Restaurant chains like McDonald’s sometimes franchise their restaurants and sometimes own them outright. The franchised restaurants are usually owned by individuals who hold them in subchapter S corporations which pass income through directly to the owners. There is no corporate tax on this income, but the owner must pay personal taxes on the income.

a. From the perspective of the owner of the franchise, is there a tax advantage to debt financing?

b. Which organizational form is better from the perspective of tax minimization: corporate ownership of the individual restaurants or franchises?

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