of trusted partners or family members. However, a corporation is a better fit if you bring in outside investors or apply for business loans.
What is a corporation?
A corporation is a legal entity that’s totally separate from its owners. That separation provides strong liability protection and gives you more flexibility when it comes to ownership and funding.
To set up a corporation, you’ll file articles of incorporation with your state. This document includes basic details like your company name, address, number of shares, and your initial directors and officers.
In a corporation, you’ll have:
- Directors, who make major business decisions
- Officers, like the president, treasurer, and secretary, who handle the day-to-day operations
- Shareholders, who own the company and vote on key matters
Shareholders invest money in exchange for shares, determining their voting power and share of profits.
Corporation tax options: S-corp vs. C-corp
A C-corporation pays taxes on its income. Then, when you distribute profits to shareholders, they pay personal income tax again; this is called double taxation. But you can deduct operating expenses like rent, payroll, and interest on loans before paying taxes.
An S-corporation avoids double taxation by distributing its profits directly to its shareholders. You report them on your personal return. However, S corporations come with restrictions: there can be no more than 100 shareholders, all of whom should be U.S. citizens, and not all states recognize S corporations for state tax purposes.
Corporations are more complex to set up and maintain, but they give you room to grow. If you plan to scale or sell your franchise down the line, a corporation may be the better long-term choice.
Key aspects to assess when choosing a business structure
When choosing between an LLC and a corporation, the following are the factors to consider to decide which one fits you best:
| Factor | LLC | Corporation |
| Liability Protection | Offers limited liability protection, hence protecting personal assets from corporate obligations. | Offers the same limited liability protection, separating personal assets from business liabilities. |
| Taxation | Pass-through taxation: Owners report profits and losses on their personal tax returns. | C-Corporations: Double taxation (corporation and shareholder levels).
S-Corporations: Pass-through taxation, but with restrictions. |
| Ownership & Management | Flexible ownership; members can manage or appoint managers. No formal structure required. | Rigid structure: Shareholders elect a board of directors, which in turn appoints officers to manage daily operations. |
| Formation & Maintenance | Simple to set up; minimal ongoing requirements (e.g., annual reports, fees). | More complex to form; requires bylaws, stock issuance, regular meetings, and extensive record-keeping. |
Pros and cons of LLCs for franchises
Let’s see the advantages and drawbacks of franchising an LLC:
Advantages
Less bureaucracy: Setting up your franchise as an LLC is straightforward, with fewer paperwork and compliance requirements. While you’ll still need to file some documents, the process isn’t as demanding as with a corporation.
Protection of personal assets: One of the most significant advantages of an LLC is that it safeguards your personal assets. If your franchise faces a lawsuit or financial trouble, your personal property, like your home or savings, remains safe.
Tax benefits: Taxing can be stressful, but an LLC offers some relief. With this structure, the business itself is not subject to taxation on its profits. Instead, the profits “pass through” to the individual owner’s tax return, which avoids double taxation, a common issue with corporations.
Drawbacks
Liability still exists: While LLCs limit personal liability, franchisees still have some personal responsibility to the franchisor, as outlined in the franchise agreement. This is not a unique issue to LLCs; corporations face similar concerns.
Difficulty in attracting investors: Investors may hesitate to finance an LLC since they can’t receive company shares. However, franchise systems often provide financing options, making this less of an obstacle.
Less guidance for new entrepreneurs: LLCs have fewer regulations around how to operate, which can be overwhelming for first-time business owners. Fortunately, franchising offers the base and direction you want, as franchise agreements often include thorough instructions on company establishment and operations.
Pros and cons of corporations for franchises
Similar to LLCs, corporations also face certain advantages and drawbacks, including:
Advantages
Unlimited growth potential: A C-Corp has no limits on the number of shareholders it can have, and supports you for growth opportunities. The flexibility to bring in more investors and their contributions can drive your expansion plans.
Protection of personal assets: Like other corporate structures, C-Corp and S-Corp shareholders benefit from limited liability (which means their personal assets are generally safe from business debts and legal obligations), making them appealing options for investors.
Attracts valuable partners: C-Corps appeal to potential company partners and investors because of their restricted liability and capacity to write off business costs, which promotes cooperation and expansion.
Tax benefits: An S-Corp avoids double taxation by passing the profits straight to the shareholders. This means shareholders only pay taxes on their personal returns, not on the corporation’s income, an advantage over C-Corps.
Drawbacks
C-Corps are great for getting investors and expanding, but they’re complicated and need a lot of managing. The big issue is double taxation – the company gets taxed on earnings, and then shareholders get taxed on any dividends.
An S-Corp also has a limitation on having no more than 100 shareholders. This cap restricts its ability to attract many investors or go public, making it less ideal for businesses with plans for large-scale expansion.
Special factors to consider
When choosing the right business structure, franchise owners should consider a few key factors.
- Check the franchisor’s requirements or recommendations for the structure, as they might have specific guidelines.
- Franchise agreements may also include contractual obligations that favor one structure over another.
- Additionally, if you plan to scale and own multiple franchise locations, consider which structure offers the most flexibility for future expansion. For instance, corporations can provide additional choices for ownership and simpler access to funding, which may be quite important as you expand your franchise operation.
Making the right choice for your franchise
Choosing the right business structure is super important for a successful franchise. LLCs are great because they’re flexible, protect you from liability, and have tax benefits. Meanwhile, corporations let you expand more easily and tend to attract investors.
However, each structure has its unique advantages and challenges, particularly in terms of scalability and franchisor requirements. Carefully assess your goals, available resources, and franchisor agreements before deciding. For tailored advice, consulting with a professional who can direct you based on your specific franchise needs and long-term objectives is always wise.
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