9.02: Corporations and Franchises

Which of the following is true in regard to taxation of a C corporation?

Double taxation on income

A business franchise doesn't have to use a specific business structure. The owners can choose the business structure that makes the most sense for that particular type of company.

Franchises are especially common in the service, retail, restaurant, and hospitality industries.

How important is tax status? The tax status of the company will determine how much of the company's income is taxed. Pass-through taxation means the company's income is only taxed once, on the personal income tax form of the owner(s). Double taxation means the income is taxed twice. Tax exempt means the company's income is not taxed. Tax exempt = Nonprofit corporation Pass-through taxation = sole proprietorship, partnership, S corporation, LLC Double taxation = C corporation

How important are company-funded benefits? Company-funded employee benefits allow owners and employees to get health insurance, life insurance, retirement plans, and other benefits paid for by the company. Depending on the business structure, the amount spent on benefits for the company's owners may or may not be taxed. Company-funded benefits = C corporations, S corporations, nonprofit corporations, LLC (if the LLC is taxed as a corporation) No company-funded benefits = sole proprietorship, partnership, LLC (if the LLC is taxed as a partnership)

How many owners will there be? The number of owners might affect the type of structure you decide to use. For example, a sole proprietorship must be just one person (or sometimes a married couple), and a partnership must be more than one person. Some structures can have one or multiple owners. One owner = sole proprietorship, LLC, C corporation, S corporation Multiple owners = partnership, LLC, C corporation, S corporation (limit of 100 owners), nonprofit corporation

How important is liability protection? The type of company you are starting will determine how important liability protection is to you. If your type of business is likely to face lawsuits, liability protection will be important. Limited liability = LLC, C corporation, S corporation, nonprofit corporation Unprotected liability = sole proprietorship, partnership

Is the organization providing a charitable or public service? If the organization provides a charitable or public service, it might qualify for nonprofit status. You must be willing to reinvest any profits of the corporation back into the products and services, instead of taking any of the profit for yourself as the owner.

How much control do you want? This includes control over business decisions, the company's direction and future, finances, and access to the money earned by the company. Full control = sole proprietorship Control shared = partnership Varies (depending on number of owners and how company is set up) = LLC Less control = C corporation, S corporation, nonprofit corporation

The franchisee pays an initial fee and regular royalties (money) to the franchisor.

In return, the franchisee gets to use an established business model, marketing methods, trademarked materials, and the brand name and image that the franchisor developed.

S corporation (sub chapter S corporation)

Is a corporation with special tax status. Special tax advantage they taxed like partnership as a pass-through entity

Here are some examples of popular franchises in the U.S.:

McDonald's® SUBWAY® Dunkin' Donuts® Cold Stone Creamery® 7-Eleven® Days Inn® Great Clips® Sylvan Learning® Gymboree® Jiffy Lube® Molly Maid® H&R Block® The UPS Store® RE/MAX® Anytime Fitness®

You might want to create a company and turn it into a franchise, so that other people can start up outlets, and you can receive money from each of them.

Or you might want to be a franchisee and start a new business that is already part of an established franchise.

There are state and federal laws regulating franchises. The franchisor must provide a document that gives all essential information to the franchisee.

The agreement between the franchisor and franchisee is in a written document called a franchise agreement.

How much complication are you willing to put up with? Complication includes complexity of setting up the business and operating the business.

The more complicated types of businesses also cost more to set up. Uncomplicated = sole proprietorship, partnership Moderate = LLC Complicated = C corporation, S corporation, nonprofit corporation

C corporation

The standard, normal type of corporation It protects the liability of its owners Has a disadvantage of double taxation

Non profit corporation (tax exempt corporation)

This type of corporation may still have to file annual financial reports to the state or federal government *Must have* Public-service mission and purpose -educational -charitable -religious - social -environmental purpose

If you decided to be a franchisee and open a franchise of an existing company, which things would you expect the franchisor to provide for you? (Select four answers.)

Trademarked materials Marketing methods A business model Brand image

1. Doug and Vanessa want to start a carpet cleaning business together and share the ownership and profits. They are not concerned about personal liability. They want the business to be fairly simple to set up. 2. Esperanza is starting a business by herself as an illustrator for magazines and children's books. She isn't concerned with personal liability, but she wants the business to be easy to set up. 3. Robyn wants to turn her sole proprietorship as a tutor into a larger company with many owners and liability protection. She is willing to deal with double taxation and a complicated setup process. 4. Cuba is starting an event planning company. He wants to protect his liability, and he would prefer pass-through taxation. 5. Ming is starting a business with the purpose of fighting hunger in her community. She doesn't care about making a profit and is willing to reinvest any income back into her products and services.

__3__ C corporation __5__ Nonprofit corporation __4__ S corporation or LLC __1__ Partnership __2__ Sole proprietorship

Franchising

is a way of turning a company into a parent company with smaller retail outlets owned by independent operators.

franchisee

is an independent operator of a franchise business.

franchisor

is the parent company.