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  • Writer's pictureJoe Dye Culik

What are the Legal Aspects of Buying a Franchise: Lending, LLCs, Leasing, and Employment

Starting a franchise can be exciting, offering the dual benefits of owning a business and operating under an established brand. However, it's crucial to understand the legal landscape that surrounds this endeavor, especially for entrepreneurs in North Carolina. This post delves into key legal considerations like Small Business Administration (SBA) loans, forming a Limited Liability Company (LLC), and general employment law issues.


What are the Legal Aspects of Buying a Franchise: Lending, LLCs, Leasing, and Employment
What are the Legal Aspects of Buying a Franchise: Lending, LLCs, Leasing, and Employment

 

1. Small Business Administration Loans

 

For many aspiring franchisees, financing is a primary concern. Securing a loan through the Small Business Administration (SBA) is a popular option. SBA loans are government-guaranteed loans that offer lower down payments and longer repayment terms than traditional bank loans. However, obtaining an SBA loan involves meeting specific eligibility criteria, such as:

 

  • Operational Aspects: The franchise must be for-profit and operate within the United States.

  • Size Standards: The business must meet SBA’s size standards, considering factors like the number of employees and annual receipts.

  • Repayment Ability: Potential borrowers must demonstrate the ability to repay the business’s cash flow loan.

 

In North Carolina, SBA District Offices can guide and assist in navigating these loans. The North Carolina Small Business and Technology Development Center (SBTDC) also offers resources and counseling for SBA loan applicants. Our office works closely with some lenders to assist with the lending process.

 

2. Forming an LLC in North Carolina

 

Choosing the right business structure is another critical decision. Many franchisees opt for a Limited Liability Company (LLC) due to its flexibility and protection. An LLC in North Carolina offers several advantages:

 

  • Limited Liability Protection: LLC members are typically not personally liable for business debts and liabilities.

  • Tax Flexibility: LLCs enjoy a pass-through taxation feature, avoiding the double taxation some corporations face.

  • Operational Flexibility: LLCs have fewer record-keeping requirements and provide more flexibility in management and profit sharing.

 

To form an LLC in North Carolina, one must file the Articles of Organization with the North Carolina Secretary of State and pay the necessary filing fee. It's also advisable to create an Operating Agreement, although not mandatory in North Carolina, to outline the LLC’s operating procedures.

 

Some entrepreneurs may also choose other business entity forms, such as a corporation or a partnership. Although an LLC is by far the most common form used, these other forms may be suitable in some instances.


3. Leasing for Your Franchise


Many franchises, especially in the retail space, will require a commercial lease. Commercial leases are different from residential leases in numerous ways, often requiring personal guarantees and containing financial penalties in the event of a breach. Franchisees often pay little attention to the leases they are signing, thinking that the only agreement with which they should concern themselves is the franchise agreement. This could not be more wrong.


Just as franchise agreements require the franchisee to pay damages to the franchisor in the event the franchisee needs to terminate the agreement unexpectedly, so, too, do leases. Indeed, the financial liability for terminating a lease may be much more than for terminating a franchise agreement. For instance, if you were to sign a 10-year lease for $5,000 per month, and you were to terminate 3 years into it, you could owe the landlord $420,000 plus the landlord's costs and legal fees.


With an attorney helping to negotiate the lease terms, however, you may be able to minimize your liability. Additionally, starting a franchise generally requires a substantial investment in the "build-out" or construction costs required to prepare the space for the new business. Some landlords may offer a "tenant improvement allowance" (i.e., they will pay part of the cost for the build-out). But with effective negotiation by an attorney, you may be able to increase that tenant improvement allows by thousands of dollars.


Finally, it's vital to ensure that the effectiveness of the lease is dependent on the effectiveness of the franchise agreement. That is, if you sign a lease before the franchise agreement is effective, and then the franchisor backs out, this has no effect on your lease liabilities. In that case, you may have a five- or ten-year lease with no business to put in the premises, and years of future rent to pay for a business you don't own. For these and many other reasons, it is vital to have legal representation throughout when you are leasing a location for a franchise.

 

4. General Employment Law Issues

 

When starting a new business, including a franchise, it's crucial to be mindful of employment laws. In North Carolina, as elsewhere, franchisees must adhere to various federal and state employment laws:

 

  • Wage and Hour Laws: Comply with the Fair Labor Standards Act (FLSA) and North Carolina wage and hour laws, ensuring proper minimum wage, overtime pay, and record-keeping.

  • Workplace Safety: Adhere to the Occupational Safety and Health Administration (OSHA) standards and the North Carolina Occupational Safety and Health (NCOSH) regulations.

  • Anti-Discrimination Laws: Follow the Equal Employment Opportunity Commission (EEOC) guidelines and North Carolina’s employment discrimination laws to prevent workplace discrimination.

  • Unemployment Insurance: Franchisees must register with the North Carolina Division of Employment Security (DES) and comply with the state's unemployment insurance laws.

 

It’s also crucial to stay updated with the changing legal landscape, such as adjustments in minimum wage rates and evolving discrimination laws.

 

Conclusion on Legal Aspects When Buying a Franchise

 

Buying a franchise in North Carolina comes with its share of legal considerations. Prospective franchisees must navigate the intricacies of SBA loans, choose an appropriate business structure like an LLC, and ensure compliance with various employment laws. It’s always advisable to consult with legal and financial experts to ensure a smooth and compliant business journey.

 

Remember, while the rewards of owning a franchise can be substantial, success often hinges on a solid understanding of the legal framework within which you operate. Aspiring franchisees should invest time and resources in legal planning to lay a strong foundation for their business venture.

 

Dye Culik PC is a Charlotte, North Carolina, business law firm. Our attorneys work with business owners on both sides of the franchise transaction. We can assist you in starting a franchise, buying a franchise, or negotiating the terms of your existing franchise. If your are entering the franchise world or need help navigating it, connect with us for a consultation.

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