Article

The changing franchise landscape: Why Incorporation matters more than ever

It is more important than ever for franchisees and franchisors to work together and remain a united front. There are many ways to achieve this, of course, but franchisors facilitating compliance education and support programs for their franchisees, to ensure the health and longevity of their businesses, is one very effective way.

December 29, 2015

By Rex Caswell, CT Corporation

For franchisors and franchisees, today’s business and regulatory environment has become increasingly uncertain, even as the franchise industry grows. Evolving federal and state laws, increased government actions, and recent stressors have led to tensions on both sides.

Yet, franchising is critical to the health of the U.S. economy. According to the International Franchise Association, economic output from franchise businesses is nearly $900 billion.

With so much at stake, it is more important than ever for franchisees and franchisors to work together and remain a united front. There are many ways to achieve this, of course, but franchisors facilitating compliance education and support programs for their franchisees, to ensure the health and longevity of their businesses, is one very effective way.

The changing regulatory landscape

There have been many developments over the last year with regard to franchise law. Consider the situation in California, for example. In October 2015, California Gov. Jerry Brown signed amendments to the highly publicized California Franchise Relations Act into law, addressing several hotly contested issues relating to franchise agreements (covering some 37,238 franchise owners in the Golden State). These changes will affect franchises entered into, or renewed, on or after Jan. 1, 2016.

The amendment, passed in response to complaints from franchisees that their contracts were unfairly terminated, further clarified the conditions under which agreements can be terminated, transferred and renewed, and the obligations that both franchisors and franchisees have to honor the franchise contract.

With the legal changes, California joins Iowa and Rhode Island in working to address franchisor-franchisee agreements. Along with changes in state law, several bills that could affect franchisors and franchisees have been introduced in Congress.

The importance of remaining compliant

It is worth noting that many of these legislative changes allow for franchise termination if that franchise is not compliant with state and local laws; the California act, for example, provides that a franchisor is able to terminate a franchise for “good cause,” which is limited to the failure of the franchisees to comply with the requirements of the franchise agreement, along with any federal, state or local law or regulations.

Thus, a key way to avoid problems is for franchisees – with the help and support of their franchisor parent – to remain compliant, and one of the best ways to ensure this is through incorporation.

How does Incorporation help?

Given that today there are over 74,000 different compliance agencies in America for small businesses to navigate (and the number of licenses that many businesses need to acquire simply to stay open continues to grow), compliance is not easy for small businesses.

A single restaurant establishment, for example, may need dozens of business licenses, permits and certificates.  These could include a federal EIN for example, a state tax number, occupancy permit, signage permit, alarm permit, zoning/building permit, heath inspection certificate, alcohol license, wage/hour permit and more.

Incorporation helps businesses manage this menagerie of paperwork by providing the support of a professional registered agent. Almost every state requires incorporated entities to maintain a registered agent. That agent receives important legal paperwork for that business (so lawsuit papers, for example, are not served at your place of business, potentially in front of customers). The registered agent also keeps the business apprised of changes in the law that could impact the company, and keeps the business updated on various compliance requirements. This is particularly important for a franchise that has operations spread across more than one state, as compliance requirements and filing dates differ from state to state.

Incorporating also has the added benefit of separating personal from business assets, and can thus help to protect an owner’s personal assets. Finally, incorporating also enables business owners to take advantage of opportunities such as loans, grants and the ability to bid for earmarked contracts.

Working Together

Given the benefits of incorporating, it is in the best interests of franchisors to work together with their franchisees and assist in the process.

Recently, for example, CT partnered with a major national franchisor to build a program that included dedicated resources to educate its franchisees on their regulatory requirements, how to incorporate and how to remain compliant. The program included a web portal with resources, 24/7 assistance to guide franchisees, on-the-ground visits to franchisees to provide further education and more.

The results from the program included a rise in incorporations among the franchisees, and an overall increase in awareness of the various different compliance obligations and how to manage them all. Further, many of the franchisees appreciated the parent company’s willingness to provide guidance and support, so the franchisor-franchisee relationship benefited.

Conclusion

Franchisors and their franchisees rely upon one another for their businesses’ wellbeing and longevity. This is why it is so important for the two to united and work together for mutual benefit.

Further, franchising is a cornerstone of the American economy. The U.S. Census Bureau reports franchise businesses accounted for more than 10 percent of businesses with paid employees in America. Franchises build wealth and stability for hundreds of thousands of owners and franchise operations employ millions of people around the United States. If franchising flounders because of the issues and stressors that have faced the industry in recent times, then we all suffer, so let’s work to ensure this doesn’t happen.

Rex Caswell is vice president of sales for Wolters Kluwer's CT Corporation