Franchising is the practice of granting a third party the right to use private information such as a trademark, company name, logo, or other identifying marks. In order to build a firm and penetrate extremely competitive markets, this is the strategy of choice. It also helps the organization to develop and access new areas, resulting in an increase in the number of customers.
Franchise Vs. Corporation
Because franchisees control the business, they are considered a third party in the comparison between franchisees and corporations. A corporation, on the other hand, is owned by a group of people known as shareholders. In addition, the scope of culpability and the type of operation are distinct.
A corporation is a firm in which the shareholders own the majority of the stock. In legal terms, it is deemed to be a distinct legal entity from its owners, which means that it is treated as such. To put it another way, it is treated as if it were a legal entity in the eyes of the law.
An entity that is aided in its growth by the franchising process, in contrast to the technique by which it expands, is referred to as a corporation.
What exactly is a Franchise?
When a brand or organization wants to extend its operations, it will establish a franchise. Isaac Singer, who lived in the mid-nineteenth century, is credited with bringing this business concept into existence. The sewing machine was created by him, and he distributed it via the use of the franchising system.
To franchise, a franchisor (the owner) must first grant the franchisee permission to use private information such as a trademark, company name, or logo before granting permission to use the proprietary information to the franchisee. In exchange, the Franchisor requests a charge known as royalty from the franchisee.
This allows the franchisor to expand its geographic reach while incurring the least amount of financial risk, while simultaneously strengthening the brand name by extending the availability of the product or service around the world. It is the recommended approach for those who wish to start a company and enter highly competitive areas, such as the restaurant industry, where they may compete with established players.
It was created in 1979 and has been in effect since then that franchisees are controlled by the Federal Trade Commission (FTC). Then, in accordance with worldwide legislation, distinct regulatory agencies are established in each state to supervise the operations of the franchise.
When a franchise agreement is signed, it does not imply that the franchisor’s ownership rights have been transferred to the franchisee. It’s more like a lease or a contract that has to be renewed on a regular basis. Any violation of the terms and circumstances of the agreement may result in legal consequences for the franchisee.
Because the brand name has already been established, franchising offers the advantages of a ready-made business strategy that can be implemented immediately as well as the ability to generate cash quickly. However, there are certain drawbacks to this approach as well. It is possible that a franchisee may find paying monthly royalties to be a hardship, and that the individual would desire to establish their own firm instead.
What exactly is a Corporation?
As defined by the law, a corporation is a legally recognized entity that has been founded. It has certain rights, just like any other living person, such as the ability to enter into contracts and borrow money, among other things.
A majority of its shares are held by shareholders, and its operations are governed by the Board of Directors (BoD). It is also responsible for paying taxes and has the authority to own property. Corporations may be founded for a variety of reasons, including profit-making or charitable ones.
It is necessary to go through legal processes in order to form a company, and the laws for doing so change depending on which state the corporation is registered in. When it comes to electing the management of the organization, the shareholders have a say.
A company may be dissolved at any moment, and this is referred to as the liquidation process. All of the external obligations are paid off first, and then the internal liabilities are paid off, as is the case in this method. The remaining value is distributed to the shareholders.
There are several benefits to being a part of a company. All of the stockholders in the company are protected from personal responsibility. This indicates that they are responsible for up to the amount of their ownership interest in the company’s share capital. Apart from that, they get income in the form of dividends and have the ability to sell or acquire more shares of the company. A company, like any other legal entity, has an indefinite existence since it is a legal entity that can only be dissolved by the law. Corporations, on the other hand, engage in excessive tax filing operations.
Difference Between Franchise and Corporation
- A franchise is held by a franchisee who has obtained from the franchisor the right to use confidential information in his or her business. A company, on the other hand, is owned by its stockholders.
- A franchise is governed by the terms of the agreement as well as the laws and regulations of the Federal Trade Commission (FTC). An organization’s governance is overseen by its Board of Directors on the other hand (BoD).
- A franchisee pays a royalty to the franchisor in exchange for the right to use the brand. Instead, dividends and investments are made available to shareholders and companies, respectively.
- The franchisor is accountable for the actions of the franchisee and has the right to bring a lawsuit against the franchisee if the franchisee violates the terms of the franchise agreement. Shareholders of a company, on the other hand, are protected from personal culpability.
- In contrast to a corporation, a franchise is a network of outlets of the same firm that are present in multiple regions in order to expand.
As a result, franchises and corporations are two distinct concepts. In contrast to a corporation, which comprises individuals such as shareholders and the Board of Directors (BoD), a franchise includes individuals such as the franchisor and the franchisee.
In franchising, the franchisee is granted a license to use the company’s private information, such as its trademark, subject to the franchisee’s compliance with certain terms and conditions. In a company, however, there is no such licensing procedure.
The latter is just a legal entity created via the procedures of the law, and it has the same rights and obligations as a human being. The royalty paid by the franchisee is the source of income for the franchisor. In contrast, dividends are given to shareholders in corporations, and the business is funded by investments and/or earnings.