The 10 Key Differences Between Franchises and Corporations

Business Management
Guy Lalzary January 6, 2022 10 min read

Wondering what the differences between franchises and corporations were? We’re here to help. This article explains everything you need to know about franchises vs corporations. 

Guy sitting at restaurant

Quick Guide

    Can corporations be franchises, and franchises be corporations? What’s even the difference between franchise and corporation structures? 

    If you’re wondering, then the short answer is: these two types of businesses are completely different from one another, and operate differently too. 

    As your business grows, you could come to the ‘franchise vs corporate’ crossroads, and maybe even sooner than you think! Either could be right (or wrong) for your business, which is why it’s important to know the basics of what both are, and how they might affect the day-to-day and overall running of your business.

    Here’s a quick rundown of the difference between franchise and corporation business structures.  

    What is a Franchise Store?

    A franchise is a type of small business. It’s a clone of a successful, standalone business, often a well-known brand, where the franchise owner pays fees to the parent company. 

    The franchise store benefits from the reputation of the parent company, and usually receives help with branding, advertising and training of employees

    For example, McDonalds is a franchise with countless locations worldwide. When you go to any McDonalds, you can expect to see the exact same menu and quality, and the spaces and locations tend to look the same, among other similarities. That’s because the owner of a particular McDonalds branch has paid a franchise fee for the right to operate a business with that name and logo.

    Pros of a Franchise Store

    For business owners who buy into a franchise: 

    • There is usually a lot less risk
    • The business model has already been proven to be successful, so the new franchise is usually set up for success. 
    • It’s also a little easier for business owners to get loans and other investments to get a business off the ground. 
    • The parent company usually takes care of tasks like marketing and advertising, which can be a huge benefit (and a nice reduction of business costs for the franchise store in question).

    Cons of a Franchise Store

    On the other hand, there are some downsides to running a franchise store. 

    • The range of fees and royalties to pay to the parent company.
    • There’s a lot less freedom when it comes to running the business because the owner of a particular franchise will always have someone to answer to in the franchise management structure.

    What is a Corporate Store?

    Similar to a franchise, a corporate store usually has several branches. The difference between franchise and corporation stores rests in the management and operation: a franchise is managed by an independent company or owner, paying fees to the parent company; a corporate store is an integrated party of the parent company, with the parent company having jurisdiction over all of the corporate stores; this includes all of the details from location to products to employee hiring and onboarding to taxes and countless other details. Starbucks is a common example of a corporate-owned store with all decisions about the business coming from the corporate office.

    Pros of a Corporate Store

    • Corporate stores maintain consistency across each store, across products, services, and quality control
    • There are no franchise fees or overheads associated with running a corporate store
    • Internal communication across locations can be much quicker and easier than with franchise stores 
    • Usually have better employee benefit programs as have more resources than a  franchise store

    Cons of a Corporate Store 

    On the other hand, there can be complications and risks when the parent company is in charge of owning and operating every location. That means when one store struggles, it sacrifices some of the profits being brought in by more successful locations. This can sometimes create a more volatile bottom line for the corporation. Corporations can also struggle with unifying their communications strategy.

    The Difference Between Franchises and Corporations

    McDonalds street corner

    One obvious similarity when it comes to franchise vs. corporate it’s that both are born out of a successful business model that has a chance to succeed on a large scale. But for the head of an organization that is deciding whether to sell franchises or become a corporation, there are clear differences up and down the board. Here are the ten most important differences between a franchise and a corporation.

    Ownership

    As mentioned, there is a massive difference between a franchise and a corporation. In fact, this is one of the most fundamental differences between the two. With a corporation, the head of the corporation retains ownership of every location that’s opened. Corporations also have stockholders that share in the profits and assume risk in case of a financial loss. On the other hand, franchising a business means allowing other business owners to open new branches. These business owners are often called franchisees who own and operate their own business under the franchise name.

    Control

    With a franchise, each third-party owner has some but only limited control over how to run the business. Most business operations are put in place by the franchisor, which is why the menu is the same at every McDonalds you’ve ever visited. Meanwhile, those who work at corporate-owned stores have almost no control over business decisions. Instead, it’s the board of directors at the top of the company who are making the decisions.

