How to register business with two partners in different states?

[WardB]

Good morning to all.

I have a question regarding how best to setup a mobile food service company with the given conditions:

1. Two partners located in different states.
2. Partners want to run their individual food truck as an LLC for tax purposes (or so we believe it's benefical)

I thought the best choice would be to setup a C-corp in perhaps Delaware with us as equal partners. Then once we're ready, as individuals, to conduct business in our community, the partner would register as an LLC in his state and simply pay a licensing fee to the parent company.

The goals are:
1) We remain equal partners in the parent company.
2) We protect the other partner from liability from the individually ran business.
3) We're able to license or franchise the business at a later time.

So the thought process is register Company, Inc. in Delaware (or some other tax-friendly or neutral state). Then register our individual LLCs in our state of residence or I guess in some cases where we'll conduct business.

I'm wondering even though we'll register the LLC in our state, would we need to register the Company, Inc. (C-corp) as a foreign entity as well?

Thanks.

--Ward

[Paul]

Good morning to all.

I have a question regarding how best to setup a mobile food service company with the given conditions:

1. Two partners located in different states.
2. Partners want to run their individual food truck as an LLC for tax purposes (or so we believe it's benefical)

I thought the best choice would be to setup a C-corp in perhaps Delaware with us as equal partners. Then once we're ready, as individuals, to conduct business in our community, the partner would register as an LLC in his state and simply pay a licensing fee to the parent company.

The goals are:
1) We remain equal partners in the parent company.
2) We protect the other partner from liability from the individually ran business.
3) We're able to license or franchise the business at a later time.

So the thought process is register Company, Inc. in Delaware (or some other tax-friendly or neutral state). Then register our individual LLCs in our state of residence or I guess in some cases where we'll conduct business.

I'm wondering even though we'll register the LLC in our state, would we need to register the Company, Inc. (C-corp) as a foreign entity as well?

Thanks.

--Ward

Interesting that we just launched a business that does exactly what you are doing. The company is incorporated in Delaware. Food trucks are sold and licensed in any state. The individual licensee sets up whatever entity they want, usually an LLC in their state. We only filed as a foreign corporation in the state that we operate the office in, happens to be NY, but not in each state that has a licensee. We’ve done a few licensing and franchise companies in the food service business and always structured it this way.

Strategically you are being smart since you want to license or franchise in the future. Your first two trucks being licensed adds to the legitimacy of the concept. It’s actually better than having two “company owned” trucks.

Pay your company the royalty or fee you expect to charge in the future, don't give yourselfs a discount. In franchise documents you have to state the standard fee and royalty. It can be a little problem if you show that others (you) have received a discounted rate.

If you really plan on franchising or licensing don't be pocketing any "cash" on the side from the trucks, not that you would of course. But, showing the success of those trucks is the key to future franchisees/licensees.

On a bit of a side note, you inadvertantly have outsmarted part of the franchising restrictions. That is, as a franchisor, you can not reveal the earnings of franchisees. That's always a problem when trying to sell a franchise. However, individual franchisees/licensees CAN reveal their earnings. So, you have an advantage because you are both licensees and can reveal the numbers. Believe me that's a big deal. Imagine how hard it is when you are selling to a prospect and they ask "how much can I make?" and you have to answer "I can't tell you".

Also,keep your books in good order. you'll need an audit to be a franchisor.

If you have franchising or licensing questions feel free to ask, I might be able answer a few.

Paul

[WardB]

Paul,

Thank you for the response.

I'm glad I'm on the right track. And thanks for pointing out the restrictions when it comes to franchising. I purchased a book (supposedly "the authority") sometime ago and will get it read before venturing beyond just our startup.

I believe DE would be the right place but would my partner and I need to register in our states as well for the "Company, Inc?" We won't have an office per se other than maintain the business process of "Company, Inc" from our homes. Of course the individual LLCs would be registered.

Thanks again.

--Ward

[Paul]

You would register the Delaware corp. as a foreign corp. in the state that the business is domiciled, operates from, if that state requires it. The two LLCs are completely separate; treat them as if it wasn’t you two that owned them.

I don’t know which two states you are in but pick the one that has the least restrictive franchise regs. There are about 37 states with almost no restrictions that are considered non-registration states. The rest have some form of registration required. Try to pick a non-registration state as your home state. Let me know your choices I can probably tell you which is better. Most are fine but there are a few to avoid.

Paul

[WardB]

Thanks again Paul and I finally visited your site and can see where your service could be very useful if/when we get to a point to franchise. The immediate objective would be to get one, if not two, trucks going.

FWIW, one of us is in Indiana and the other in Virginia would would possibly operate in DC as well.

So I understand the individual LLC is just that...individual and one wouldn't have to register the other. That I can grasp.

And could see my partner and I registering the Delaware Corp in both Indiana and Virginia since that's where we two, as the principals, are located.

But what if Billy Bob from Nevada becomes a franchisee or licensee? Obviously he'll need to register in his own state but he/we wouldn't need to register the Delaware Corp since he isn't a principal...is this correct?

Thanks again for the help. I'd like to learn more about how you may be able to help at the early stages of development.

--Ward




You would register the Delaware corp. as a foreign corp. in the state that the business is domiciled, operates from, if that state requires it. The two LLCs are completely separate; treat them as if it wasn’t you two that owned them.

I don’t know which two states you are in but pick the one that has the least restrictive franchise regs. There are about 37 states with almost no restrictions that are considered non-registration states. The rest have some form of registration required. Try to pick a non-registration state as your home state. Let me know your choices I can probably tell you which is better. Most are fine but there are a few to avoid.

Paul

[Paul]

Ward, if you incorporate in Delaware you don’t have to also register in each state that you and your partner live in. You would pick one or the other as your company’s home office. The Corporation is its own entity, regardless of where the owners live.

In fact you may consider incorporating in one of those two states instead of Delaware. Delaware has certain benefits but it may not be worth the trouble of also having to file as a foreign corporation. You can always move the corporation to Delaware in the future.

Your main company is the “licensor” or the “franchisor”. You simply grant licenses/franchises to other individuals or entities, including each of your separate truck businesses.

Billy Bob creates his own entity wherever he is and gets a franchise or license from you. HOWEVER, here is where it gets a little tricky. Depending on where Billy Bob is, as a franchisor, you MAY have to register the franchise in his state (this is not incorporating; it is just getting approval to sell franchises in that state). Now, there are only about 15 states that require this. The other states require no registration, you can just start franchising.

BTW-Both of your states are considered “registration” states. That means you do have to file your Franchise documents with each of those states before you can franchise in them. Indiana is a little easier than Virginia. But you’re not franchising yet so you don’t need to think about it yet. There are 15 “registration” states. The rest have no registration requirements, you can just start franchising once you write up a FDD.

NOW-being a licensor is considerably different than being a franchisor. There are a few specific differences in structure that make the difference. In licensing you have a little less strict control over the licensee and the revenue capture structure is a little different.

All the corporate and legal issues aside, the main thing is to develop a “system” for the franchise/license. In the food business it’s all about the menu and the system of operating.

To be a successful franchisor /licensor you must give your franchisees/licensees something of value in return for the fees/royalties.
The hardest thing will be to develop an operating manual. In food this is primarily the actual recipes, preparation and assembly of the menu items. It needs to be fairly comprehensive.

Becoming a franchisor vs. licensor would depend on you concept/theme, structure and other considerations.

Here's what we are doing for whatever its worth. Sites not complete but gives you an idea. In this case we are licensing. www.ezservefoods.com.

Let me know if I can be of help.
Paul