Should You Incorporate Your Franchise as an LLC or an S Corporation?

Many business owners decide against starting a C corporation by choosing a limited liability corporation or an S corporation. Franchises are no exception. So, how should you incorporate your franchise as an LLC or an S corporation?

As an LLC

An LLC can be subject to taxes as a corporation, partnership, or sole proprietorship, offering you a ton of options in bookkeeping routines and filing taxes.  LLCs are favored since they can be used as pass-through organizations for taxation. LLCs don’t pay corporate taxes. Net compensation is obligated only from the individual perspective, staying away from a twofold tax assessment.

LLC taxes are lower. LLCs don’t need to hold investor meetings or choose a governing body. Establishing your business as an LLC makes it simpler to constrain the organizational bureaucracy although some filings are required.

Your own personal belongings are shielded from company-oriented claims. According to Investopedia, when claims are made against your franchise, the LLC status limits your personal liability. You are usually shielded from claims and lawsuits.

The business is organized to remain intact even after you expire. Sole proprietorships and partnerships usually break up after an owner dies. LLCs stay intact.

Incorporating as an LLC also has disadvantages. Your liability is unlimited. Most franchisors mandate that you waive the typical corporate shield of the LLC and be personally obligated to the franchisor. Even as a corporation, you cannot avoid liability to the franchisor; and you are legally responsible to determine the setup and operation of your LLC. Fortunately, however, most franchisors have an interest in franchisee success, so franchisors provide structure, guidance, and suggestions to help minimize risks. Unlike C corporations, LLCs are unable to issue shares, which makes attracting equity investors a challenge.

As an S Corporation

Unlike the S Corporation, any entity can be a partnership. According to Franchise Gator, incorporating as an S corporation allows franchises to save money on payroll FICA taxes. A shareholder’s personal assets are protected by an S corporation. An S corporation won’t pay corporate-level federal taxes. An LLC that is taxed as an S corporation makes the owner’s salary a business expense. The owner will report salary and other business profits on their personal income tax return.

U.S. Corporations

In general, U.S. corporations are established under individual state laws, which vary. Some allow entrepreneurs to become incorporated online.

Seek the insights of experienced advisors in your industry first. This will help you decide whether or not to incorporate as an LLC or an S corporation.

Incorporating your franchise isn’t the only important task to consider. Here are some tips every startup business owner should know about gaining online success.

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