Franchise vs Dealership vs Distributorship: FTC Legal Test

A franchise is a continuing commercial relationship that meets all three prongs of 16 CFR 436.1(h): trademark association, significant control or assistance, and a required payment. A dealership is a business term for a relationship that resells a supplier’s goods; the FTC Franchise Rule does not define it. A distributorship is also a business term for a relationship that resells a supplier’s goods, not a term the Rule defines; whether either relationship is a franchise depends on the same three prongs.

This is general information, not legal advice.

	Franchise	Dealership	Distributorship
Trademark association (436.1(h)(1))	Yes, one of all three required prongs: a business or goods, services or commodities identified or associated with the franchisor’s trademark.	Depends on the agreement; the Rule applies only if all three prongs are met, subject to exemptions.	Depends on the agreement; the Rule applies only if all three prongs are met, subject to exemptions.
Significant control or assistance (436.1(h)(2))	Yes: significant control, authority to exert it, or significant assistance in the method of operation.	Depends on the agreement; the Rule applies only if all three prongs are met, subject to exemptions.	Depends on the agreement; the Rule applies only if all three prongs are met, subject to exemptions.
Required payment (436.1(h)(3) and (s))	Yes: payment or commitment to the franchisor or its affiliate; excludes reasonable inventory at bona fide wholesale prices for resale or lease.	Depends on the agreement; all three prongs must be met. The same wholesale-inventory exclusion applies.	Depends on the agreement; all three prongs must be met. The same wholesale-inventory exclusion applies.
FTC disclosure (FDD) required?	Yes, unless an exemption under 436.8 applies.	Depends on the agreement; all three prongs must be met and no exemption apply.	Depends on the agreement; all three prongs must be met and no exemption apply.
Other law that may apply	Varies by state (e.g., Wisconsin Fair Dealership Law; Minnesota Franchise Act).	Varies by state (e.g., Wisconsin Fair Dealership Law; Minnesota Franchise Act).	Varies by state (e.g., Wisconsin Fair Dealership Law; Minnesota Franchise Act).

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The three-part test

The FTC definition at 16 CFR 436.1(h) covers a continuing commercial relationship or arrangement “whatever it may be called.” Its opening language includes terms specified in an offer or contract and promises or representations made orally or in writing. The three prongs read:

1. Trademark association. “The franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark;”
2. Significant control or assistance. “The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and”
3. Required payment. “As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate.”

Use those words to frame questions about the actual relationship. A dealer or distributor label does not replace the test, and the definition alone does not resolve exemptions or state-law obligations.

Wholesale inventory and the payment exemption

16 CFR 436.1(s) defines required payment as “all consideration that the franchisee must pay to the franchisor or an affiliate, either by contract or by practical necessity, as a condition of obtaining or commencing operation of the franchise.” It then states:

A required payment does not include payments for the purchase of reasonable amounts of inventory at bona fide wholesale prices for resale or lease.

The qualifications matter: reasonable amounts, bona fide wholesale prices, and resale or lease. Review other payment obligations separately rather than treating every purchase from a supplier as excluded inventory.

The separate small-payment exemption in 16 CFR 436.8(a)(1) covers total required payments or commitments to the franchisor or an affiliate made from before to within six months after commencing operation that are less than $735 (as adjusted effective July 12, 2024, per the FTC’s 89 FR 57077 notice; current in the eCFR as of October 2026).

The adjustment comes from the FTC’s Federal Register notice, 89 FR 57077. Section 436.8(b) states that “the Commission shall adjust the size of the monetary thresholds every fourth year based upon the Consumer Price Index.” Check the current text when reviewing an agreement.

Falling outside the Franchise Rule does not mean falling outside all law

State definitions are worded differently from the federal test. These two examples quote statutory scope and provisions, checked 2026-10-14; they do not determine coverage for a particular agreement.

Wisconsin Fair Dealership Law. Wis. Stat. 135.02(3)(a) includes this definition of a dealership:

A contract or agreement, either expressed or implied, whether oral or written, between 2 or more persons, by which a person is granted the right to sell or distribute goods or services, or use a trade name, trademark, service mark, logotype, advertising or other commercial symbol, in which there is a community of interest in the business of offering, selling or distributing goods or services at wholesale, retail, by lease, agreement or otherwise.

Wis. Stat. 135.03 states:

No grantor, directly or through any officer, agent or employee, may terminate, cancel, fail to renew or substantially change the competitive circumstances of a dealership agreement without good cause. The burden of proving good cause is on the grantor.

Wis. Stat. 135.04 begins with an express qualification:

Except as provided in this section, a grantor shall provide a dealer at least 90 days’ prior written notice of termination, cancellation, nonrenewal or substantial change in competitive circumstances. The notice shall state all the reasons for termination, cancellation, nonrenewal or substantial change in competitive circumstances and shall provide that the dealer has 60 days in which to rectify any claimed deficiency.

Read the section’s exceptions with those notice and cure provisions.

Minnesota Franchise Act. Minn. Stat. 80C.01, subd. 4(a)(1) defines one category of franchise as a contract or agreement between two or more persons, including these clauses:

(i) by which a franchisee is granted the right to engage in the business of offering or distributing goods or services using the franchisor’s trade name, trademark, service mark, logotype, advertising, or other commercial symbol or related characteristics; (ii) in which the franchisor and franchisee have a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise; and (iii) for which the franchisee pays, directly or indirectly, a franchise fee; …

That language uses “community of interest” and “franchise fee,” rather than the federal significant-control-or-assistance wording. Subdivision 4 continues with other categories and exclusions; the excerpt is not the whole definition. For car-dealership questions, subdivision 4(d) expressly excludes certain new motor vehicle agreements from this definition. Have an attorney review the full scope language.

A separate federal regime. 16 CFR 436.8(a)(4) lists this exemption from the federal Rule:

The franchise relationship is covered by the Petroleum Marketing Practices Act, 15 U.S.C. 2801.

Other states have their own laws. Check the agreement, applicable definitions and exclusions with a franchise or dealer attorney licensed in the state.

Related reading

For the roles within a franchise relationship, read franchisee vs. franchisor. For the separate question of who owns and controls a location, see franchise vs. chain store vs. joint venture. If an existing independent business is joining a franchise system, start with what a conversion franchise means.

For other business-model labels, see franchise vs. business opportunity vs. MLM. Continue with state franchise registration and filing requirements and the guide to reading an FDD.