McDonald's corporation legal structure and franchise system advantages

Legal Structure of McDonald's Corporation

There are many different categories of business in the world today. McDonald's brand franchisees operate as part of a corporation. The company, comprised in part of restaurants run by independent entrepreneurs, is currently considered one of the worlds most successful and largest franchising companies every created. Seventy percent of McDonald's restaurants are owned and operated by independent owners.

This corporate business structure has resulted in substantial opportunities for individual business owners and for the corporation as a whole. The legal structure of McDonald's is discussed below, as well as the advantages and disadvantages McDonald's corporation has over other legal business entities. Though McDonald's corporation operates slightly differently than other corporations in the world today, it remains one of the world's leading retailers, a testament to its strong legal structure.

Legal Aspects Of A Franchise

McDonald's successfully operates as a franchisee corporation. There are many legal components of a franchise agreement. A franchisee must negotiate contractual points, address trade secrets, limit personal liability, establish a trade name and learn about state statutes (Obringer, 1). For an independent operator to own a McDonald's he or she must first qualify to own a conventional franchise, meaning they must have roughly $175,000 worth of capital (Obringer, 1).

The costs of opening a restaurant exceed $400,000 dollars, and an owner has to have forty percent of these funds initially. McDonald's first assessed a franchisee fee, then engage in rigorous training to learn the ins and outs of McDonald's service quality standards, formulas and specifications. As a bonus, once training is complete you can operate in a pre-selected location with a completed exterior. The independent owner does have to purchase interior supplies and decor. The owner also pays McDonald's 4% of monthly sales each month and a flat rent or rent based on a percentage of sales.

Thus far McDonald's franchising system has proven successful. The company has a globally branded name and is renown as the world's leading food service retailer. The company currently owns restaurants in 119 countries and serves more than 47 million customers every day (FranchiseOpportunities.com, 1). The company has adopted the motto that a Corporation can be successful only if the franchisees that operate under it are successful. Thus the company works hard to build relationships with owners, operators, employees and suppliers. The company's success is based on that of its business partners.

It is important when starting a company an individual limit their personal liability for paying debts and taxes. Understanding legal structures helps this process.

Advantages and Disadvantages Incorporation

There are multiple types of corporations like McDonald's. AC-corporation creates a legal entity that is separate from an individual owner. A legal entity can conduct business on its own. The benefits of a C-corporation status are many, and include no liability for shareholders, simple structure for raising capital, and ownership that can easily be exchanged from one person to another. Disadvantages however, include double taxing (owners have to pay taxes twice), higher administrative set up expenses and additional state and federal regulatory requirements that must be adhered to (Molnar, 1).

An S-Corporation on the other hand, like a C-corporation, is taxed just as a sole proprietorship, thus owners only have to pay taxes once and shareholders aren't personally liable for corporate expenses (Molnar, 1). The biggest disadvantage however is the administrative expenses for set up and maintenance can be high, and there are restrictions regarding ownership (Molnar, 1).

Advantages and Disadvantages Sole Proprietorship

A sole proprietorship is a legal structure that makes no clear or legal distinction between the business owner and the business (Molnar, 1). Thus the owner takes on all the liability associated with conducting business. There are some advantages of a sole proprietorship. For one, the costs associated with administrative setup are low; the owner only has to pay taxes once and there are few state and federal legal requirements an owner must follow (Molnar, 1). However, the owner is personally liable for any claims against the company. An owner may also have trouble raising capital for the company. This would hinder an owner's ability to own a McDonald's, and put the owner at too much risk for personal liability if he owned a McDonald's.

Conclusions

McDonald's has wisely decided to set up operations as a franchising company. The company should be structured as a corporation because it affords McDonald's the greatest protection from personal liabilities. This structure also protects shareholders and employees from frivolous lawsuits.

Unlike most traditional corporations McDonald's operates as a franchise corporation. It relies on franchisers to help sustain the corporation. The corporate structure affords McDonald's multiple protections including personal liability protection for owners. While owners are taxed higher and have higher administrative fees than other legal structures like an LLC, the profitability of the company far outweighs any disadvantages. A sole proprietorship would not be suitable for McDonald's corporation as too much liability is involved in owning a fast food restaurant with a brand name as large as McDonald's. The very name carries with it multiple opportunities for legal suits against the company.

No other business structure would afford McDonald's the same amount of profit currently enjoyed than a franchise corporation. This is the best legal structure for McDonald's as time has proven and will continue to prove.

References:

"McDonald's Corporation." FranshiseOpportunities.com. Retrieved Sept 1, 2005:

http://www.franchiseopportunities.com/Zor_52/McDonalds.htm.

"McDonald's Owners Operators." Retrieved Sept. 5, 2005: