What is the Difference Between Franchising and a Partnership?

While understandably, franchising and partnerships can be confused, there are notable differences. Knowing these differences will bring you one step closer to figuring out how you want your business structure to make the most efficient decision for your company. A franchise and a partnership are great decisions when recently starting a business without doing it from scratch. When it comes down to the basics, the critical difference between the two is ownership. A franchise is a business owned by an individual who got a licensing agreement from a franchisor. On the other hand, a partnership takes place when two or more people own the same business. 

What is the Definition of a Franchisee?

To put it into more detail, a franchisee gets permission from an existing business to use their brand name, logo, etc., in return for a payment in the form of franchise fees. These fees may include royalty fees that pay for the training and support that the franchisor provides to the small business. This franchise agreement ensures that each party gets adequate benefits from the exchange. Since the franchisee can use the name of a more established brand, they are less likely to fail than if they were start-ups. This business model also allows the franchisor to have a less hands-on approach in their managing. They can expand their business without having to be responsible for the day-to-day operations of the company. However, a franchisee does not have as much authority in the company’s decisions since the franchisor is the true business owner. Additionally, any error conducted by the franchisee may also reflect on the entire franchise and ruin their reputation if handled wrong. Thus, in a franchise business, you adopt the workings and strategies that have already been adopted, whereas there is more choice when it comes to partnerships.

What is the Definition of a Partnership?

In a partnership, two or more people decide to open and share a particular business. Every party in the partnership is usually responsible for managing and operating the business. It also includes contractual agreements between the owners to outline the different responsibilities. There are several different types of partnerships, including general partnerships, limited partnerships, and limited liability partnerships.

General Partnerships

A general partnership is a business plan where 2-20 people agree to share all assets, profits, and financial and legal liabilities. They share equal responsibility in business ownership, which means that all of their actions reflect on one another, whether positively or negatively. 

Limited Partnerships 

Limited partnerships allow more leeway in the business decisions of the company to limit liability and personal investment. Thus, the partners are only as liable as the money they decided to invest in the business. As such, they have direct access to income and expenses. The benefit of this kind of partnership is that the partners are not liable for more money than they put it, lowering the chance of risk.

Limited Liability Partnership 

A limited liability partnership is a general partnership that offers protections against any bad decisions or wrongful acts that any partner or partners may have made. By doing this, the risk of the business going into debt decreases since the action of the others does not necessarily correlate with the company’s general success. If you do not entirely trust the people you are opening the business with, this may be an excellent decision to ensure that not all your eggs are in one basket and there is some level of protection. 

What is the Role of a Franchisee?

The franchisee serves the role of a manager in a specific franchise, in which they run the more minor workings of the business under the guidance of the franchisor.

Following the Franchise Business Model 

First and foremost, one of the essential things a franchisee must do is to uphold the business model that the franchisor intended for the business. In this way, the business stays recognizable to customers with its reputation intact.

Royalty Fees

To continue operating under the franchisor’s brand, the franchisee pays a royalty fee to the franchisor that helps the franchisor pay for training, recruitment, and legal costs. With this trade, the partnership can continue since it becomes a symbiotic relationship that allows each party to grow.

Day-to-Day Business Operations

Since the franchisee becomes the manager of their own franchise, they are also responsible for any task that comes with that business. These may include hiring/firing new staff, training these staff, selling products and services, ensuring quality control, and managing finances and accounts for the company. They would also be involved in advertising and marketing that the franchisor already created the precedent for. These promotional activities aim to bring more traffic for the business without the influence being entirely up to the franchisor.

What is the Role of a Partner in a Partnership Agreement?

Depending on the type of partnership that the business owners decide to go with, the partner’s roles in a partnership agreement would differ.

In a general partnership, each owner is responsible for all workings of the business from scratch. They equally share all of profits and liabilities. The partnership would require all of the parties to come together to create a contract to follow to outline the set amount of profits and responsibilities. This would then go on to include limited partnerships and limited liability partnerships. In these instances, the contracts would differ since the individual investment and risks would lessen by being less affected by the actions of the other partners. 

Specifically speaking, each party’s responsibilities in a partnership are primarily up to the partners themselves to decide on the level of commitment and investment they are willing to put in. Law firms, financial companies, and other small businesses often adopt partnerships to share the management of the business. 

Some advantages of opening a partnership are that it is easy and relatively low cost to set up. Additionally, since the responsibilities are shared, there is less stress on one person to control every aspect of the business. Working together splits up the work while also being able to share the profits. However, there can be disputes that can arise between partners, as well as the chance that the action of one party may affect the rest. 

What is the Difference Between a Franchise and a Partnership?

The recap, the main difference between a franchise and a partnership is who owns the business. A franchise is an existing business that gives another business the right to use its name and logo and established business practices in return for fees. Unlike partnerships, they are not start-up companies. Partnerships require two or more people to agree on each other’s roles and responsibilities to run the given company. While they also work together towards a common goal, where no party takes an established leadership position, like a franchisor. 

In a partnership, there are fewer restrictions since they do not necessarily have a guideline they have to follow. If you are looking for a better chance at stability, then a franchise may be an adequate option. However, if creative innovation is your cup of tea to work with people you feel comfortable with, then partnerships may be right for you! It is crucial to understand the differences between your choice to ensure you are choosing the most efficient business structure for you and increase the probability of success!