Business and Commercial Law

— What is a Franchise? —

A franchise is not a type of business entity. Instead, it refers to an arrangement where someone (called the “franchisor”) has developed a business idea and methodology that is packaged up in a plan that is sold to other folks (called “franchisees”) who want to go into business for themselves. Under a franchise agreement, the franchisee is authorized to use and market goods or services under the franchisor’s trademarks, service marks and trade names for a specific length of time, usually in exchange for payment of a fee to the franchisor. A typical arrangement will require some payment up front and then a percentage of sales.

Many new business owners choose to purchase a franchise business because of the assistance they can get from a company with experience in the business. If you purchase a franchise from a reputable franchise company, the risks of opening a business may be significantly less than starting a new business “from the ground up.”

Generally, the franchisee will pay an up-front fee as well as continuing fees based on the dollar amount of goods or services sold. The franchisor trains the franchisee and provides market research to determine a favorable location for the business. The franchisor typically has strict rules and standards as to how business is conducted, the goods and services to be sold and the design and construction of the business location.

Each state has strict rules and regulations on franchises. Generally, franchisors must comply with strict disclosure requirements, so that people are fully aware of what they are getting into before they sign up to buy a franchise business. If you’re looking at buying a franchise, you should be sure that it has been properly registered. You should also be very careful to read and understand all the documentation given to you.

What kind of tax liabilities do I have to worry about in my business?

If you’re a first-time business owner or operator, the taxes levied on your business will be shocking. There are federal, state and local taxes assessed against every business, and a lot of the time you can be held personally liable for them. These taxes include:

  • Business license fees (essentially a tax on the cost of doing business)
  • Payroll taxes and withholdings (both the employer and the employee portions)
  • Excise taxes on products, goods or services (e.g., petroleum products)
  • Franchise taxes (for the privilege of doing business)
  • Permit and application fees (essentially another tax on the cost of doing business)
  • Sales and use taxes
  • Property taxes
  • Federal and state income taxes (personal and corporate)
  • Federal and state capital gains taxes (personal and corporate)
  • Penalties and interest that accrue on taxes that are not timely paid.

Failing to pay payroll taxes is a classic example of where many businesses get into trouble. As an employer, a business has the responsibility for withholding certain taxes from an employee’s paycheck (for example, income tax withholdings, social security, federal and state unemployment and disability taxes). These amounts are not the employer’s money and the employer is responsible for collecting them on behalf of the government. The IRS and other tax authorities are very unforgiving about failing to pay over these withholdings in a timely manner. In addition, the employer is responsible for the business’s portion of social security and other payroll taxes that must also be paid on time. If the employer fails to pay in these taxes and withholdings, penalties can be assessed against the owners and/or managers of the business up to 100% percent of the amounts owed.

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