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When to Incorporate When Buying Into a Franchise?

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By Ephrat Livni, Esq. on June 09, 2016 12:59 PM

Starting a business involves so many different types of tasks that the business owner, especially in the beginning, has to wear a lot of hats. This is why many people who wish to start a business consider franchising, or purchasing the right to open a branch of an existing business.

Buying into an existent brand that is already successful doesn't eliminate the risks or difficulty of running your own shop, but it certainly limits them a lot. When you do buy into a franchise, keep in mind these critical tips from CorpNet Founder and CEO Nellie Akalp. One of the first questions you have to address is this: when and how should you incorporate as a new franchisee?

Incorporate the Franchise Before Buying

Many business owners believe that legal steps are secondary to doing business, when in fact they should come first to limit your personal liability and establish the credibility of your business.

Incorporating a business means registering it officially with the state, providing the locations where corporate officers can be served legal papers, outlining the structure of the company, and informing authorities of intended activities. That is step one.

If you're going to buy into a franchise (becoming a franchisee), you may be waiting for after the deal is finalized to incorporate, not wanting to jump the gun or rush unnecessarily. But Alkap says that waiting is a risk in two respects. First, it's better for the business to do business as an entity than for you to be personally liable. Second, prospective franchisors will be reassured by your incorporation and know you mean serious business.

Do Your Own Due Diligence

Be careful, Do research. If you are buying a franchise headquartered in another state -- and even if you are not -- make sure you are aware of your own state's laws and the ways they intersect with the other's laws and requirements. You must be in compliance and you must carefully review any business in which you plan to invest. Don't rely on the franchise for legal advice.

While it's true that buying into a franchise means a lot less will be up to you than if you were choosing everything in a new business. But you should still get help before you sign the dotted line. Find counsel who can guide you on the best corporate structure for your business, file necessary paperwork and review any deals you do before you finalize them.

Consult With Counsel

If you're going into business, then you are bold and, hopefully, resourceful. But that doesn't mean you can take it all on. Talk to a lawyer and get guidance to ensure that your business, whether it's homegrown or a franchise, will thrive.

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