Which business entity is best if I'm starting a business that could potentially become a franchise?
The choice between these two types of entities is really more about taxes than about any other factor. An LLC is taxed like an S corporation in that any taxable income from the entity is passed on to the owners via an informational return and so each owner pays personal income taxes on the amount of the LLC income that they get.
In the case of a C corporation, the corporation itself files an income tax return and pays all corporate taxes. If you want to get the balance of the after tax income out of a C corporation and into your pocket personally, you have to distribute it as dividends which are subject to personal income taxes as well. Most people set up their entities as either LLCs or S corporations in order to avoid this double taxation of their earnings.
As far as the other main reason to use one of these entities, to create personal liability protection, any of the three options discussed should be equally effective.
Jeff Elgin has almost 20 years of experience franchising, both as a franchisee and a senior franchise company executive. He's currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best meets their needs.