A franchise and a corporation can be essentially the same type of business with different growth strategies. A franchise is a satellite business of a parent company owned and operated by a separate business entity under license from the parent company. A corporation owns all its business locations without bringing in other companies. An incorporated franchise has the same legal protections as an incorporated business, with owners remaining separate from the financial responsibilities of the corporation.
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Parent Company Similarities
A corporation may choose to franchise its business locations just as a private corporation may choose to invest in any number of those franchise locations. The parent corporation owning the franchising rights may choose to own certain business locations while franchising others. A private corporation investing in franchising locations only has control over the franchises the private corporation chooses to invest in through the parent company, which still retains overall control of the business brand and methods of operation. Each entity functions as a corporation, with varying levels of control over the franchise and its organizational direction.
Company Owning Franchise Location
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The private company purchasing a franchise from the parent corporation may choose to incorporate to provide the same level of liability protection granted to the parent corporation. Limited liability protects the personal assets of business owners from attachment by creditors for business debts. This legal maneuver also provides the private corporation with the same “limitless” life that the parent corporation enjoys and allows the owners of the corporation to pass the franchise location on to other owners through the transfer of shares without risking the health of the business.
Business Growth Patterns
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A corporation and franchise both seek continual growth. A private corporation achieves growth through the acquisition of capital and successful marketing, sales and product development strategies. A corporation operating as a franchise seeks growth through private investors and other companies purchasing franchise locations. The parent company achieves profit through collecting franchise fees from each location while also using each location to promote the larger brand. Opening more franchise locations across the country leads to growth for the parent corporation and a larger share of the profits.
Paying Business Taxes
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Corporate franchises and other corporate businesses pay taxes in a similar fashion. The IRS considers both business entities as separately taxable from its creators, which means the corporations pay taxes on business profits and claim losses completely separate from ownership, who may draw a salary from corporations and pay taxes as employees. Corporations and corporate franchises pay similar taxes at the state level although corporate franchises may have to pay additional fees, depending on the state the company chooses as its base for incorporation.