Compliance for U.S. franchise owners

Compliance for U.S. franchise owners is a critical aspect of protecting your investment, preserving your brand, and avoiding potential rescission or penalties. This guide provides comprehensive, up-to-date guidance on the compliance requirements for U.S. franchise owners, covering federal and state regulations, and practical operational steps.Summary of Key Findings:Federal Baseline: The FTC’s Franchise Rule (16 CFR Part 436) mandates that franchisors deliver a Franchise Disclosure Document (FDD) containing 23 specific items to prospective franchisees at least 14 calendar days before signing or payment. Item 19 is the exclusive location for any Financial Performance Representations (FPRs). The FTC provides compliance guides and blog posts explaining these items and timing requirements.State Overlay: Many states require registration and review of FDDs (known as “registration states”), while others require filings or notices. Common registration/registration-like states include California, Hawaii, Illinois, Indiana, Maryland, Michigan (often notice rather than full registration), Minnesota, New York, North Dakota, Rhode Island, Virginia, Washington, and Wisconsin. Additional filing/notice states and special rules may apply based on trademark registration status. State examiners may require financial assurance, and states have separate enforcement powers and private rights of action. Many states also have relationship laws regulating post-sale conduct (termination, nonrenewal, transfers, good-faith limits).Operational Compliance Beyond Franchising Law: Franchise owners must also comply with general business regulations, including business formation and state registration, federal & state tax obligations (federal income, payroll taxes, state sales & use, and any state franchise taxes), employment laws (wage/hour, classification, posters, I-9/E-Verify), workplace safety (OSHA and state OSHA programs), ADA obligations for public accommodations, local health and safety permits (especially for foodservice), trademark/licensing rules (USPTO), marketing laws (TCPA, CAN-SPAM), and ongoing corporate/annual reporting requirements. Joint-employer exposure is a key risk area where franchisors and franchisees should limit operational control to avoid joint employer status.Actionable Compliance Checklist for U.S. Franchise Owners:1. Read and verify the FDD: Confirm the issuance/effective date, Item 20 franchisee contact list, Item 21 audited financials, Item 19 (FPRs) if present, and Item 23 receipt. Insist on the 14-day waiting period before signing or paying.2. Confirm state requirements before offering or selling in a state: Determine if the state is a registration state (requires FDD registration and possible review), filing state (notice), or non-registration. Budget for registration/filing fees and renewal schedules. If you will operate (not sell) in a state, still confirm local licensing/permits.3. Check for franchise relationship laws where you operate: Review state statutes governing termination, nonrenewal, transfer, good-faith obligations, and any notice/cure periods; modify expectations and bargaining positions accordingly.4. Corporate and local business compliance: Form the appropriate entity (LLC or corporation) based on tax and liability advice; register as a foreign entity where required; maintain annual reports and registered agent information.5. Taxes and accounting: Register for EIN, payroll tax accounts, state withholding, sales & use tax permits, and check for state franchise taxes; retain an accountant to review FDD financials and model local tax and cashflow impacts.6. Employment and HR compliance: Ensure wage/hour compliance (FLSA and state laws), proper classification, I-9 completion, state hiring/leave requirements, required posters, and workers’ compensation coverage; maintain records and trained managers to reduce joint-employer exposure.7. Safety, health & ADA: Obtain local health permits; comply with OSHA and state safety standards; ensure public-facing premises meet ADA Title III obligations.8. Intellectual property and marketing: Follow franchisor trademark use rules; ensure licensing agreements and local signage comply; follow TCPA and CAN-SPAM rules for marketing and obtain consents for texts/calls; keep marketing approvals and records.9. Compliance documentation and audits: Keep copies of FDDs, Item 23 receipts, all state filings/registrations, franchise agreements, training materials, supplier contracts, payroll records, tax returns, and maintain an internal annual compliance review.10. Seek professional advisors: Franchise counsel for FDD and state registration; CPA experienced with franchises for Item 21 review and tax compliance; HR counsel for labor issues; and local permitting counsel for regulated industries (e.g., restaurants, health services).State Registration & Relationship Laws — Practical Notes:Registration states (commonly cited lists): California, Hawaii, Illinois, Indiana, Maryland, Michigan (notice filing in many cases), Minnesota, New York, North Dakota, Rhode Island, Virginia, Washington, Wisconsin. Several other states require filings or apply business-opportunity laws depending on whether the franchisor’s trademark is federally registered. State regulators can require additional disclosures, impose fees, and demand financial assurance in some cases.Relationship laws: Many states (over 20 plus D.C. and territories) have enacted post-sale relationship laws that regulate termination, nonrenewal, transfer, good-faith, and related franchisee protections; these operate independently of the FTC Rule and can create private rights of action or statutory damages.Key Federal Authorities and Where to Read Them:FTC Franchise Rule and compliance materials: full rule, compliance guide, and blog series explaining the FDD items and the 14-day rule.eCFR (16 CFR Part 436) for the exact regulatory text.SBA guidance for buying/franchising and operational startup steps.Practical Examples & Risk Areas to Highlight:Missing or late FDD delivery (violates FTC and state rules; can create rescission or liability exposure).Unlisted or inconsistent FPRs not put in Item 19 (dangerous and prohibited outside Item 19).Failing to register or file in registration/filing states before offering/selling (can block offerings or trigger penalties).Payroll, sales tax, and nexus errors: out-of-state sales or franchisor support can create nexus and unexpected taxes.Joint employer risk from franchisor operational control (scheduling, required software that controls wages) — liability for wage & hour and other employment claims.Top Recommended Resources and Links:FTC: Franchise Rule overview, compliance guide, and blog deep dive on the FDD.eCFR: 16 CFR Part 436 (text of the Rule).ICLG / Franchise Laws & Regulations report: overview of state registration states and interaction between federal and state regimes.State registration summaries (law-firm resources and state regulatory pages) for state lists and filing procedures (examples: Taft/FranchiseLawSolutions/LPJLegal summaries and state regulator pages).SBA: Buying a franchise and small-business startup compliance.Next Steps:To ensure full compliance, consider consulting with franchise counsel, a CPA experienced with franchises, and HR counsel. These professionals can help navigate the complexities of federal and state regulations.