Reading time: 5 minutes

While franchises share some similarities with a partnership, they are two different business models. Under a franchise system, a franchisor allows its franchisees to distribute the business’s goods and services in various locations using the franchisor’s brand. On the other hand, a partnership is where two or more people carry on a business, with each member of the partnership distributing income or losses between themselves.

This article explains the critical differences between franchises and partnerships and explores the pros and cons of both business models.

The Ultimate Guide to Hiring & Retaining Employees

Whether it’s your first hire or your fiftieth, this guide will help you understand the moving parts behind building a high-performing team.

Download Now

Ownership

One of the most significant differences between a franchise and a partnership is ownership. A franchisor will own the brand and business operating system within a franchise. Further, as a franchisor, you will develop a licensing agreement allowing franchisees to use your brand.

On the other hand, a partnership is where two or more people own and operate a business. It may be that certain partners contribute certain things”. For example, partner A may license the partnership the right to exploit specific Intellectual Property (IP). However, unlike a franchise, each owner is responsible for operating and managing the business. 

Distributing Money

How business owners distribute profits and fees will also vary depending on whether they run a franchise or partnership.

Franchises

A franchise agreement will outline the correct way to distribute money in a franchise. Often, a franchisee will have to pay:

  • the initial franchise fee, which is an initial upfront fee a franchisee pays upon entering the franchise; and
  • ongoing fees, such as royalties and licensing fees.

Franchisees might also have to contribute to a marketing fund. Franchisors use marketing funds to pay for the marketing and advertising of the franchise network. Since the fund consists of contributions from all franchisees, franchisors have strict disclosure obligations regarding how they use the funds.

Partnerships

In a partnership, the distribution of money depends on the type of partnership. In addition, the terms of any partnership agreement may impact this. Each partner is equally interested in the business’s profits in a general partnership. Although, in a limited partnership each partner’s profits and losses are determined by the percentage of any capital contributions they made to the business. In most cases, both partners will be responsible for any business losses. However, a franchisor is not responsible or liable for any losses its franchisees incur. 

Liability

Franchises

One of the biggest questions for business owners is how liability works under different corporate structures. For franchises, different corporate structures can affect who is liable. For example, a single company franchise is where a proprietary limited company operates the franchise. This company operates as a separate legal entity that owns its own assets and incurs its own liabilities.

On the other hand, a two-tiered company structure for a franchise generally consists of a holding company and an operating company relationship. The holding company owns the assets and intellectual property of the business. Additionally, the holding company owns 100% of the franchise system’s shares in the operating companies. These operating companies are the entities that enter into contracts and incur liabilities.

Partnerships

In a partnership, the type of partnership heavily impacts the liability.

A general partnership is where two or more business partners share equal responsibility in the operation of the business. In a limited partnership, each partner’s liability depends on the percentage of any financial stake they have in the business. Finally, in a limited liability partnership, liability is limited because partners can lose assets in the partnership but not those they hold outside of the partnership (i.e. their personal assets).

Advantages and Disadvantages

Franchises

Some advantages of franchising include:

  • increased brand recognition since multiple businesses will operate under the same brand;
  • rapid growth since multiple locations can be opened at the same time; 
  • higher returns where there is increased growth; and
  • exposure to experienced and talented franchisees.

Alternatively, some disadvantages include:

  • can be high upfront costs if you have to register your trade marks, restructure your business, create an operations manual and seek legal advice;
  • potential to lose control over your branding if no performance standards are in place; and
  • onerous obligations under the Franchising Code of Conduct.

Partnerships

Some advantages to running a partnership include:

  • easy and low costs to establish a partnership;
  • depending on the partnership structure, there can be equal responsibility and share of profits; and
  • you can work alongside experienced business partners to achieve common goals.

On the other hand, some notable disadvantages include:

  • disagreements between partners without a clear dispute resolution process can be detrimental to the business;
  • partners can be personally liable when debts are not paid since partnerships are not their own legal entity; and
  • one partner’s bad decision can be detrimental to other partners.

Key Takeaways

In a franchise, the franchisor will own the brand and operating system of the business. The franchisor will license the business’ branding to their franchisees, who can distribute the business goods and services using this brand. 

On the other hand, a partnership is where two or more people carry on 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 draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is a franchise?

A franchise is where a franchisor licenses their business’ branding to a franchisee. The franchisee can then distribute the business goods and services using the franchisor’s brand.

What is a partnership?

A partnership is where two or more people own and operate a business. In a general partnership, each partner shares the profits and liabilities of the business equally.

Webinars

Cyber Security Breaches: Your Business’ Legal Responsibilities

Thursday 25 August | 11:00 - 11:45am

Online
Learn how to manage cyber risks for your business and how to respond to an attack. Register today for our free webinar.
Register Now

Ending Employment: Understanding your Obligations as an Employer

Thursday 8 September | 11:00 - 11:45am

Online
If you are ending a team member’s employment, you must understand your legal obligations. Register today for our free webinar.
Register Now

Tips on Structuring Your Entity for Growth

Tuesday 13 September | 10:00 - 10:45am

Online
Choosing the best structure for your business is crucial for growth. Understand your options. Register for our free webinar today.
Register Now

Protecting Your E-Commerce or Retail Brand

Wednesday 14 September | 11:00 - 11:45am

Online
Learn how to protect your e-commerce or Retail brand. Register for our free webinar today.
Register Now

Australia’s Global Talent Visa: How To Make Your EOI Stand Out

Thursday 22 September | 12:00 - 12:45pm

Online
Applying for a Global Talent Visa? Learn how to make your application a winner. Register today for our free webinar.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards