Setting Up a Franchise in the USA: Steps and Legal Requirements

The United States remains one of the most attractive destinations for entrepreneurs looking to expand via franchising. With its large consumer base, robust legal infrastructure, and mature franchise ecosystem, it offers immense opportunities for both domestic and international franchisors. However, setting up a franchise in the U.S. involves a structured process and adherence to specific legal requirements.

This blog outlines the essential steps and legal considerations involved in starting a franchise in the U.S., helping you navigate everything from USA company formation to franchise disclosure and registration.

1. Understand the U.S. Franchise Landscape

Franchising in the United States is governed by both federal and state laws. The Federal Trade Commission (FTC) regulates franchising at the national level through the Franchise Rule, while some states have their own franchise registration and disclosure laws.

Before proceeding, you should:

• Conduct market research to assess the demand for your product or service
• Understand your target regions’ regulatory environment
• Evaluate competition and consumer behavior in your industry

2. Choose the Right Business Structure

To legally start a business in the USA, you must first determine your business structure. Common options for franchisors include:

• LLC (Limited Liability Company): Offers flexibility, limited liability, and simplified taxation
• Corporation (C-Corp or S-Corp): Suitable for larger operations or those seeking external investors

Your chosen entity affects taxation, liability, and operational flexibility. Consulting a legal expert during this phase is highly recommended.

3. Company Registration in the USA

Once you’ve selected your entity type, the next step is company registration in the USA. This includes:

• Choosing a business name: Must be unique and compliant with state rules
• Registering your company: File incorporation documents with the Secretary of State in the chosen jurisdiction
• Obtaining an EIN (Employer Identification Number): Required for tax purposes and hiring employees
• Opening a U.S. business bank account: Needed to manage franchise-related transactions

If you're a foreign national, you can still form a company in the U.S. without needing to be a citizen or a resident, although additional documentation and legal support will be required.

4. Draft and Register the Franchise Disclosure Document (FDD)

The Franchise Disclosure Document (FDD) is a legally mandated document that outlines the franchise relationship. Under the FTC Franchise Rule, you must provide this to prospective franchisees at least 14 days before signing any agreement or accepting any payment.

The FDD contains 23 specific items, including:

• Company history and business model
• Initial and ongoing fees
• Obligations of both franchisor and franchisee
• Financial performance representations (if included)
• Trademark and intellectual property use
• Litigation history and audited financial statements

States such as California, New York, and Illinois require FDD registration before you can legally offer or sell franchises within their borders. These are referred to as “registration states.”

5. Register in Franchise Registration and Filing States

There are three categories of states regarding franchise regulation:

• Registration States: Require franchisors to register the FDD with the state authority before offering franchises (e.g., California, New York)
• Filing States: Require a one-time or annual notice filing (e.g., Florida, Kentucky)
• Non-Registration States: Follow only the FTC Franchise Rule

Ensure you consult with a franchise attorney to understand state-specific requirements for where you plan to operate.

6. Create the Franchise Agreement

The Franchise Agreement is the legal contract between the franchisor and the franchisee. It should cover:

• Rights to use the brand and IP
• Fees and royalties
• Territory exclusivity (if any)
• Advertising requirements
• Training and support
• Duration and termination clauses

Having this agreement drafted or reviewed by legal counsel ensures that it complies with U.S. federal and state laws.

7. Protect Your Intellectual Property

Trademarks, logos, and proprietary systems are central to a franchise. To protect your brand:

• Register your trademarks with the United States Patent and Trademark Office (USPTO)
• Ensure international trademarks are aligned through agreements like the Madrid Protocol
• Use licensing provisions in the franchise agreement to control IP usage

Protecting IP is especially crucial if you’re expanding from abroad and want to avoid misuse or infringement.

8. Comply with Tax and Employment Laws

Once your franchise is operational, you must stay compliant with:

• Federal and state taxes: Income, sales, and payroll taxes vary by location and business type
• Employment laws: Ensure all hiring practices follow federal and state labor laws, including wage laws, anti-discrimination, and employee classification

Consulting a CPA or tax advisor who understands franchising and multi-state operations is highly recommended.

9. Provide Franchisee Training and Ongoing Support

Training programs and operational support are typically required in a franchise agreement. Providing robust onboarding, manuals, and field support enhances franchisee success and brand consistency.

10. Monitor Compliance and Renew Registrations

Once your franchise is running, ongoing compliance is essential:

• Renew FDDs annually
• Update franchise registration in registration states
• File annual reports for your company
• Maintain records of franchisee performance and compliance

Regular legal audits and proactive management will keep your franchise network strong and compliant.

Conclusion

Setting up a franchise in the USA offers significant growth potential, but it involves a detailed process requiring legal and regulatory compliance at every stage. From initial company registration to drafting franchise agreements and adhering to state-specific franchise laws, careful planning and expert guidance are essential.

Whether you're expanding an existing brand or entering the U.S. market for the first time, understanding the legal framework can save time, reduce risk, and position your franchise for long-term success.