Legal Structure of Business

Legal Structure of Business

For a McDonalds franchisee, there are three options. The franchise can be operated as a sole proprietorship, a partnership, or a corporation. The real issue is not that there are options, but which option should be chosen. It is not always possible to make that determination easily, since there are many factors that have to be considered in each choice. A sole proprietorship is operated by one person. That person is solely responsible for the business, and there is no complex legal structure. That person can reap all the profits and rewards, but he or she also shoulders all the liability for any lawsuits or other issues that might go wrong. In a partnership, the profits and the liabilities are shared between two people. There can be some adjustment as to which person is "more" responsible for specific issues, or it can be a completely 50-50 split of everything, both good and bad.

In a corporation, it is the corporation itself that gets the benefits and also shoulders the liabilities. The corporation then "pays" the people running that corporation. If the corporation is sued only the assets of the corporation can be taken, and the individuals are not going to lose their assets to creditors or to someone claiming negligence or another serious problem. McDonalds itself is a corporation, but the franchisees have a choice as to what they want to be. Which structure should they pick? That has to be up to each individual person who decides to open a franchise, but it would appear that the best and most logical choice would be for the franchisee to open his or her franchise under a corporation, and not under a sole proprietorship or partnership. The reason for that is that there is simply too much risk to the other options. On a personal level, sole proprietors and people in partnerships are dealing with a lot of serious risk that people who own corporations can avoid.

In the past, there have been several lawsuits against McDonalds. The most notable one was when a person sued because the coffee was too hot and a burn occurred. While many people thought it was very silly to sue over something like that, other people agreed that McDonalds should have warned people more clearly that the product was hot and that they could be burned by it if it spilled. There are many arguments of the duties of a company and the common sense of the people using the company's products. Regardless of all of that, the main issue to examine is what the lawsuit would have done to a franchisee, depending on his or her legal business structure. When a sole proprietorship is sued, that means that the single person who is the sole proprietor is being sued. He or she is the one accused of being at fault, and he or she must prove that there was no guilt in order to avoid being required to pay damages to the injured party. What the damages will or could be is not important for this discussion. What matters is that the sole proprietor is the accused and the one who could lose everything. If the lawsuit is successful, assets could be taken from the sole proprietor and a judgment placed against him or her if there are not enough assets to cover the damages.

For someone who works with another person as a partnership, the liability would simply be split between two people who would both have their assets taken and (potentially) judgments placed against them. It is true that nothing can be taken from them if they do not have anything, but the judgments could follow them for the rest of their lives and keep them from being able to have much of anything else. They could see their tax refunds taken each year, and they may have serious trouble attempting to purchase a home or a car because they have poor credit and are considered to be a serious risk from a financial perspective. Naturally, this is not the place in which a person wants to find himself or herself. It is a place best avoided, and a corporation can help protect personal interests.

A franchisee who gets involved with McDonalds as a corporation still has risk. Corporations are not licenses to get away with anything and simply walk away free and clear when things go bad. For example, it generally costs between $500,000 and $750,000 to invest in and be awarded a franchise. McDonalds will not franchise to people (or corporations) that have no capital. If something goes wrong, the corporation (and thus the people or persons owning and operating it) could easily lose that money. If the corporation has other assets, they could also be taken and sold to pay off debt or satisfy the judgment of a lawsuit. However, the advantage that franchisees have when they open a franchise as a corporation is this: the liability is generally limited to the corporation. That means that personal assets like cars and homes are generally not able to be taken. The law is complicated and there may be some exceptions to this rule, but overall there is no real concern that a franchisee who owns his or her franchise as a corporation can be held personally liable if there is a problem with the franchise itself. Corporations do not protect their owners 100%, but they are often believed to be safer. Of course, they also cost more to operate.

The cost of incorporation can be quite high. Depending on the nature of the business, the legal requirements in a particular state, and other issues, thousands of dollars can be spent setting up a corporation. Then there is the matter of profit. With a sole proprietorship, the profit is all going to go to the person who owns the franchise. A partnership will see the profit split between partners. In a corporation, there may be many people who have to get paid. Running a corporation, especially if it is a larger one and/or experiencing growth, is a full-time job. It takes more than just a couple of people, and each one of those people has to get paid for what they do. That seriously cuts down on the profits that the franchisee will receive, but he or she might feel as though that is a fair trade-off for the protection afforded to him or her by the more complicated corporate structure.