Franchising is the process of licensing of proprietary information such as trademark, business name, logo, etc. to a third party. This is a preferred method to establish business and enter highly competitive markets. It also enables the company to expand and enter new markets, establishing a larger customer base.
Franchise vs Corporation
The main difference between Franchise and Corporation is that a franchise is owned by franchisees, a third-party. On the other hand, a corporation is owned by shareholders. The extent of liability and model of working is also different.
A corporation is a business that is owned by shareholders. It has a separate legal entity, i.e., it is considered separate from its owners. In simple words, it is considered a legal person in the eyes of the law.
Where a Franchise is a method to expand, a corporation is an entity whose expansion is facilitated by the process of franchising.
Comparison Table Between Franchise and Corporation (in Tabular Form)
| Parameters of Comparison | Franchise | Corporation |
|---|---|---|
| Meaning | A franchise is the chain of the same company. | A corporation can have a single company or a group of companies. |
| Ownership | A franchise is owned by individuals. | A corporation is owned by shareholders. |
| Control | A franchise is controlled by the Franchisor | A Corporation is controlled by the Board of Directors (BoD) |
| Liability | In a franchise, a Franchisor is liable for the actions of the franchisee. | Since corporations are owned by shareholders, they have limited liability. |
| Income | A franchisor gets royalty payments for giving rights to the usage of trademarks, etc. | A corporation is dependent on the sale and purchase of shares and investments by investors. |
What is Franchise?
A franchise is created when a brand/company wants to expand its operation. This model of business came into existence because of Isaac Singer in the mid – 19th century. He invented the sewing machine and then used the method of franchising to distribute it.
In the process of franchising, a franchisor (the owner) gives the rights/license to use the proprietary information such as trademark, business name, logo, etc. to the franchisee. In return, the Franchisor asks for a fee that is known as a royalty.
This helps the Franchisor to increase its reach geographically with minimum costs and also strengthen the brand name by increasing its availability over the globe. It is a preferred method for people who want to start a business and enter highly competitive industries like giving a competition to the eating joints.
The franchises are regulated by the Federal Trade Commission (FTC) regulation that was established in 1979. Then states have different regulatory authorities in alignment with the global regulation to monitor the activities of the franchise.
Franchising does not mean that the ownership rights of the Franchisor have been transferred to the franchisee. It is more like a lease or a contract that has to be renewed. If the terms and conditions of the contract are violated, the franchisee is subject to the law.
Franchising provides the advantage of having a ready-made business model that can be used right away and quick income generation because the brand name is established. But then there are some disadvantages as well. For the franchisee, paying regular royalty can be a burden, and the person might want to start their own business.
What is Corporation?
A corporation is a legally established body that has been created by the law. It, like any other living person, has certain rights such as it has the right to enter into contracts and borrow money.
It is owned by shareholders and is regulated by the Board of Directors (BoD). It is also liable to pay taxes and has the right to own assets. Corporations might be formed for earning profit or for social purposes.
A corporation is incorporated by legal procedures, and the rules for the same are different for the state the corporation is being registered in. The shareholders get a vote to elect the management of the corporation.
At times, a corporation might be dissolved; this process is known as liquidation. In this process, all the external liabilities are paid first, and then the internal liabilities are paid off. The shareholders get the left-over value.
There are many advantages to having a corporation. All the shareholders in the corporation have limited liability. That means they are liable to the extent of their share in the share capital of the company. They also get payments in the form of dividends and have the right to sell their shares or purchase more shares. A corporation also has a perpetual life since it is a person created by law; it can only be dissolved by the law. But then, corporations have excessive tax filing activities.
Conclusion
Thus, franchises and corporations are two different terms. Where a corporation includes people like shareholders and the Board of Directors (BoD), a franchise includes people like Franchisor and franchisee.
In franchising, the license to use the company’s proprietary information like the trademark is given to the franchisee under some terms and conditions. Still, no such licensing takes place in a corporation. The later is just a legal person formed by the processes of the law and has the rights and responsibility just like a human. The revenue for a franchisor is the royalty paid by the franchisee. In contrast, the shareholders in a corporation are paid dividends, and the corporation is run by investments and/or profits.
References
- https://www.sciencedirect.com/science/article/pii/S0883902600000689
- https://scholarship.law.wm.edu/cgi/viewcontent.cgi?article=2174&context=wmlr