A sole proprietorship is a legal business structure owned and operated by one person. A franchise is a turnkey, or complete, business that can be bought and operated as a sole proprietorship, partnership, limited liability company or corporation. The restaurant business presents a good comparison of franchises versus sole proprietorships because franchising is common for familiar chain restaurants. Sole proprietorships that operate cafes, small local restaurants and even major gourmet restaurants also are common.
A study published in the Cornell Hotel and Restaurant Administration Quarterly titled "Why Restaurants Fail" found that, over a three year period from 1996 to 1999, chain restaurants consistently performed slightly better than independent restaurants, with 57.2 percent of the chain restaurants out of business by the third year as opposed to 61.4 percent of the independent restaurants. On the other hand, in 2002, the Small Business Administration published its findings on the performance of franchise loans, stating, “Despite the popular view that franchisees are much more successful than non-franchisees, SBA’s experience with defaulted loans does not support this.” From 1991 to 2000, 7 percent of franchise loans defaulted versus 6.3 percent of non-franchise business loans.
Franchising also is common in hotels, convenience stores and cleaning services. It provides a developed business model, marketing, supplies and advice but can be an expensive way to start a business. Many franchisees find the expense of maintaining their franchise to be overwhelming during their first years while still developing a customer base. Also, franchisors must sell enough franchises to achieve economy of scale. This results in optimistic sales presentations attracting inexperienced purchasers of the franchises.
Sole proprietorships, or independents, tend to start small and build as revenues increase over time. Lack of funding is the primary cause of start-up business failure, but it is also true that starting small gives the entrepreneur the opportunity to control costs. Franchises don't always present this opportunity as many include specific products that must be bought from the mother company.
Although the term sole proprietorship is often used to refer to a privately held small business, it also is a legal form that presents some liability problems to its owners. Many new businesses start as limited liability companies or corporations because of the protection these incorporations give the personal assets of the owners. Any dispute between suppliers or customers can result in lawsuits, and sole proprietors and partnerships do not protect their owners. Corporations and LLCs are legal entities so liabilities generally fall on the company and not its owners or operators.
- Blue Mau Mau: Franchise Success Rates
- Blue Mau Mau: SBA Studies Say Franchises More Likely to Fail than Small Businesses
- Entrepreneur; Choosing a Legal Form for Your Franchise; Jeff Elgin
- University of California at Santa Barbara; Cornell Hotel and Restaurant Administration Quarterly; Why Restaurants Fail; H.G. Parsa et al.
- Small Business Administration: SBA's Experience with Defaulted Franchise Loans
- Scott Olson/Getty Images News/Getty Images