Difference Between a Franchise and a Corporation

By Cindy DeRuyter, J.D.

Difference Between a Franchise and a Corporation

By Cindy DeRuyter, J.D.

When you open a franchise, it means another established company gave you permission to use their name, logo, products, and more. Franchisees typically pay fees to the original company for the right to capitalize on the established entity. If you decide to open one, you can form your new company using any type of business structure, including a corporation, partnership, or limited liability company (LLC).

Coworkers sitting around a conference table

Potential Benefits of Franchising

There are several well-known companies out there that operate as franchises, including McDonald's, Subway, UPS, RE/MAX, and more. If you want to open your own business, you may want to consider opening a location of an existing company. When you do so, you get to take advantage of the existing company's brand recognition and advertising efforts, potentially making it easier for customers to recognize and choose your company over another store or restaurant.

When you take these next steps, you'll need to enter into a formal franchise agreement with the company. You might also need to meet their minimum requirements. For example, some agreements require ongoing payments for national advertising campaigns and other marketing efforts—on top of payments in the form of fees and royalties for the privilege of using the original company's name and products. This is why it's best to do some research beforehand if you think you might want to open a franchise.

Existing entities benefit from offering such opportunities because they can expand their reach without having to open additional stores themselves. In effect, the existing company leases its operating model, name, and proven business strategies to the franchisee. In turn, they agree to adhere to brand and quality standards in order to maintain the franchise.

Franchise Stores vs. Corporate Stores

Some businesses operate with a mix of corporate and franchise stores. A corporate store is one the original company owns and operates, and an independent owner controls a specific location.

With a corporate store model, the parent company has more control and oversight over management of the restaurant or retail store and may be able to leverage greater efficiencies in its contracts with suppliers and other third-party service providers. The main company has an incentive to operate efficiently, as it benefits from the corporate store's profits. However, the parent company also assumes all of the risk with corporate-owned stores.

When a company decides to allow other business owners to purchase franchise rights, those individuals assume some of the risk for the company's success. On the other hand, franchisees also get to realize the fruits of their labors, reaping the company's profits after paying fees and other expenses to the parent company.

Whether you decide to form your own company independently, establish a franchise of an existing business, or enter into agreements with other entrepreneurs allowing them to use your established brand and products, it is important to enter into agreements designed to protect your interests and rights. Ensure you do so in a way that best meets your needs, as well as your short and long-term goals.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.