    Legal Formation

    The process of setting up a corporation legally tends to be rather complicated. It’s not something that can be done lightly and requires plenty of legal assistance. But a franchise store is a little more straightforward. The third-party owner signs a contract with the franchisor, and as long as both hold up their end of the contract, everything typically runs smoothly.

    Motivation

    The motivation of franchise owners is different when compared to corporations. These third-party owners have usually a vested interest in the business because they’ve made both a personal and financial investment in starting the business and paying the franchise fees. For this reason, they are likely to be far more hands-on and involved in the day-to-day operations of a franchise store than a manager who is running a corporate location.

    In fact, when it comes to being more ‘hands-on’, there are several, digital ways to help keep your employees – even deskless employees across franchises or corporations – engaged, happy and productive. 

    Hiring

    For corporations, those higher up the ladder usually take the lead when it comes to hiring and staff decisions. The corporate HR department provides the information, support, and resources that store managers need to hire the right people. There are some similarities with a franchise store, although store owners usually have a little more freedom when it comes to hiring decisions. Of course, they have to comply with different standards (such as a standardized new hire checklist), but there is less micromanaging involved in franchise locations hiring employees, and knowing what to look for.

    An easy solution around this, is to use a digital solution – such as an app dedicated to a business’ HR needs – to keep all standards consistent, and stay on top of every new employee, and even onboarding new employees remotely, across different locations. 

    Marketing and Advertising

    In both franchises and corporations, local stores tend to have limited control over marketing and advertising. Corporations, in particular, typically provide all marketing materials for stores. There is sometimes more freedom for franchises to do more localized marketing. But most of the time, it can only be done with the permission of the franchisor.

    Liability

    The franchisor is usually held liable if there is a legal problem with any of the franchise locations. This can be a burden for the head of the franchise, although they can also cut ties with a franchisee if there is a serious issue. Meanwhile, anyone with shares of a corporation is typically safe from legal trouble, as long as it doesn’t threaten to bankrupt the corporation.

    Having an easy, foolproof way to ensure your business remains compliant (whether you choose to go the route of a franchise or a corporation) is also incredibly important. 

    Inventory Management

    Franchisors tend to take control when it comes to product purchases and inventory with each franchise location. That can limit some of the headaches for franchise owners while trying to keep up with inventory orders. Surprisingly, corporate-owned locations have a little more freedom to handle their own purchases when they need to purchase supplies. Remember that doing inventory manually can lead to a lot of errors, which can have a huge impact on your bottom line. Having a digital solution to automate and manage this would be best, across both types of businesses. 

    Auditing Procedures

    Audits are common with both franchises and corporations, as the folks calling the shots at the top will want to make sure everything is in order. However, the procedures can be a little different. At a franchise store, the owner or manager will likely conduct the audit via the instructions given to them by the franchisor. Meanwhile, a corporate store will only act according to the direction of the head office. The parent company will be responsible for setting the schedule and the terms of every audit.

    Relationships

    For those who run one branch of a franchise or a corporate store, there is a clear difference in how they relate to those in charge, as well as the employees of the store. Franchise locations tend to have more of a family atmosphere because the owner and manager tend to be more hands-on and so communication is usually easier. On the other hand, corporations tend to be a little more formal and less personal with the way they communicate with the people who run each store.

    The Bottom Line on Franchises vs Corporations

    Now that you understand the main differences between franchise and corporation, it’s on to you! We’ve only touched upon ten main differences. 

    However, there are many more. Take a look at the main differences that concern your business and decide which option is right for you. 

    Of course, regardless of whether you choose to go down the franchise store or the corporate store route, one thing’s for certain: before you get to make this decision, it really pays to focus on running your business’ operations and employees effectively. 

    As mentioned above, having a digital way to do this will be quicker, easier and much more cost-effective than any annual processes you might already be using. All-in-one business and employee management apps like Connecteam help to ensure your – 

    • Cross-location communication
    • Cross-location scheduling
    • Company-wide forms and documentation 
    • Company-wide HR management 

    …can be easily automated and delegated, allowing you to focus on conundrums like whether a franchise vs corporate store is the best option for you! 

    With no training required, a forever-free plan and over 20,000+ happy businesses, Connecteam is the app you need to run your business, whether you choose to do so as a franchise or a corporation! 

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