minimal US business income-do I have to file? Franchise Rules US, Ontario and Alberts -

david ingram replies: 

An interesting business to be sure but you may have a problem..

I hope that you realize that you may be in violation of Ontario and US franchise laws. 

You may be in vilation of Ontario's 'Arthur Wishart Act' which governs franchising in the Province of Ontario.  You can find out more at http://www.search.e-laws.gov.on.ca/en/isysquery/ce1a4574-eaef-437e-94cb-e07dcb95ce06/1/frame/?search=browseStatutes&context=

with a little more about changes in 2005 at http://www.hg.org/articles/article_693.html

The US is even more stringent.  Wisconsin, for instance can give you a criminal record for even talking to a resident of Wisconsin about the 'possibility' of a franchise if you are not already registered in Wisconsin. California is perhaps the hardest and you can expect to spend anywhere from $25,000 to $250,000 to $1,000,000 to get registered as a franchisor in the United States on a State by state basis starting with California.  Most peolle start with California because it has a Canada sized market and is considered to have the toughest registration process.  If you can get your California registration, the other states just fall into line.

If you are licencing a US city in the same manner as your website shows Vicotria and Toronto, quit right now, if you are not registered as a franchisor.  Do NOT listen if someone says it is only a licence or a handshake deal or not very big and not worth registering.  If something goes wrong, your licencee can make a complaint that could have you in handcuffs.

I will not bother with names but one Ontario Franchisor I knew personally ended up with a Wisconsin Criminal record and a massive fine for talking to a potential franchisee in Wisconsin for a $1,000 up front fee,  The Wisconsin resident contacted the fellow out of the blue.

That is why you will see a franchise advertisement that specifies what states it is available in or more particularly what states it is not available in. 

In Canada, it is illegal to advertise a franchise opportunity Alberta without being registered first. 

If, and I say 'IF' you do happen to be registered in the state you are dealing with (the cost would not be worth $200 a month so you better be planning on expanding a lot) you do not have to file a US return, but should. 

If you have incorporated, you would file US form 1120F ( I would likely charge $2,000 or so for the first one), if not incorporated, you should likley file form 1040NR and the state return you are dealing in since you would have a NEXUS in that state. I would likely be $800 for that portion.

The following is a $60,000 fine in November 2007 for a husband and wife selling an EXOTIC COFFEE in California

http://www.corp.ca.gov/enf/info/lit/olas/complaint.pdf

There are US Federal Franchise laws - The payment of more than $600 to the parent within six months of opening is likely enough to cause your business to be considered a franchise.  State laws differ as to what is a franchise under state law. 

State Law.  State law definitions of franchises vary, but there are several common themes:

In 12 states, the 3 elements of the legal definition of a "franchise" are:

• Marketing Plan. The franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system substantially prescribed by the franchisor.
• Association with Trademark. The operation of the franchisee’s business is substantially associated with the franchisor’s trademark, trade name, service mark, etc.
• Required Fee. The franchisee is required to pay a fee, directly or indirectly.

These states are California, Illinois, Indiana, Iowa, Maryland, Michigan, North Dakota, Oregon, Rhode Island, Virginia, Washington, and Wisconsin.

In 5 other states, the 3 elements of the legal definition of a "franchise" are:

• Trademark License. The franchisee is granted the right to engage in the business of offering, selling or distributing goods or services using the franchisor’s trademark, trade name, service mark, etc.
• Community of Interest. The franchisor and franchisee have a community of interest in the marketing of goods or services.
• Required Fee. The franchisee is required to pay a fee, directly or indirectly.

These states are Hawaii, Minnesota, Mississippi, Nebraska, and South Dakota.

In Connecticut, Missouri, New York and New Jersey, the definition of a "franchise" involves some (but not all) of the elements in these 17 states. Finally, in Arkansas, Delaware and Florida, the state definitions are unique, and not like any other state

The above in red came from -  http://franchiselaw.net/startups/usfranchiselawbasics.html

I know this is not the answer you are looking for.  However, even if the potential business operator in the US is your sister or best friend, do not do it unless you have registered properly.  The same applies to the Toronto operator.  50% of the bad business deals and lawsuits I see involve 'ex' best friends or relatives.  Another 30% inovlve ex husbands and wives who used to sleep together and maybe 20 percent involve strangers.

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