Business Entity In The USA: Franchise Prerequisite

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Yes, it is important to form a business entity before buying a franchise. Before anything, let us learn more about the business entities.

First things first- building or buying a franchise is no piece of cake. It comes with a dozen of business aspects, start-up costs, agreements, contracts, taxation, and everything else. To make it concise, buying a franchise calls for understanding and application of the deep-rooted legislation and regulations. Yes, it is important to form a business entity before buying a franchise. Before plunging into the role of Business entities, let us take baby steps in knowing about the business entities. This article covers the introduction to the basics of Business Entities, as well as:

  1. Business entities and their types
  2. Roles and operations of the Business Entities
  3. Business entity and its place in franchise ownership

What is a Business Entity?

Any organization that is built to perform business activities is called a business entity. Further, the type of entity determines the expenses of the business in terms of taxation, exposure to liabilities, and other legal demands. A business entity is also referred to as a business structure.

There are various types of Business entities and each of them is subjected to different sets of laws and operations hence are suitable for different business set-ups.

Types of Business Entities:

  1. Sole-Proprietorship
  2. Partnerships
  3. Limited Liabilities Company 
  4. Corporation

Roles and Operations of the Business Entities


A sole proprietorship is a type of business form that one person owns and manages. Here, the business and the owner are not legally separate and hence is the simplest form of business entity or structure. 

The business owner, also known as a proprietor or a trader, conducts business using their legal name. Alternatively, they may choose to do business using another name, that is, by registering a trading name. Of its simplistic idea and less expenditure in setting up a sole proprietorship, it is one of the most sought business entities and is common among small businesses, freelancers, and other self-employed individuals.


Partnerships are those entities that enable multiple owners to invest and actively take part in the business, with certain set rules and limitations, obviously. There are different types of partnerships that one must know and they are:

  • General Partnership- This kind of partnership is a show-stopper among USA businesses. These are the entities that do not need any public filling. Here, all the partners are equally liable for the liabilities. This kind of partnership can be created with ease in the context of the agreement and other requirements. Most franchise owners prefer this kind of partnership over any other.
  • Limited Partnership – In this form of partnership, there are two kinds of partners- general partner and limited partner. While the general partner is responsible for all the debts that the firm incurs and has complete control over the business operations, the limited partner is subject to limited liability and does not contribute to the business’s management 
  • Limited Liability Partnership – This type of partnership accounts for the partner’s liabilities to be limited. However, if the partner is involved in malpractice or professional misconduct, his/her liability is unlimited. Professionals that prefer this kind of partnership are architects, accountants, legal franchises, and likewise.
  • Limited Liability Limited Partnership- The business entity that allows the blend of two types of partnerships- Limited partnership and Limited Liability

Limited Liabilities Company 

An LLC or Limited Liability Company is a kind of business entity that offers its owners a certain degree of protection from liabilities. An LLC presents the best of both- Partnership and Corporation. Limited Liability to all of its owners like a corporation, without the complexities of the setup and maintenance of the business as well as the flexibility of allocating profits like a partnership.

Hence, this business entity offers a lot of flexibility in operations. That makes this form of business entity to gain popularity among franchise owners.

LLCs can take different forms under the federal tax code. If your LLC has one member only, the business will be referred to as Sole Proprietorship, while with more than two owners, the business is bound to be called a partnership. When it comes to tax code, LLC is referred to as an S Corporation, and a single ownership LLC is required to fill the form as a sole proprietorship.


Corporations are business entities that are separate from their owners. Corporations, under the law, can enter contract loans and borrow money, sue or be sued, hire employees, own assets, and pay taxes. They possess rights as an individual. Corporations are flexible and popular. With regards to the taxations, corporations can be sub-categorized into the following:

  • C Corporation- A registered Corporation business entity is termed a C Corporation. The owner is offered protection against liabilities. The tax applies to the profits generated out of the business, 
  • S Corporation- When registered with the IRS(Internal Revenue Services), the corporation is termed an S Corporation. The revenue, losses, and tax items are all passed through the corporation, not letting the individual pay the tax.
  • Professional Corporation- These corporations are suitable for professionals extending medical, accountancy, and legal services to clients. The corporation laws offer provisions for the security of licensed professionals.
  • Non-Profit Corporation- These corporations are not established aiming at profit purposes. Further, the governing policies and laws are completely different. 

Understanding the underlying principles and working of each business entity empowers a business. Knowledge of these becomes the support system for the owner. This in turn opens up better scopes for the business’s future.

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