How Is a Franchise Different From a Partnership?
How is a franchise different from a partnership? The main difference is in the ownership.3 min read
How is a franchise different from a partnership? The main difference is in the ownership. A franchise is a business owned by an individual with a licensing agreement from a franchisor. A partnership, on the other hand, involves having two or more people operating and managing a business.
While a franchise is managed by a single person, they have to follow the rules of the contractual relationship. This defines how they can run their business, market the business to customers, and even how they acquire economic resources. Contractual agreements are also an important part of a partnership, as they list out any legal issues that might come up over time.
Types of Partnerships
There are three main types of partnerships. These include:
- General partnerships: This is when the two or more owners of the business share equal responsibility in the operation of the business. This means that if one person makes a bad business decision, it will affect every owner of the business equally. General partners also all handle their business debts personally.
- Limited partnerships: In this type of partnership, the owners have less personal investment in the business, limiting their liability in case something goes wrong.
- Limited liability partnerships: These partnerships are a good choice if you don't trust the people you are going into business with, as they offer protection if your partners make bad decisions or bring the business into debt.
Similarities and Differences Between Partnerships and Franchises
While they operate on a completely different level, partnerships and franchises do share some similarities when it comes to business features. For example, most franchise agreements will define the royalties and licensing fees that franchises must pay to the franchisor. Partnerships do something similar by defining limited and general partners as well as how much profit each partner will earn once the business is profitable. Partnerships also go a step further by detailing the specific functions of each partner and what areas of the business they are responsible for.
Another way these two structures are similar is how they handle considerations. Most franchises incorporate so they can reduce their legal liability if a customer or employee decides to sue. This is often required by the franchisor, who may also stipulate other requirements on a conditional basis.
Partnerships have a bit more freedom in that their agreements can be adjusted depending on the current economic situation. Unfortunately, franchises don't have this freedom, as their contracts are often more strict and less flexible. Even worse is if the franchisor suddenly decides to change the operating agreement for franchisees without their input.
Starting a Partnership
Starting a partnership is a bit trickier than starting a franchise, as you'll have to create guidelines for your business all on your own. There are a number of steps to take before you choose this business model:
- Choose a partner that you trust. If you think someone is flaky or unreliable, your business won't be successful.
- Create a business plan that's solid. From the very beginning, you'll want to define all the roles and responsibilities for each member. This can prevent you from having issues in the future.
- Consider important questions. These might include things like how much time each person will put into the business, how you will resolve disagreements, and how you will create your business plan. The more questions you can tackle early on in the process, the smoother the partnership should run.
- Keep in contact. Always stay in touch with your partners to find out if they have any issues or problems.
How to Decide Between a Franchise and a Partnership
Choosing between these two business structures can be tricky, even with all the facts in front of you. If you're still stuck, contacting an attorney for help is a good idea. Additionally, you may want to reach out to your local chamber of commerce, the Small Business Administration, or other professional organizations, as they might have specific advice for your unique situation and the local economic environment.
Another idea is to talk to current business owners to see how they are faring in your local area. They can help you review business models and discuss which options are best for you.
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