Key Differences Between Franchises and Partnerships

When deciding how to set up or scale up your business, it is important to understand the various business structures. Franchises and partnerships are two different business models. This article will explain the key differences between franchises and partnerships. It considers aspects such as financial liability and the level of ownership business owners have under each model.

What is a Franchise?

Franchising involves business owners authorising another party to use their existing business’ name, products and branding. Business owners can give a franchise licence to:

• an individual; 
• a group; or 
• a company.

What is a Partnership?

With partnerships, at least two individuals will operate a business as ‘partners.’ Prospective business partners must sign an agreement to create a partnership. The terms of the partnership depend on what the individuals write in their partnership agreement. This contract will determine how the partnership will operate, including how the partners will share liability and split profits.  

Key Differences Between Franchises and Business Partnerships

1. Financial Liability

One key difference between partnerships and franchises is the financial liability of the business owners. The level of financial liability depends on the specific business model adopted and the terms set out in the agreement that established the franchise or the partnership.

Franchises

The liability of franchisors depends on the responsibilities and obligations within the franchise agreement. The franchise agreement is the document establishing the relationship between the franchisor and franchisee. Franchisees tend to be responsible for their franchise unit’s day-to-day financial operations and obligations. 

Partnerships 

Similarly to franchises, the financial liability of the business owners depends on the specific terms of the partnership agreement. There are two main types of partnerships. One is a traditional general partnership, and the other is a limited liability partnership (LLP). 

With the general partnership model, partners share the financial responsibility of the business. Creditors can use partners’ personal assets to satisfy the business’ debts. In contrast, an LLP incorporates a company as a separate legal identity to its members (the ‘partners’). With an LLP, partners limit their liability based on their investment in the company. Businesses such as law and accountancy firms usually adopt the LLP structure, and businesses such as GP surgeries tend to adopt the traditional partnership model.

2. Ownership

Another key difference between partnerships and franchises is the level of ownership of the business. Similarly to financial responsibility, it is key to remember that the exact level of business ownership varies depending on the terms set in the partnership or franchise agreement.

Franchises 

Franchisors typically maintain ownership of their business’ brand and operating systems. Franchisees essentially borrow these from franchisors for the period stipulated within the franchise agreement. 

Additionally, franchisees are the owners of their individual businesses despite operating under the name and branding of the overarching franchise. This means that franchisors have responsibilities and obligations towards the franchisee but do not have ownership over any franchisee’s individual business unit.

Partnerships

With partnerships, ownership is more clear-cut. Partners collectively own and operate the business. Partners share in their ownership of the business. The level of ownership depends on the terms stipulated in the partnership agreement. 

3. Control and Decision-Making 

Franchises

The control and decision-making responsibilities of franchisors sit in a balance between their obligations to the franchise and the independence of the franchisees. Franchisees operate with a level of autonomy as they control their unit’s day-to-day operations, financial responsibilities, and management. However, major decisions may require the approval of the franchisor. 

Partnerships 

In partnerships, partners collaborate and share responsibility for the decision-making and control of the business. Partnerships can allow greater control over the overall business than franchises. Depending on the partnership agreement, some partners may have greater control over the business than others. 

Partners can benefit from each other’s expertise. However, disagreement between partners may be difficult to navigate. Likewise, the larger the partnership, the more complex decision-making may be. Decision-making can involve democratic processes to ensure fairness. 

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Key Takeaways 

Franchises are a business model that involves business owners granting others the right to use their brand, products, and business model in exchange for fees. A partnership involves at least two individuals operating a business, guided by a partnership agreement. 

Franchises and partnerships are different, offering varying levels of responsibility and ownership to business owners. Some key differences between franchises and partnerships relate to:

• the liability of the business owners; 
• ownership; and
• control and decision-making. 

The specifics of a franchise or a partnership will be laid out in the franchise or partnership agreement. It is important to understand these terms as they determine how your business and business relationships will operate. 

If you need legal advice regarding franchising, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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