Legal Compliance Checklist for a Start-Up Franchisee
By Matt Dickstein
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Buying a franchise can feel overwhelming. You worry about all the things you know, and you worry about all the things you don’t know. I write this checklist to fill in the great unknown. This checklist gives you a bird’s eye view of legal compliance for your start-up franchise.
Let’s start at the beginning – buying the franchise.
Franchise Documents. I assume you’ve researched your new franchise and you’re ready to buy. Next up are the franchise documents. The Uniform Franchise Disclosure Document (FDD) is your primary source for information about the franchise system; for more on this subject see my article, The Franchise Disclosure Document. Thoroughly read the FDD.
The Franchise Agreement is your primary contract with the franchisor, and it controls the relationship. This legal document binds you in many ways, for example, it usually requires that you pay a nonrefundable up-front fee to the franchisor, that you pay on-going franchise fees, and that you pay liquidated damages to the franchisor if you try to get out of the franchise early. The franchisor also might demand a personal guaranty from you.
You should have a franchise lawyer help you understand the franchise documents before you sign them. Your franchise lawyer can negotiate the franchise documents, and can make sure that all of the franchisor’s promises to you are in writing.
Form a Corporation or LLC. Your basic choices are a C corporation, S corporation, or an LLC. Get an attorney to help you choose among the entities, and in which state to incorporate. Also see my article Should You Incorporate Your Business?
Shareholders / Buy-Sell Agreement. If your business has more than one owner, seriously consider getting a shareholders / buy-sell agreement to govern your relationship with your partner. These agreements save you a lot of money if partner relations go bad. A buy-sell agreement resolves disputes between the partners, including exit provisions if the partners can’t work together anymore. I call this the partners’ economic divorce. For more info, see my article, Buy-Sell Agreements.
Federal Employer Identification Number (EIN). You can call the IRS for your EIN or get it from the IRS’ website.
Bank Accounts. Once you have your company’s articles of incorporation plus EIN, you can open bank accounts.
Choose a Location. First decide on a general location, then check local zoning requirements to be sure you can operate your business there. Visit your local planning / permits department for this and other local requirements for your chosen location.
Real Property Lease. One of the most important contracts you’ll sign is the lease for your company’s offices. The lease will bind you for years to come, and you’ll have to continue paying rent even if the business doesn’t perform well. This is another area where you need a lawyer. Read Understanding Commercial Leases.
Fictitious Business Name. If your company uses a fictitious name (that is, a dba or some name other than the company’s legal name), you must register the name in your county.
State & Local Business Licenses. There are many types of state and local licenses that could apply to your business. For example, you’ll need health and sanitation licenses if you have a restaurant. Call the CA Department of Commerce, Office of Small Business, for information about the state licenses that might apply to you. Call your city about your local business license.
Seller’s Permit. If you sell merchandise, get a seller’s permit from the California State Board of Equalization.
Employer Filings and Withholdings. If you have employees, file form DE-1 with California EDD. This starts the never-ending process of employment law compliance. Hire a payroll company to handle your employee wage withholdings. Do not classify your workers as contractors unless they really are; see Classifying a worker as employee or contractor.
Workers Compensation and Other Insurance. Once you have employees, get an insurance broker for workers compensation insurance. Workers comp is required by law. And now that you have an insurance broker, look into property and liability insurance to cover risks associated with your operations (note that the landlord in your lease might require this insurance).
Finally, read Reduce your personal liability from your business to learn how to protect your personal assets from business risks.
That’s it for this bird’s eye view of the start-up of your franchise. I hope this checklist has been helpful to you. Call me if you want to talk more.