Franchise vs Corporation: 6 Key Differences You Need to Know

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What is the right business for you, franchise vs corporation?

Starting a business comes with challenges in financing, hiring, and more. Thus, consider several factors, such as nature and capital, before establishing a business. A franchise and a corporation offer advantages.

Owning a franchise offers high profit and reduced risks. A corporation can guarantee liability protection and continuity of the business.

Learn about the difference between a franchise and a corporation below.

1. Nature of the Business

What is a franchise? It’s a type of business that grants a license to its operations. It includes the brand, products, and trademark of the product or service.

The franchisor discloses the operating information to the franchisee. Moreover, franchising allows third-party to gain profit from selling their products or services. However, they must also pay the start-up charges and licensing fees.

The franchisor sets the terms for the business. It covers the marketing, pricing, and outsourcing of the franchise. Thus, the franchisee can only manage the franchise outlet they bought.

A corporation refers to a legal entity formed to grow and continue to generate profit. Moreover, a corporation is distinct from its owners, making it a juridical person.

It can own assets, borrow capital from financial institutions, and enter contracts. Thus, it offers limited liabilities to its owners. The ownership of a corporation belongs to several shareholders.

They invest and buy shares from the company to gain ownership. The shareholders elect their board of directors. They are responsible for the activities and proper management of the corporation.

2. Organizational Structure and Hiring Process

The organizational structure and hiring process differs for each type of business.

Franchising allows direct communication between the franchisor and franchisee. Moreover, the owner sets up business operation guidelines. The franchisee has limited control over some aspects of the business.

It’s up to you to hire and manage your workers. You can also set the standards depending on the type of skill you need.

A corporation follows a vertical organizational structure. It comprises three levels: the top, middle, and first-line management.

The owners who make strategic decisions belong to the top-level management. The middle manager communicates with the top and first-line management. The first-line management performs the operational activities of the business.

In application, the owners set standards to consider when recruiting employees. Then, the human resource department provides information, help, and resources. The hiring managers perform the recruitment process.

3. Operation

The operation of a franchise and a corporation are the same. Both types of businesses manage their sales, inventories, and finances every day. However, the difference in operations depends on the process and people.

Investing a large sum of money comes with the risk of losing it. With this, franchise owners provide direct help in running business operations. Moreover, they make arbitrary decisions that benefit or cost the business’s net income.

A corporation follows a formal setting in delivering its business operations. It incorporates a system, process, and tools to ensure the organization functions well. Owners, managers, and employees need to cooperate to determine efficient operational methods.

4. Inventory, Accounting, and Auditing

The franchisor controls the inventory and product purchases in each franchise unit. They manage the accounting and auditing process of the business, too. However, a franchisee follows the guidelines set by the corporation.

Specific departments work on different business operations. It organizes activities based on their functions. Incorporating departments reduces cost, increases productivity, and creates efficiency.

The purchasing department manages the business inventory. They secure goods, ensure their quality, and record order details. Moreover, they ensure the company provides quality products and reduces operational risks.

The accounting and finance department deals with the financial operations of the corporation. They record, analyze and communicate financial transactions to create economic decisions. The accounting department finances and provides efficient support for business operations, too.

5. Liability

Liabilities are business debts they owe to creditors. Failure to settle liabilities can lead to a loss, halt operations, and reduced business value. You must pay debts to protect the business from damages.

Liabilities offer different effects on each type of business. It can damage the franchise vs corporation where it offers limited liabilities.

Creditors often hold the franchisors liable for problems caused by the franchise units. Moreover, the brand can suffer damages, such as a poor reputation. The franchisor can end their contract with the franchisee if the issue worsens.

A corporation is distinct from its owners. Thus, shareholders enjoy limited liability. Liabilities incurred by the corporation don’t affect the assets and shares of the owners.

6. Legal Formation

The legal formation process differs in each type of business, too. The ease of legal formation is one of the benefits of owning a franchise. However, a corporation undergoes a long and complicated legal process.

The legal formation starts with the franchisor preparing the contract. It covers start-up fees, annual licensing fees, and royalties. The agreement must include grant permission and an explanation of the guidelines, too.

Signing the contract seals the deal between the franchisor and franchisee.
There are many legal documents to process in establishing a corporation. You must file the articles of incorporation, corporate bylaws, and other IRS forms.

You can ask for the legal services of a reputable lawyer in your area.
It guarantees you a smooth business formation process.

Ensure to appoint a registered agent for your corporation. They will receive documents when the corporation becomes a participant in a lawsuit.

Franchise vs Corporation: Which Is Right for You?

Many people open their franchises or start-up corporations. However, there are factors to consider when choosing the right business. It includes capital needed, mode of operations, and legal formation process.

With this, what is the right business for you? A guaranteed higher profit in franchise vs corporation that increases capital accessibility. To learn more about growing your business, check out our other blog posts!

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