Before we dive into the pros and cons of LLCs for your franchise, it’s important to build a sound understanding of what exactly LLCs are. Forming an LLC for a business means creating a legal entity for it separate from you as an owner, unlike in sole proprietorships or even partnerships.
The Pros and Cons of Turning YourFranchise Into An LLC
Have you already decided on starting your own franchise, but have yet to decide on the right business structure for it? Don’t worry, you aren’t alone.
Choosing which legal business structure is right for your business is a challenge, because each one will bring different kinds of legal and tax implications for you in the future. And for a lot of franchisees, a Limited Liability Company (LLC) is the most favorable one. This is because it offers a lot of benefits to business owners. But as with any kind of business structure, it also has its downsides.
What exactly is a Limited LiabilityCompany?
Before we dive into the pros and cons of LLCs for your franchise, it’s important to build a sound understanding of what exactly LLCs are. Forming an LLC for a business means creating a legal entity for it separate from you as an owner, unlike in sole proprietorships or even partnerships. Thus, there is a line between the business’s assets or liabilities and your own, which can be useful for keeping your personal properties safe from any business debts or lawsuits. But there’s more to an LLC than that, as many entrepreneurs choose this type of structure because it’s easy to set up and has a flexible management structure.
Advantages of choosing an LLC
•You can choose how your business will be taxed. LLCs can be taxed as sole proprietorships, partnerships, or corporations, offering you a lot of flexibility in accounting practices and tax filings. LLCs can choose to pass through tax status or a corporate tax status
•You limit your personal liability.An LLC is viewed as a legal entity separate from its individual members or owners. As such, your personal assets are protected from claims made against the franchise.
•You are subject to fewer compliance requirements. LLCs face fewer state-imposed compliance requirements and ongoing formalities than sole proprietorships, general partnerships, or corporations, such as keeping strict records and holding shareholder meetings.
•Distribution of profits is simple and flexible.An LLC’s members or owners get to determine how profits are allocated. There is no need for formal documentation as is required with corporations.
Disadvantages of choosing an LLC
•You have to keep records separate.Owners of an LLC must be careful to keep their personal business separate from the business of the LLC. The LLC must have its own records, and money must be kept separate as well.
•You’ll find it harder to raise money.While LLCs offer limited liability, investors might be more accustomed o or comfortable investing in the established governance and structure of a corporation, and a lot of banks are wary of loaning money solely to an LLC.
•You’re legally on your own in terms of how to operate your franchise. Because of the few compliance requirements on howLLCs must operate, it can be challenging to structure and run your company.Luckily, most franchise agreements give you guidelines on how to structure and operate your business.
Is setting up an LLC the best option for you?
As attractive as LLCs can be, it isn’t always the best legal structure for businesses. So, it’s up to you to see whether anLLC is the best option for your business needs, but we hope that this article has helped you decide whether it is, or not.
Choosing which business structure is best for your franchise is not easy, but building and growing a franchise business is even harder. It takes a lot of planning and patience. And we can help you with that. Contact us today to get started.
This article was written by: Jam Bonnie
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