In Short
- Franchises and partnerships are distinct business models with different ownership, liability, and regulatory structures.
- Franchisors retain brand ownership and grant licence rights, while partners co-own and manage the business.
- Franchising is highly regulated under a national Code; partnerships offer more flexibility but less legal protection.
Tips for Businesses
Before choosing a business structure, consider who will own the brand, how profits and risks will be shared, and the level of regulation you are prepared to manage. Franchising may offer faster growth, but with more compliance obligations. Partnerships offer flexibility but can expose individuals to personal liability.
While franchises share some similarities with partnerships, they are two distinct business models. Under a franchise system, a franchisor allows franchisees to sell the business’ goods and services in various locations using the franchisor’s brand. In contrast, a partnership involves two or more people running a business together, with each partner sharing the business’s income or losses.
This article explains the key differences between franchises and partnerships, and explores the advantages and disadvantages of both business models.
Ownership
One of the most significant differences between a franchise and a partnership is ownership. In a franchise, the franchisor owns the brand and the business operating system. As a franchisor, you will develop a franchise agreement that allows franchisees to use your brand under an intellectual property licence.
Distributing Money
How business owners distribute profits and fees will vary depending on whether they operate a franchise or a partnership.
Franchises
A franchise agreement will outline how money should be distributed within the franchise. Typically, a franchisee will have to pay:
- the initial franchise fee, which is an initial upfront payment made when entering the franchise; and
- ongoing fees, such as royalties and licensing fees.
Partnerships
In a partnership, the distribution of money depends on the type of partnership. The terms of the partnership agreement may also impact this. In a general partnership, each partner has an equal share in the business’ profits. However, in a limited partnership, each partner’s share of profits and losses is based on the percentage of capital they contributed to the business. In most cases, both partners are responsible for any business losses. However, a franchisor is not responsible or liable for any losses incurred by its franchisees.
Continue reading this article below the formLiability
Franchises
One of the biggest concerns for business owners is understanding how liability works under different corporate structures. In franchises, the corporate structure can affect who is liable. For example, in a single company franchise, a proprietary limited company operates the franchise. This company is a separate legal entity, meaning it owns its assets and is responsible for its liabilities.
This means the franchisor is not directly liable for goods or services provided by the franchisee under the brand, as the franchisee is an independent operator. However, franchisors can be vicariously liable for breaches of employment law by franchisees in certain situations. Additionally, if the franchisor manufactures products (either directly or through an associated entity), they may also be liable. A franchisor could also be liable if the training and support provided to franchisees, or the lack of it, leads to legal breaches. For this reason, franchisors must ensure their guidance and support are accurate and relevant.
Partnerships
In a partnership, the type of partnership significantly affects liability.
In a general partnership, two or more business partners share equal responsibility for running the business. In a limited partnership, each partner’s liability depends on their financial stake in the business. In a limited liability partnership, liability is limited, meaning partners can lose assets within the partnership, but not assets outside the partnership, such as personal assets.
Regulations
Franchises and partnerships are two distinct business models, each governed by different regulations in Australia. While both involve multiple parties collaborating in a business, the nature of these relationships and the legal requirements are significantly different.
Franchises
Franchising in Australia is a highly regulated industry. All parties must comply with the Franchising Code of Conduct, a mandatory industry code under the Competition and Consumer Act 2010.
The Code aims to regulate the franchisor-franchisee relationship by imposing a range of requirements for franchisors before and during the franchise agreement. Key obligations include providing detailed disclosure documents to potential franchisees, allowing a 14-day cooling-off period after signing the agreement, following rules for termination and non-renewal, and using a dispute resolution process to resolve disagreements. The Code’s regulations aim to ensure prospective franchisees make informed decisions and protect them from potential exploitation by franchisors. If you plan to enter into a franchise agreement, it is essential to understand and comply with the Code, as breaching it can lead to penalties.
Partnership
In contrast, partnerships are significantly less regulated and are not subject to a specific industry code. Instead, they are governed by the Partnership Act in each state or territory. These Acts generally outline the duties and obligations of partners, including fiduciary duties, decision-making processes, and liability for partnership debts and obligations. Unlike franchising, partnerships have no mandatory pre-acquisition disclosure requirements, although partners commonly document their agreement in writing.
Setting up a partnership also involves fewer legal requirements. There is less external regulation by government bodies such as the Australian Securities and Investment Commission (ASIC), and fewer administrative tasks. Overall, the regulation of partnerships allows more flexibility than the stricter rules for franchises.
Advantages and Disadvantages
Franchises
Some advantages of franchising include:
- increased brand recognition, as multiple businesses operate under the same brand;
- rapid growth, as multiple locations can be opened at the same time;
- higher returns with increased growth; and
- exposure to experienced and skilled franchisees.
However, some disadvantages include:
- high upfront costs, as you may need to register your trade marks, restructure your business, create an operations manual, and seek legal advice;
- potential loss of control over your branding if there are no performance standards in place; and
- ongoing obligations and potential fines (known as civil penalties) under the Franchising Code of Conduct.
Partnerships
Some advantages of running a partnership include:
- setting up the business quickly and at a low cost;
- sharing responsibility and profits, depending on the partnership structure;
- working alongside experienced partners to achieve common goals; and
- managing fewer regulatory requirements than other business structures.
However, some notable disadvantages include:
- partners may disagree, and without a clear dispute resolution process, these conflicts can damage the business or lead to dissolution;
- partners must cover unpaid debts personally, as partnerships are no separate legal entities; and
- one partner’s poor decision can directly affect the others.
This publication offers guidance on managing your franchise network effectively to achieve success, ensure franchisee satisfaction, and maintain legal compliance.
Key Takeaways
In a franchise, the franchisor owns the brand and operating system of the business. The franchisor licenses the business’s branding to franchisees, who can use the brand to distribute the business’s goods and services.
In contrast, a partnership involves two or more people running a business. Depending on the type of partnership, each partner shares the profits and liabilities of the business.
If you are unsure which business model suits you, our experienced commercial lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and help you with drafting and reviewing documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A franchise is where a franchisor licenses its business’s branding to a franchisee. The franchisee can then distribute the business’s goods and services using the franchisor’s brand.
A partnership is when two or more people own and operate a business together. In a general partnership, each partner shares the profits and liabilities of the business equally.
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