How you hold a franchise license or development agreement may seem like a simple decision. Or maybe you haven’t really thought about it at all, since in some cases franchisors dictate how agreements are held — either by the individual owner or in the operating company. But neither of these options provide flexibility and both create unwanted liability, so it’s worth finding out a franchisor’s expectations prior to signing an agreement.
If it turns out you do have a choice on the issue, you may want to consider using a single- or multi-member LLC. An LLC generally provides greater flexibility regarding transferring income and estate planning concerns and will give you an additional level of asset protection. In a single- or multi-member LLC, your children/grandchildren can be set up as members, not owners, of the operating company. This allows you to charge a fee to the operating company for use of the license and transfer that income to the children/grandchildren. In addition, if the operating company is ever sold, it will be easier to allocate capital gain to agreements held in an LLC.
Further, if the LLC holding the agreements is filing as a partnership and is not operating as a business, then an election can be made so annual tax returns are not required, saving additional time and money. If the LLC files as an S Corporation, annual tax returns will be required even if there is no activity beyond holding the agreements.
It pays to know up front what flexibility you have with the franchisor on how you hold the license and development agreements. But even if you own a well-established company that is currently holding the agreements individually, it never hurts to ask the franchisor if they are amenable to change. There are instances when requirements can be changed and may even become a model for the rest of the franchise. As always, speak with your team of advisors before signing any franchise agreements.
For more information, contact a member of your service team.
This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.
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